What’s the best way to invest in your future?
Life insurance is an investment…in more ways than one.
For all its benefits, only 54% of Americans have some form of life insurance, which means there’s a pretty good chance that you’re one of the millions of adults without this vital form of coverage.
Perhaps you think you can’t afford it. Or you’re overwhelmed by all the options in the marketplace. Maybe you simply don’t like thinking about your own mortality.
However, I think more people should review life insurance as part of their overall retirement and family planning.
What Makes Life Insurance an Investment?
The average home or auto insurance policy is exactly that: insurance. You pay a premium each month and—in the event you have to make a claim—you will be reimbursed for your losses and damages.
Life insurance is a bit different.
While there is no guarantee that you will have a kitchen fire or get into a car accident each year, there is a guarantee that you will eventually pass away. When (not if) that happens, your family members may find it difficult to make ends meet without you.
If you’re a breadwinner, they will be left without that source of income. If you stay at home to care for the home and children, they will have to pay others to take over.
Having a life insurance policy is an investment in your family’s future. But not all life insurance is created equal. Let’s take a look at three different types of life insurance to see how each can help you invest in your future.
Term Life Insurance
Even the most affordable form of life insurance is an investment in the loved ones that you will leave behind after your death.
Term life insurance lasts for a certain period of time (usually 10, 20, or 30 years) before the policy expires. If you pass away during that time, your beneficiaries receive the amount listed on your policy.
Because of the wide range of policies, it’s usually fairly easy to find a policy that fits your needs. Term life insurance also tends to have the lowest premiums as compared to other forms of life insurance.
This can be a bit of a gamble, however. If you need to cancel your policy (or it expires without you having to use it), you will have received essentially nothing in return for all those premiums you paid. This is where permanent life insurance may be more beneficial to your situation.
Permanent Life Insurance
With permanent life insurance (both whole and universal policies), your policy also has a cash value portion that grows over time.
Your monthly premiums are allocated three different ways:
- Your death benefit;
- Operating expenses for the insurance company; and
- Your policy’s cash value.
The cash value component takes the form of a fund that earns interest. Over time as this money accumulates, you’re allowed to use this money in multiple ways.
The first method of using your cash value is to withdraw or borrow it to pay bills as needed. You typically need a certain amount of value built up in order to do this. Some contracts allow you to put your cash value into paying your premiums or upgrading your policy.
Once you reach the point where you no longer need the policy (for instance, your kids have grown up and your spouse went back to work), you will receive the cash value of your life insurance (minus any surrender fees).
Whole Life Insurance Dividends
If you’re looking for a little more than the average permanent life insurance policy can offer, consider looking into dividend-paying whole life insurance which is issued by a mutual insurance company. A mutual insurance company is an insurance company that is owned by its policyholders.
In addition to your death benefit and cash-value component, dividend-paying policies have the added benefit of an annual share of the company’s profits. The amount you receive is usually a percentage of your cash value. The higher the cash value, the higher the dividend.
You can choose to collect your dividends annually (reinvest them if you’re smart), use them to pay your premiums/upgrade your policy, or leave them alone and let them earn interest.
Who Can Benefit From Life Insurance As an Investment?
For the right individual and a very disciplined strategy, a cash value life insurance can be one of the most powerful investment vehicles you can use to plan for your retirement. In addition, if you were to unexpectedly pass away it will protect your family’s future and help ease the financial burden of your passing.
The qualities that make life insurance a powerful retirement planning tool are:
- No penalties Pre-59 ½ withdrawals
- No 1099’s during accumulation
- Distributions are not reportable income if properly structured
- No contribution limits
- No legislative risk
- Could provide a cost-free long-term care rider
- Safe and high yield investment vehicle
(You don’t have to like life insurance or life insurance companies, you just have to like them a little bit more than the IRS does.)
Generally speaking, it’s best to purchase life insurance while you’re still young and healthy. This will lock in a low premium rate and give you plenty of time to build up that cash value (if you opt for permanent life insurance).
Keep in mind, however, that permanent policies will always cost more in premiums than term policies. And those that pay dividends will cost you even more. However, if that’s not in your budget, a term life insurance policy will still be better than having no life insurance at all.
Plan For Your Future
Life insurance is far from a luxury. Rather, it’s an investment in your family’s future.
If you’ve put time and energy into building your 401k or IRA, but ignored life insurance, you’re doing your loved ones a disservice.
As The Financial Quarterback, I put my knowledge and expertise to work for you, advising you on all the steps necessary to reach your goals—whatever they are.
Call today so we can prepare your financial future.