Investing In Life Insurance

Is Life Insurance a Good Investment?

When most people think of investments, they think of savings accounts, mutual funds, stocks, and real estate.

However, life insurance is essential to any financial plan and can be considered an investment while alive or after your death.

All life insurance policies are regarded as investments to your family because the death benefit will eventually be paid out to them when you pass away.

Your death benefit will have an internal rate of return calculation based on the cumulative premiums contributed against the death benefit paid out.

It would be best if you had a rough estimate of your life expectancy to calculate the death benefit IRR based on a projected date of death. 

If you die suddenly after the policy is activated, the return on your investment will be higher than when you live for many years.

According to Motley Fool, the death benefit IRR can be over 1,000% in the early policy years, decreasing to 4%-6% if you have a long life.

Term life is not considered an investment while you are alive because it only pays out a death benefit and does not have cash value accumulation.

Permanent coverage is considered an investment while you are living because it accumulates cash value savings over time.

You can take a withdrawal or borrow against your cash value while you are still alive to pay unforeseen expenses or supplement retirement income.

Is cash value life insurance a good investment?

Cash value life insurance is a long-term investment that should supplement rather than replace other retirement accounts like a 401(k).

Permanent coverage is ideal for someone who is a conservative investor or does not have access to a retirement plan at work.

The internal rate of return on the cash value in a permanent coverage has an inverse association with the death benefit.

Similar to any investment, the IRR of the cash value is small in the beginning and gradually increases depending on the rate of return in your policy.

After many years, some equity-based permanent coverages can have an IRR on cash values comparable to a bond or balanced mutual fund.

It’s necessary to understand both the pros and cons associated with cash-value life insurance when making this long-term commitment.

benefits of cash value Life Insurance

• Permanent Coverage – Permanent life coverage will last your entire life if you continue to pay your premiums.
• Tax-free death benefit – The death benefit that goes to your beneficiary when you die is not taxable. 
• Tax-deferred growth – The cash value account can offer a conservative 5%-6% tax-deferred interest rate. 
• Tax-free withdrawals – You can withdraw up to the amount of money you’ve paid into the policy without taxation.
• Tax-free policy loans – You can borrow against your policy’s cash value. Your policy loan can be paid back or deducted from your death benefit.  
• Dividends – Participating whole-life plans pay a dividend not subject to income taxation.

Disadvantages of permanent Life Insurance

• High cost – Permanent coverage is more expensive because part of your premiums goes into a cash-value account.
• Fees & Expenses –  Cash value life has initial fees and expenses that make it difficult to get ahead in the early years of your policy.
• Insurer keeps the cash value – Unless money is taken out before you die,  beneficiaries only receive your death benefit and do not get your cash value.