Here are different variations of life insurance plans, and these plans generally fall into two categories, i.e. general and term. The term policies function quite similar to other types of policies that you may carry, and on your early death, there is a benefit paid out.
On the other hand, permanent or whole life insurance has an investment component and allows its policyholders to accumulate the cash value. When we hear our financial advisors or life insurance agents advocating for life insurance as an investment, they are actually referring to the cash value component of whole life insurance and different ways that you can invest and borrow this money.
As whole life insurance accumulates cash and can be used in a variety of ways at various stages of life, therefore, it is a great investment for many people. It also provides a guaranteed death benefit for your family. It is a tax-efficient way of building your net worth in total while retaining some flexibility of using the funds as needs arise.
How whole life insurance works as an investment?
When you pay the premiums of your whole life insurance, a portion goes towards paying the cost of insurance; some is put towards the administrative fields and sales, while the rest of the money goes towards the cash value of the policy.
In the early years of your insurance coverage, the fees and cost of insurance use up the majority of your premium, but over a period of time, an increasing amount is contributed towards the cash value. Cash value is actually an investment account inside the whole life insurance policy that keeps growing at a guaranteed rate over time.
The guaranteed rate of return is normally great enough that your cash value should be equal to the death benefit of the policy when you turn 100, assuming you don’t make any withdrawals. A simple way to think about the cash value of your policy is that it is the amount of money that you would get in return for giving up the policy to the insurer.
During the first 10 to 20 years of coverage, the cash value of a whole life insurance policy is quite small due to the cost of coverage and fees. Therefore, many people don’t recommend whole life insurance as an investment if you are older, because in their view you may not live long enough to see the good returns with your policy.
If you happen to purchase whole life insurance from a mutual insurance company, you might be receiving dividends as your cash value grows. The mutual insurers are owned by the policyholders; therefore, the profits are redistributed annually as dividends. While the dividends are not guaranteed, the largest of the mutual insurers have consistently distributed them for decades.
You might choose to take dividends as cash, and then use them to pay your premiums or use them to purchase paid-up insurance additions. Paid-up insurance additions are a reinvestment way as they act as a small addition to your existing whole life insurance policy, increasing the death benefit and cash value.
The cash value of a whole life insurance policy grows tax-deferred, and that is why it is often compared to a retirement account. One has to understand that the contributions to the whole life insurance policy are not tax-deductible, as they are normally with the retirement accounts.
Accessing whole life insurance investment gains
The cash value of a whole life insurance policy is not added to the death benefit if you happen to pass away, and it is kept by the insurer, so you need to either use it or lose it. The following are the ways that you can access and utilize the cash value.
Taking out a policy loan
The insurance company continues to hold your money but gives you a loan using the cash value as collateral. In your insurance policy, the cash value continues to grow according to the interest rates that are set in the policy, and you don’t basically need to pay back the loan. However, you do need to pay a small amount of interest on the policy loan, and this will be added to your outstanding balance.
If your outstanding balance happens to exceed your cash value in size, then your policy lapses and you have to pay taxes on the money. Though you don’t have to pay back a policy loan, the outstanding balance will be deducted from the death benefit that your beneficiaries will receive if you pass away.
Taking dividends as cash
If you have a participating whole life insurance policy, then you are able to take any dividends paid as cash. There is no income tax as long as the amount you receive does not exceed that you have paid in premiums.
Making a partial withdrawal
You are able to withdraw from the cash value of the policy up to a certain level that is determined by the insurance company. However, the insurance company may charge a withdrawal fee or limit when you are able to take the money out, and this value of withdrawal will be taken out of the death benefit. However, you are allowed to withdraw cash value up to the amount that you have paid in premiums without paying income tax.
Selling your policy
If your spouse passes away or your children do financially well, you might no longer want insurance coverage. In that case, you may be able to sell your insurance policy for an amount that is greater than its cash value, but obviously less than the death benefit through a life insurance settlement. The buyer may take over the premium payments and become the beneficiary. Any gain that you make on this settlement is taxed either as an income or as capital gains, depending on the terms.
Surrendering your policy
If you no longer want your life insurance or can’t get a life insurance settlement, then your cash value is the amount of money that you would receive by surrendering coverage to the insurance company. You should note that during the first 10 to 15 of your coverage, the insurers normally impose a high surrender fee. This is one of the main reasons why whole life insurance must not be considered as a short term investment.
