Life Insurance Investment
You may have heard that life insurance is not an investment. And still, some of the experts say life insurance is a good investment. What gives?
Anyone who talks about using senior life insurance as an investment is talking about permanent life insurance. Most likely a full life insurance policy. Total insurance differs from term life insurance in two ways. It does not end and it has a portion of the cash value. We will be able to see here the comparison between whole and term life insurance for seniors. The latter is where the investment aspect comes in.
Life Insurance Investment
When you pay your premium for a full life insurance policy. Part of that is for life insurance and part of it is an interest-bearing investment, the value of which increases in value like any other long-term life investment you make
Mainly you are essentially using your premium to both pay for your insurance and finance the investment part of the policy. And because the policy works well in the golden years (when insurance is the most expensive), life insurance is much more. expensive than the term.
Why do some experts still recommend it?
Because most people are bad with money, especially in the long run. Most of them do not invest or, if they do, they make poor investment decisions. By using all of life insurance as an investment, consumers can essentially kill two birds with one stone: you get life insurance. Which is important, and they are also responsible for the investment, which is also important.
For this reason, some experts recommend life insurance as an investment strategy as it requires investments.
But it may still not be worth it.
The money that is there in the cash value portion of your whole life insurance policy is tax-deferred. Meaning you don’t pay tax until you withdraw it, but many other investment vehicles (like 401 (k) s and traditional IRAs) they also offer this option.
You can lend against the cash portion to pay big expenses with no withdrawal penalties. Unlike most of the retirement products, which have penalties if you withdraw before you reach a certain age. However, you will be billed for your cash value payout until you repay it. Removing the gains you have made and making it an undesirable option. (You can learn more here.)
Also, the performance you will get is not that good. You can also take down your cash value to pay your insurance premium as you get older. If you don’t get the same income as when you bought the policy and can no longer pay the monthly payments.
Life insurance investment pros and cons
You may think that despite all the negatives, the important thing is that you will at least have the option of insurance when you are old. But honestly it is not necessary for most people. Life insurance is a valuable income replacement option when you die and your family still has a mortgage, college, and other major expenses. To worry about life insurance investment pros and con. If you are between 50, 60 and 70 years old, you don’t have that many of these expenses. So you are paying for senior citizen protection that has no practical use
In general, life insurance is not a good investment because whole life insurance is not a good option. AARP can help you find an affordable life insurance investment
So what is the best alternative?
First, get a term life insurance policy that offers the coverage your family needs while being affordable
The next step is a little bit more difficult. Remember how bad people are to invest? It is important to educate them so that they can be better. Today, it is not too difficult to save money. Automate investments in the workplace and the IRA of the 401 (k). Use low yield index funds in places like Vanguard for an easy and inexpensive way to invest. Use an app like Acorns or Stash to save even some more money. Now, here is our review of these popular investment apps.
In the end, “buy term and invest the difference” is still the best option for most people. If you are Using life insurance as an investment, it provides you with a mediocre life insurance product and a mediocre investment product. A little more education about better investment opportunities can go a long way in making better investment decisions.
Insurance companies and insurance agents often market life insurance investments for the elderly as an alternative. To old way of investments (full disclosure, I am a licensed insurance agent). There is no doubt that some policies have investment characteristics, but are they good investments?
Basic Life Insurance Concepts
Before we check and evaluate life insurance as an investment alternative. We need to have a very basic understanding of how an insurance policy works. An important caveat, life insurance can be very complex.
All life insurance investment plans have two main components. The death benefit (what you get) and the bonus (what you pay). Insurance companies don’t offer free policies. This may seem obvious, but after listening to many sales pitches with life insurance companies over the years, I have seen how anyone can make someone believe that the policy is essentially free. It never is.
Term of Life Insurance
The Basic life insurance, or a term insurance, does not have a cash value component. If you pay premium to the 401k life insurance investment company each year and if you die during the term of the policy, the company issues a check to your beneficiaries. The death benefit payable is generally free of federal income tax. Term life policies purchased many years ago had a premium that increased each year.
