Investing is an essential part of finance, and there are several ways to do it. One of these numerous ways is through insurance. However, finding the best insurance to invest in can be challenging, even for the most seasoned investors.
That said, many people opt for life insurance when thinking of investing. So, how do you use life insurance for investing?
This article will contain details on how investing with life insurance works, the types of life insurance, and the factors to consider before investing.
First, you need to know that there are two types of life insurance: permanent and term life insurance.
Term life insurance is a temporary plan that covers you for a specific period, such as 10 or 20 years, but eventually expires. Most people use this plan because its premium is significantly lower than permanent life insurance.
Furthermore, some people prefer this policy because of the "buy term and invest the rest" strategy, which means opting for a term life policy and using the remaining funds for other investments, like stocks.
On the other hand, permanent life insurance covers you for your entire life but comes with a much higher premium.
Both types of insurance have death benefits payout, but only permanent life insurance has an investment aspect.
When you opt for a permanent policy, a part of your premium is used to accumulate cash value, and this money keeps growing over time without you paying tax unless you withdraw the cash value.
You have access to the funds at any time while you are alive. So, you can withdraw or borrow against the cash value in that account.
If you don’t need the cash and simply want your beneficiaries to get more money in case of your death, you can also arrange for the insurer to move the cash value to increase the death benefit. Another way to benefit from the cash value is to use it to pay premiums.
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Alt text: Elderly man with a health care form
As mentioned earlier, you get an opportunity to invest if you obtained permanent life insurance. That being said, there are various types of permanent life insurance you can choose from.
While these plans cover you for the rest of your life, they all have different cash values. This means that your cash value grows based on the type of policy you opt for, its terms, the amount you pay, and your coverage period. If you find it hard to pick which plan to go for, you should consider hiring an insurance broker.
Here are the permanent life insurances to look at when investing:
Most people prefer using whole life insurance because it is the most straightforward plan. The plan has fixed and steady premiums, guaranteed cash value growth, and death benefits.
When you select whole life insurance, your cash value grows at a steady rate, which your insurer sets. Also, your investment is not affected by any changes in the market due to the fixed interest rate you receive.
With universal life insurance, you get a bit more flexibility. Things like premiums, death benefits, and cash value are not fixed. Hence, you can adjust your premiums and death benefits based on your needs. However, you might need to undergo a medical examination to qualify.
Your cash value interest rate will depend on the current money market rates. These rates fluctuate, so this investment is a bit riskier than whole life policies. That said, some brokers set a defined minimum rate (between 1-2%), so you do not experience massive losses regardless of the money market rates.
This insurance is a subdivision of universal life insurance, meaning they have similar features. Similar to universal life, you can adjust your death benefit and premiums depending on the limits and your needs. Additionally, you can choose how you want to invest your money, meaning you have more control over your investment.
The cash value of this policy depends on the performance of the investment plans your insurer has available. These plans could include stock, bonds, or other investment fund options. Also, your insurer might create minimum interest rates, depending on your chosen policy.
Indexed universal life insurance is another subdivision of universal life insurance. You also get the flexibility of universal life insurance. However, the only difference is that your cash value does not earn interest in the same way.
Somewhat similar to variable universal life insurance, the cash value of this policy depends on stock indexes (such as S&P 500) performance. Furthermore, these plans come with interest floors that prevent market losses. Your insurer may also set maximum interest rates (caps).
Variable life insurance is one of the most dynamic policies. This policy has various investment options. However, unlike universal life insurance, you do not get to adjust your premiums. Due to the wide range of investment options, variable life insurance holds greater risk than other policies.
Your cash value grows based on various investments set by your broker. These investments include stocks, mutual funds, indexes, and bonds. Brokers might create minimum and maximum interest rates to reduce the severity of losses.
Now that you know the ways you can invest with life insurance, you need to consider a few factors before investing. Here are some of those factors.
- Before choosing between permanent and term life insurance, consult your attorney, wealth manager, and tax advisor to get all the financial advice you need.
- Be sure you have a cash reserve (for emergencies), clear all debts, and still have enough disposable funds to invest. Remember that you also need to consider other financial obligations before investing.
- Consider choosing plans that allow you to withdraw money before you turn 60 without a tax penalty.
- Look into risk analysis and decide on your risk tolerance.
- Remember that long-term investments such as life insurance investments have illiquid funds during the first couple of years.
- You can remove funds prematurely, but you will have to face surrender charges, which take 10 to 20 years to pay.
Another thing people struggle with is knowing the right time to get life insurance. So, when should you get life insurance? The truth is, you can get life insurance at any time. However, the amount you pay varies based on several factors, such as age, health status, driving experience, etc. Furthermore, you need to figure out your budget and what type of policy would fit into it.
Having investments is a smart move when you want to make passive income, and there are many ways to go about it. While not as popular as others, purchasing a life insurance policy is a valid investment method. Hopefully, you can use this article to invest the right way.