"You should never mix life insurance and investing." You’ve probably heard that before, right? Here’s the problem with that thinking: you can’t do it. You can’t separate life insurance from investing. Not really. Life insurance policies require an investment component to function. The only choice you can make is whether you want to participate in the insurer’s profits or not. Sometimes, it’s worth the hassle of getting a blood and urine test. Here is what you need to know about life insurance investment policies:
- Participating Whole Life: Whole life policies may credit dividends based on the policy’s death benefit. Dividends may be used to increase the amount of death benefit, they may be paid out as cash, they may be invested with the insurer, or they may be used to pay premiums due on the policy. They are a benefit to you when you use them to purchase additional paid up life insurance. This "supercharges" the cash value growth and forces the policy to function similar to a bond fund. As interest rates climb, you get progressively higher interest crediting to your cash value account. When interest rates fall, you never lose money and you never drop below the contractually guaranteed minimum interest rate specified in the policy. Nice huh?
- Current Assumption Whole Life: Another method to credit excess interest to a whole life policy is to tie the cash value performance, in part, to current market interest rates. As these rates fluctuate, the whole life policy’s cash value may be credited with more or less interest. Like participating whole life, you can never make less than the guaranteed minimum.
Here is a visual illustration of how the whole thing works:
Universal life insurance policy
This is the classic "bucket analogy" taught to just about every life insurance agent. My drawing is a bit crude, but I hope you get the gist of it.
David Lewis is the owner and founder ofTwin Tier Financial. He is a member of the International Association of Registered Financial Consultants and author of over 1,500 articles on business and personal finance. Want to learn more about life insurance investment policies? Visit: http://www.twintierfinancial.com/whole-life-insurance-rate-of-return/