Investing in life insurance may not be the first option that comes to mind for people when deciding where to put their money. However, it is one that, for some people, could be a beneficial strategy for diversifying their portfolio as they pursue their financial goals. There are two types of life insurance: permanent and term. Determining which type of permanent life insurance is appropriate for you depends on the features offered and your risk tolerance.
Types of Permanent Life Insurance
Whole Life Insurance
Whole life insurance is typically easier to manage and more predictable. You have fixed premiums and a cash value account with the potential to grow wealth over time. You can normally withdraw or borrow against the cash value during your lifetime; however, your death benefit will be lowered by the same amount if you don't pay it back. After death, your beneficiaries generally get the face amount of the policy but not the cash value amount.
Universal Life Insurance
Universal life insurance is an option that may provide flexibility as your financial situation evolves. You can also combine the death benefit and the cash value so your beneficiaries can get a higher payout. A more expensive universal life insurance option is the indexed universal life insurance. However, this alternative fluctuates with the stock market and offers flexibility in premiums and death benefits similar to regular universal life insurance.
Variable Life Insurance
Variable life insurance may be riskier than whole or universal life insurance because the policy allows your cash value to be put into your chosen investments. Generally, the premiums are fixed, and returns on the cash value are not a guarantee.
Variable Universal Life Insurance
Variable universal life insurance is exactly what it sounds like, a combination of variable life and universal life insurance. This policy's cash value will fluctuate based on the investments you choose and the market.
Here are the pros and cons of permanent life insurance:
Pros:
Wealth growth
You have the potential to grow tax-deferred cash value over time, meaning your money will not be taxed while it grows. Because it is not taxed yearly, it accumulates faster when the interest you earn is applied to the cash value amount.
Flexibility
You can usually withdraw from the cash value part of the policy while you are alive without canceling the coverage. Your heirs would receive a lower payout when you die. You also typically don’t owe income tax on withdrawals up to the amount of the premiums you paid on the policy.
Lifelong benefits
Generally, you have lifelong benefits. Even if you live to be 100 years old, the policy will pay a benefit so long as the premiums are paid.
Combining cash value growth with death benefits
Depending on the policy, it is possible to combine the cash value growth with the death benefit. As long as you are paying the premiums, your beneficiaries can claim the policy's death benefit after you pass away.
Cons:
Beneficiaries only get a portion of the money
Depending on the policy, the cash value may not get passed on to your heirs.
Lower than expected death benefit
If you withdraw money from the cash value or take out a loan without paying it back, the death benefit is reduced by the same amount or more. Should a loan exceed the policy’s cash value, the policy could lapse.
Slow growth
It takes time to build cash value.
Cost
Premiums are generally more expensive than term policies and potential fees may be high.
There may be other advantages and disadvantages not listed here that you should be aware of depending on your financial plans. It is more common for people to buy life insurance so their heirs will have something after they are gone, as opposed to being a financial instrument to grow wealth. Consider speaking with a financial professional to help you determine if this investment option would benefit you and your long-term financial strategy.
Important Disclosures
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
Sources:
Permanent Life Insurance: Definition, Pros and Cons - NerdWallet
Buying life insurance as an investment - NerdWallet
What Is Permanent Life Insurance? | MoneyGeek.com
Whole Life vs Universal Life Insurance | New York Life
LPL Tracking # 1-05367965