Using Your Life Insurance as an Investment

Summary: Certain types of life insurance, like whole life and universal life, can double up as investment tools, offering a unique way to help build cash value, supplement retirement and help secure financial peace of mind for you and your loved ones.

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When you think of life insurance, you may consider it to be a safety net for you and your loved ones. But did you know that life insurance can also double as a strategic investment tool? That’s right—certain types of life insurance allow you to build cash value over time, providing you with extra resources to help supplement your retirement income or other long-term goals.

Permanent life insurance vs. term life insurance

When considering life insurance investment options, it’s important to weigh the benefits of permanent versus term life insurance. A term life insurance policy provides coverage for a set period—10, 15, 20, or 30 years—with premiums covering only the death benefit and fees, making it a simple and typically affordable option without cash value. On the other hand, a permanent life insurance policy, such as whole life insurance, stays active for life as long as premiums are paid. This type of policy typically includes a unique cash value element, which you can use as a financial resource and investment.

The cash value component of permanent life insurance

So, how does whole life insurance work as an investment? With permanent life insurance, a portion of your premium goes toward a cash value that grows tax-deferred over time, allowing you to access these funds for supplemental income, emergencies, or even as collateral. However, any loans from the cash value early may reduce the death benefit, so planning is key when considering whole life insurance as an investment.^**

Using whole life insurance as an investment

Whole life insurance is a type of permanent life insurance. With whole life insurance as an investment, each premium payment does more than help secure a death benefit—it also contributes to a cash value component that can grow steadily over time. Much like a savings account, the cash value earns interest at fixed rates, building on a tax-deferred basis. This cash value becomes a financial resource that you can access if needed, any loans may reduce the death benefit amount.^*

One of the key benefits of whole life insurance is the stability it typically offers. Premiums remain the same throughout the life of the policy, providing a steady, predictable bill you can budget for. Additionally, whole life insurance guarantees a set death benefit that cannot be adjusted, though accessing the cash value early could impact the amount.

Universal life insurance as an investment

If you're interested in knowing how universal life insurance might be the investment tool you're looking for. Universal life insurance is a permanent life insurance that combines the typical protection of life insurance with a flexible cash value component that can grow over time, often based on interest rates or the market.

While growth can fluctuate with market conditions or stay at a fixed rate, this flexibility makes universal life appealing for those looking to balance life insurance with some investment potential.

With Universal Life, you can adjust your premium payments within certain limits and even change the death benefit to suit your financial goals over time. And if you need access to cash, you can tap into your policy’s cash value. Keep in mind, though, that fees might apply, and using the cash value could lower the final death benefit.

Indexed universal life insurance (IUL)

For those open to tying part of their cash value growth to the stock market (without the risk of direct market losses), indexed universal life insurance (IUL) offers a unique option. Here’s a breakdown of how it works:

1. Your premiums at work: After covering fees and insurance costs, the rest of your premium goes into either a fixed-interest account or an indexed account.
2. Fixed account: Choosing this option means your cash value grows at a steady, fixed rate, much like a savings account.
3. Equity-indexed account: If you choose this option, your cash value is linked to a stock index, like the S&P 500. When the market is up, your cash value benefits significantly. However, if the market is down, you're protected; your cash value won't decrease, but it won't grow as much either. These policies come with a cap rate, which is the maximum annual interest rate the policy can earn. This cap rate acts as a ceiling for potential growth, even if the underlying index performs better.

IUL could be a good option if you’re comfortable with a bit more complexity in your investment approach. It offers potential for growth while keeping the safety net of life insurance. But it’s worth noting that both universal and indexed universal life insurance can be intricate products, best suited for those ready to explore a flexible, lifelong investment option alongside traditional life insurance.

Variable life insurance as an investment

Variable universal life insurance is another type of permanent life insurance that combines the investment opportunities of variable life with the flexible premium payments found in universal life insurance. It allows your cash value to grow through market-based sub-accounts, much like mutual funds. This means that while you can benefit from potential growth, your cash value and death benefit can fluctuate based on market performance.

Key benefits and risks

• Growth potential: If the market performs well, your cash value could increase, and you might even cover your premium payments using this growth. However, if the market takes a hit, your cash value could decline, which may affect both your death benefit and the stability of your policy.
• Flexible death benefit: One of the unique features of variable life insurance is that the death benefit can change based on how your cash value performs. So, it's essential to understand how this can impact what your loved ones would receive.

If you’re interested in variable life insurance, it’s wise to consult a financial professional to navigate the investment options within the policy and ensure it fits your goals. Call us at 800-377-9000 with questions and guidance about what type of life insurance might be right for you.

Reasons to invest in life insurance

Finding the right balance

Investing in life insurance can fit into your overall financial plan, balancing your current needs with your future goals. While it’s crucial to have enough coverage to help protect your loved ones, it’s equally important to consider how the cash value of your policy can contribute to your financial health down the road.

Understanding common misconceptions

You might wonder, "Why doesn’t everyone invest in life insurance?" Some people hesitate because they see life insurance as just a protective measure and overlook its investment potential. Others might feel overwhelmed by the variety of policy options and investment strategies, leading them to shy away from considering it.

By learning more about the different types of life insurance and their benefits, you can make more informed decisions that reflect your financial priorities.  premium payments found in universal life insurance. This means you can adjust your contributions while working toward building your cash value.

If you’re interested in variable life insurance, it’s wise to consult a financial professional to navigate the investment options within the policy and ensure it fits your goals.

Frequently asked questions (FAQs)

What trade-offs should you consider when using life insurance as an investment?

Life insurance as an investment involves trade-offs. Premiums for permanent policies are higher than term policies but provide benefits like cash value and lifelong coverage. Additionally, while the cash value grows steadily, returns may be lower than other investments like stocks or mutual funds.

Is whole life insurance a good investment?

Whole life insurance can be a good investment choice for those seeking stability and long-term growth. It offers guaranteed cash value accumulation, tax advantages, and lifelong coverage. While its returns may not be as high as riskier investments like stocks, it provides consistent, low-risk growth and ensures financial protection for your family.

Can you switch from term life insurance to permanent life insurance later?

Yes, many term life insurance policies offer a conversion option that allows you to switch to a permanent life insurance policy, such as whole life or universal life, without undergoing a new medical exam. This option is typically available during a specified time frame within your term policy, making it a flexible choice for those who want temporary coverage now but may consider a long-term investment later. However, the premiums for permanent life insurance are usually higher, so it’s essential to assess your financial goals and needs before making the switch.

Sources:
Investopedia (Updated November 26, 2024). Universal Life Insurance. Retrieved on March 18, 2025.

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