This premium that increases is compensated the insurance company for the fact that with each aging year, it is one year closer to death and therefore more expensive to insure. Today, most of the term insurance policies offer a tier premium of 10, 15, 20, or even 30 years. In general, the longer the tier premium period, the higher the premium will be charged.
Permanent Life Insurance
Permanent life (cash value) insurance policies come in many varieties, including whole life, universal life, adjustable life, variable life, index life, or some combination of those terms, each with its own risks and expenses. Regardless of type, the concept of using a permanent policy for an investment is the same.
You pay a higher premium than you would pay if you simply bought a term insurance investment policy and the difference is essentially deposited into some type of underlying investment. Every year, the cost to insure your life plus other policy charges are deducted from the cash accumulation and the balance grows within the policy based on tax deferred.
Under current law, cash withdrawals from the insurance policy are generally considered first a tax-free return of the premiums you paid in the plan and then taxable earnings (an exception is if the policy has been considered a Contract of Modified Endowment or “MEC”, which is beyond the scope of this article. All single-premium life policies are MEC, most policies are not).
Once contributions are fully withdrawn, the policyholder can borrow the proceeds from the policy and not pay taxes, as the loans are not taxable. The idea is to stop paying premiums on the policy at some point and have the cash value pay the insurance charges while taking tax-free distributions from the plan.
Tax Saving Life Insurance Advantage
This favorable tax treatment is the main advantage life insurance policy as an investment. You can invest after tax in the policy and withdraw a significant amount of the tax-free cash value through a combination of withdrawals and loans.
It is important to understand that 100% of the cash value will never be available for retirement, as the internal insurance charges have yet to be paid and the remaining cash value is often the source of those payments. The main disadvantage of life insurance as an investment is that you must pay the internal insurance charges for the benefit of life insurance investment plans for senior parents.
Rules to follow
Now that you have a basic understanding of life insurance, we can outline some general rules for determining whether you should consider permanent life insurance as an investment.
The first rule is that if you don’t need insurance, then don’t buy insurance. There is simply no reason to pay the cost of insurance if you don’t need it. And the older you are, the more emphatic the “no” becomes. Remember, the older you are, the more it will cost you to secure it. Maximize your tax-deferred retirement plans and contribute to a 529 college savings plan if you need college funds.
If you like taxes on your cheap life insurance policy, invest your retirement dollars in a Roth 401 (k) or Roth IRA, if you qualify.
Once you’ve narrowed down your retirement plans, you may want to consider a tax-deferred annuity. While there are charges on these plans that do not exist on stocks, bonds, or mutual funds, those charges are generally not as high as the insurance costs within a permanent life insurance investment tax free policy.
Life Insurance IRA 401k Investment
If you need insurance, a cash value policy can be advantageous as it will pay the cost of the insurance, whether you buy a temporary policy or a permanent policy. But before allocating funds to a cash value policy, maximize contributions to your 401k life insurance investment and / or IRA plans. And if you are planning your children’s education, nothing is better than a 529 college savings plan.
If, after contributing the maximum amounts to these plans, you still have excess cash to invest, then certainly consider a policy of cash value life. You can even mix and match a term life insurance investment policy with a cash value 401k policy. Buy the minimum permanent policy you can to maximize the cash you want to allocate to it. Then complete the balance of insurance need with a term policy.
An important caveat: if you need compare of 401k IRA saving insurance coverage beyond the age of 20 or 30 that you can get through temporary insurance, then the only option is a permanent policy. However, this has nothing to do with the investment qualities of the policy, but with the structure of the policy itself.
Life Insurance Over 50 to 90 Age Coverage
If you want or need to provide coverage for a dependent regardless of when you die, then no term life insurance over 50 policy in the world can provide that coverage. For example, you may want to provide a death benefit for a child with special needs, whether he or she dies at age 50 or 90.