Benefits of a Permanent Life Insurance Policy
Permanent life insurance can be an intriguing investment tool. There are many benefits that most people are not aware of that go above and beyond the death benefit and estate planning that life insurance is typically known for. There are four main advantages that savvy investors find attractive with life insurance: cash value, lending options, tax advantages and asset protection
How Does the Cash Value Grow?
The premiums that you pay into the policy accumulate a cash value. The insurance company takes a set amount or percentage off of the top for their overhead and profit, and then the remainder is typically invested into mutual fund-like accounts. The cash value of your policy grows based on policy dividends, interest and/or earnings from these investments. In time, as the cash value grows, the interest or dividends earned on it can cover some, or all, of the monthly premium. There is a drawback specific to universal life that people should be aware of. With universal life, if market returns are lower than expected, your premiums could actually go up. The monthly premiums for whole life are not affected by market rates.
Taking a Loan
When a policy has reached certain cash value or has matured to a certain age the policy holder may have the option of taking a loan from the insurance policy. This could be a valuable option for someone who may need to pay for a child’s college tuition, make a large purchase, or make another investment. The lending guidelines are much more lenient compared to a typical bank or financial institution because the money is collateralized with the cash value of the insurance policy. Also, the loans do not show up on credit reports or negatively impact credit scores. The death benefit of the insurance remains in effect while the loan is in place.
To learn more about an in depth strategy behind loans and insurance policies please read NuWire’s article on Infinite Banking.
Probably the most unknown, yet advantageous, benefit of a permanent policy is that the cash value continues to grow tax free – not tax deferred like an IRA or 401(k). Even the dividends paid by whole life policies are not taxed. In this way life insurance is a legal, legitimate and often used tax shelter for wealthy individuals and savvy investors. There are typically a minimum number of years, or minimum cash value, before you can start taking loans. Once those minimums are achieved, though, whole life can be an effective way to resolve any death benefit needs, while simultaneously growing an extremely tax-advantaged asset.
A Protected Asset
Finally, an added benefit that most people are not aware of is that in many states life insurance policies are creditor and judgment proof. This means that if you are ever sued, or forced to declare bankruptcy, your life insurance is a protected asset.
With regard to utilizing life insurance as an investment, it’s important to understand the benefits and the drawbacks to different types of policies. Some policies and companies can offer more flexibility and be more ‘investor friendly’ while other types of policies carry more financial risks as the market goes through different cycles. While evaluating different policies and companies be sure to ask about the limitations and fees that may be charged for loans, and also how much of your premium is going to the insurance company’s overhead and profit. Always bear in mind that a good deal is important, but a longstanding and stable insurance company is the most critical factor.