Is the cost of whole life insurance worth it?
If you know that you want permanent life insurance coverage, but you are on the fence about the high cost of investment in whole life insurance, then you should evaluate the guaranteed returns of the whole life insurance policy against the estimate of your returns.
If you think that you will do better on a financial basis to get permanent coverage and simply invest the difference in cost, then you must go for it. But you need to actually do it, as many people purchase a less expensive term or guaranteed universal insurance policy and simply spend the money that they save by not purchasing a whole life insurance policy.
If you have decided that it is worth to invest in whole life insurance, you must make sure to choose an insurance company that has high financial strength rating. You might lose your insurance coverage or investment if your insurer becomes insolvent.
In addition to that, you must check that the policy allows you to receive a portion of the death benefit early if you happen to develop a severe illness. This option is known as accelerated death benefit and is quite a common feature for the life insurance policies.
Whole life insurance is permanent life insurance
Whole life insurance lasts your entire life, regardless of how long you live. Whole life insurance is permanent life insurance that never expires. The cash value in your whole life insurance policy is guaranteed and does not decline whatever the economic climate is. Therefore, no matter what happens, your beneficiaries are guaranteed to receive the face amount of the policy.
While it is true that one can purchase term life insurance at a lower cost, but at some point, the policy term will end, taking the death benefit with it. The term insurance is likely to end at an age when you might need it most. Remember that a whole life insurance policy provides you with lifetime security.
One should try to think of purchasing a life insurance policy in the same way as he/she makes any other purchase. When you are to make an important, major purchase like a car or an appliance, you often favor a particular product with the best value for the money that you payout. When you are making life insurance decisions, the value becomes an important consideration.
A closer look at cash value
One of the main benefits of whole life insurance investment is the cash value that accrues over the life of the insurance policy. The cash value of whole life or other permanent life insurance policies accumulate on tax-deferred bases, just like any retirement savings account. As the cash value grows, you can be able to borrow against it for whatever you require, including the retirement income.
You can access the cash value of a whole life insurance policy without having to jump through the various hoops that are necessary to receive a bank loan, which includes reams of paperwork and a credit check. There is basically no penalty for taking out your cash. The penalty for early withdrawal with an IRA can be up to 10%.
It is important to know that when you borrow against the cash value of your insurance policy, interest will be charged on loan, but in most cases, it will be very low. This loan must be repaid, or the loan amount and the interest will be deducted from the death benefit, and this could affect your beneficiaries.
The cash value can also be used to cover your premiums if, for any reason, you are no longer able to pay the premium amount. This cash value can be used to keep the policy in force for as long as the cash amount covers the costs of the policy. In some cases, this may be for the life of the policy.
The fact that you have a permanent insurance coverage offers you the ability to spend the rest of your assets. The whole life insurance will guarantee that you will leave a legacy to your beneficiaries or family members, no matter what.
Investing in a whole life insurance policy as part of your comprehensive investment portfolio is quite a good investment strategy. Any other type of investment could be less secure as they might be fluctuating with the financial trends.
A whole life insurance policy will obviously enhance your existing investments. This will help you to provide a comfortable retirement when the time comes, in addition to any other benefits that it provides.
For some people, their most valuable asset is that they are the financial provider of their families. A whole life insurance policy guarantees to protect the value that they are to bring to their family. Regardless of how life unfolds, those people would like to continue protecting their family by purchasing the right life insurance policy in the right amount.
Whole life insurance basically covers all your financial bases. It is a guaranteed fund that helps you now, later, or just when you require it. Buying a whole life insurance policy is versatile, tax-efficient, guaranteed, and permanent. A whole life insurance policy offers you peace of mind for your entire life and for the lives of those who you leave behind.
There are a few simple reasons why whole life insurance can be quite a good option. The long term investment is all about balancing risk and potential rewards. As far as whole life insurance is concerned, its stable value can help you take a little more investment risk but not being that much riskier in your overall plan. A good investment is entirely relative to who you are and what you basically want to accomplish, and whole life insurance as an investment can certainly add a great deal of value to your financial goals. Compare us with Colonial Penn or Globe Life Insurance.
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