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Using Life Insurance as an Investment Tool

Life insurance is more than what meets the eye. Forbes writes that life insurance is primarily purchased for risk management. How so? Life insurance helps families manage the risk of financial survival after the loss of a breadwinner. 

The death benefit from a life insurance policy can be used by the beneficiaries in many different ways, including to help:

  • Fund day-to-day living expenses, such as food, gas, and medicines
  • Pay off debts, like mortgages, credit cards, and car loans
  • Provide income to surviving relatives for health care or education needs, or
  • Pay federal and state estate taxes

While life insurance is great at managing the economic risk of death and can provide a rate of return on premiums paid over the years in exchange for a  death benefit, it also can be an effective investment tool for the policy owner while the insured is still alive.

Let’s discuss this further.

Life Insurance as an Investment Tool

As you look to diversify your investment portfolio, life insurance can be a dependable, lower-risk option to funnel money into because of its growth potential and tax benefits. 

There are two types of life insurance categories: term life insurance and permanent life insurance. Here, we are focusing only on permanent life insurance because it includes a cash value account in addition to a death benefit. The cash value component is used by the policy owner to protect, grow, and access wealth on a tax-favored basis while the insured is still alive. 

Let’s discuss how permanent life insurance can act as an investment tool.

Permanent Life Insurance

Permanent life insurance is designed to last your lifetime and is composed of three components:

  • Premiums
  • Cash value, and
  • A death benefit

The cash value is a tax-advantaged savings account. It serves as a living benefit that the policy owner can access for any reason before the insured has died.

When you make a premium payment, what happens? A portion goes to pay for the cost to insure a life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow and be accessed without paying tax, for you to use for any purpose at a later time.

There are a few different types of permanent life insurance contracts to note—and the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Types of Permanent Life Insurance

  • Whole Life Insurance
  • Universal Life Insurance
  • Index Life Insurance
  • Variable Universal Life Insurance

Visit our article “Permanent Life Insurance: What Options Are Available to You?” for more details on each permanent policy.

Life Insurance as an Investment: Cash Value Life Insurance

All four aforementioned permanent life insurance policies include a cash value component which, when structured properly, can serve as a tax-favored investment vehicle that the policyholder can use while the insured is still alive. 

With all life insurance policies, a permanent policy still includes a large tax-free death benefit paid to the beneficiaries when the insured passes away. 

But the cash value component can have tremendous value as well. It’s available to the policyholder while the insured is alive, and grows tax-deferred.

The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or a withdrawal of principal. This component adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.

A Final Word

Life insurance, when structured properly, can be a low-risk option to stabilize and grow an investment portfolio on a tax-advantaged basis. In order to ensure your life insurance policy is acting as an investment tool, however, you need proper guidance and insight into selecting the right policy.

This is where our team at Acumen Insurance Solutions comes in.

Contact us today to learn more, then read on to find out what permanent life insurance options are available to you.