When it comes to considering life insurance as an investment, you’ve probably heard the adage, “Buy term and invest the difference.” This advice is based on the idea that term life insurance is the best choice for most individuals because it is the least expensive type of life insurance and leaves money free for other investments. Permanent life insurance, the other major category of life insurance, allows policyholders to accumulate cash value, while term does not, but there are expensive management fees and agent commissions associated with permanent policies, and many financial advisers consider these charges a waste of money.
When you hear financial advisers and, more often, life insurance agents advocating for life insurance as an investment, they are referring to the cash-value component of permanent life insurance and the ways you can invest and borrow this money. When does it make sense to invest in life insurance in this way – and when are you better off buying term and investing the difference? Let’s take a look at some of the most popular arguments in favor of investing in permanent life insurance and how other investment possibilities compare.
Arguments in Favor of Using Permanent Life Insurance As an Investment
There are many arguments in favor of using permanent life insurance. The issue is: These benefits aren’t unique to permanent life insurance. You often can get them in other ways without paying the high management expenses and agent commissions that come with permanent life insurance. Let’s examine a few of the most widely advocated benefits of permanent life insurance one by one.
1. You get tax-deferred growth.
This benefit of the cash-value component of a permanent life insurance policy means you don’t pay taxes on any interest, dividends or capital gains in your life insurance policy until you withdraw the proceeds. You can get this same benefit, however, by putting your money in any number of retirement accounts, including traditional IRAs, 401(k)s, 403(b)s, SIMPLE IRAs, SEP IRAs and self-employed 401(k) plans.
If you’re maxing out your contributions to these accounts year after year, permanent life insurance might have a place in your portfolio.
2. You can keep your policy until age 100, as long as you pay the premiums.
A key advertised benefit of permanent life insurance over term life insurance is that you don’t lose your coverage after a set number of years. A term policy ends when you reach the end of your term, which for many policyholders is at age 65 or 70. But by the time you’re 100, who will need your death benefit? Most likely, the people you originally took out a life insurance policy to protect, your spouse and children, are either self-sufficient or have also passed away.
3. You can borrow against the cash value to buy a house or send your kids to college, without paying taxes or penalties.
You can also use money you put in a savings account that you control – one on which you don’t pay fees and commissions – to buy a house or send your kids to college. But what insurance agents really mean when they make this point is that if you put money in a tax-advantaged retirement plan like a 401(k) and want to take it out for a purpose other than retirement, you might have to pay a 10% early distribution penalty plus the income tax that’s due. Further, some retirement plans, like 457(b)s, make it difficult or even impossible to take out money for one of these purposes.
That being said, it’s generally a bad idea to jeopardize your retirement by raiding your retirement savings for some other purpose, penalties or not. It’s also a bad idea to confuse life insurance with a savings account. What’s more, when you borrow money from your permanent insurance policy, it will accrue interest until you repay it, and if you die before repaying the loan, your heirs will receive a smaller death benefit.
4. Permanent life insurance can provide accelerated benefits if you become critically or terminally ill.
You may be able to receive anywhere from 25% to 100% of your permanent life insurance policy’s death benefit before you die if you develop a specified condition such as heart attack, stroke, invasive cancer or end-stage renal failure. The upside of accelerated benefits, as they’re called, is that you can use them to pay your medical bills and possibly enjoy a better quality of life in your final months. The drawback is that your beneficiaries won’t receive the full benefit you intended when you took out the policy. Also, your health insurance might already provide sufficient coverage for your medical bills.
In addition, some term policies offer this feature; it isn’t unique to permanent life insurance. Some policies charge extra for accelerated benefits, too – as if permanent life insurance premiums weren’t already high enough.
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