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Understand how life insurance works

Can Life Insurance Be Used as An Investment?

A senior couple enjoys a day at the beach after using life insurance as part of their retirement investment plan

Life insurance is a tool that’s primarily used to help financially protect your loved ones in the event of your death. While its main use is for that protection, did you know that there are other uses for life insurance?

You may be wondering why you would want to consider using life insurance in a different way in the first place. Well, you can use the cash value from certain life insurance policies to help boost your supplemental retirement income outside of your 401(k) or individual retirement account (IRA). Or, if you consider yourself a diligent investor, you can use variable life insurance to help build your policy’s cash value through investments in sub-accounts over time on a tax-deferred basis. But, more on that in a bit.

Permanent Life Insurance vs. Term Life Insurance

If you take out a term life insurance policy, you’re covered for a specific amount of time and your premium goes only toward covering the policy’s death benefit and fees. However, if you decide to get a permanent life insurance policy, your premium goes toward covering the death benefit, fees, and has a tax-deferred cash value element that can build up over time.

Permanent Life Insurance Term Life Insurance
  • This policy has no expiration date as long as you continue paying premiums
  • The premium you pay covers the death benefit and is added to the cash value of the plan
  • The cash value may have the potential to grow overtime
  • You can access the cash value early if needed, but this will reduce the death benefit
  • This policy has an expiration date. Typically, term life insurance policies last 10, 15, 20 or 30 years
  • The premium you pay goes toward covering the death benefit and fees
  • This policy has no cash value component

If you’ve decided on buying a permanent life insurance policy, here are a few ways you can use the three main types as part of your strategy.

Whole Life Insurance

When you pay your premium for whole life insurance, part of that payment goes to the cash value. The cash value of your policy builds over time through fixed interest rates. This is similar to how a savings account works. You can access your cash value if needed, however withdrawal fees may apply. With this policy, your premium payment amount stays the same through the life of the policy. Whole life insurance also has a guaranteed death benefit amount. This means your death benefit amount can’t be adjusted or changed. However, if you access the cash value early, the death benefit could be affected.

Universal Life Insurance

With a universal life insurance policy, your cash value can build similarly to how it builds with a whole life insurance policy – through interest rates. However, universal life insurance policies have fixed interest rates. The amount at which your cash value grows depends on the current market or your policy’s minimum interest rate, whichever is greater.1 This means that the cash value growth can fluctuate over time. This type of life insurance policy does offer flexible premium minimum and maximum amounts, and you can adjust your death benefit over time. You can also access your policy’s cash value; however withdrawal fees may apply, and your death benefit could be affected.

Indexed Universal Life Insurance (IUL): As the name implies, this is a type of universal life insurance policy. It can be a good policy for you if you’re looking for permanent life insurance that can build up cash value over time through either a fixed account or an equity-indexed account. You can choose which type of account you want, or choose to invest in both types.

Here’s how it works:

  • You pay your premium for your IUL policy.
  • After fees and the policy coverage is paid, the remaining amount (your cash value) goes to a fixed account or an equity-indexed account.
  • If you choose a fixed account, your cash value grows based on a fixed interest rate.
  • If you choose an equity-indexed account, your cash value will build based on the performance of an index. For example, policies typically offer popular indexes like the S&P 500 or the Nasdaq 100.
  • If the index you choose for your equity-indexed account doesn’t perform well, your cash value doesn’t decrease because it isn’t invested directly into the stock market –it just won’t grow.
  • You can access your cash value at any time, or use any profits from it to cover your policy’s premium. You may be subject to withdrawal fees and your death benefit amount could be affected, however.

This is considered an advanced life insurance product, because it can be tricky to understand.

Variable Life Insurance

Variable life insurance is a permanent life policy that allows your cash value to grow through investments in sub-accounts. The sub-accounts act similarly to mutual funds, in that they’re made up of bonds, stocks and other financial tools that help diversify your investments. Because of this, your investments are affected by market movements. If your investments perform poorly, your cash value can decrease.

This type of policy has a death benefit like the other types of life insurance; however it can change based on the performance of your investments in the sub-accounts. If your investments perform well, there’s the potential for your cash value to cover your premium payments. However, you’ll want to use caution with this approach. If you miss a premium payment, your policy could lapse. Your policy’s death benefit can be affected by the performance of your cash value, so make sure to ask your insurance provider if this approach could affect your policy’s death benefit amount as well.

Variable Universal Life Insurance (VUL): As the name implies, this type of life insurance policy combines aspects of variable life insurance with universal life insurance. Like variable life insurance, your cash value in a VUL policy has the potential to grow through investments in sub-accounts. And, like universal life insurance, there’s a flexible premium maximum and minimum amount for your VUL policy.

Because of the investment component, you may want to check in with a financial advisor if you’re interested in a variable life insurance policy.

The Most Important Thing

The most important thing when it comes to paying for life insurance is being able to give yourself and your family some financial peace of mind knowing you’re protected by the policy’s death benefit. Although you can use certain types of life insurance policies for cash value, make sure to do your research before deciding which life insurance policy is right for you.


SOURCES:

1 Investopedia (April 2, 2018). Web page: Universal Life Insurance. Retrieved on January 24, 2019, from https://www.investopedia.com/terms/u/universallife.asp

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice. Consult a qualified professional regarding your specific situation.

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