Life Insurance as an Investment: Pros and Cons
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Most of us don’t like to think about the uncertainty that awaits our loved ones when we die or what life will be like for them in those moments.
The truth is, safeguarding our family and the people we care for is one of the most important duties that come with adulthood. A great way to do this is by getting life insurance, which can ensure financial protection for our loved ones should something happen to us.
That said, life insurance is more than just a form of protection – it can also be an investment vehicle that can make you want to look forward to your future.
In this article, we’ll cover the pros and cons of life insurance as an investment, so you can better understand whether this type of product is right for you.
Can Life Insurance Work as an Investment?
There are two main types of insurance policies: term and permanent life insurance. The differences between the two are pretty distinct.
- Term Life Insurance. Term life insurance offers a death benefit in exchange for a fixed premium paid throughout the policy, which is typically anywhere from 10 to 30 years. The premiums are generally lower than permanent life insurance, but the death benefit is only payable if you died during the policy’s term.
- Permanent Life Insurance. This type of policy stays active for the entire lifetime of the policyholder. Unlike term life insurance, it will never expire unless you stop paying the premiums. The biggest difference is that permanent policies also accumulate a cash value, which policyholders can use to pay premiums or invest in other options.
As you can see, life insurance can certainly work as an investment, but only if it builds cash value.
Term insurance is not a sensible long-term investment option as it expires after each term, and you don’t get your money back. Additionally, there are no savings or investments associated with this type of policy.
Factors to Consider When Using Life Insurance as an Investment
If you want to leverage permanent life insurance as an investment strategy, however, there are certain factors that must be taken into account.
- Insurance component. This is the most important factor. You shouldn’t get life insurance as an investment just for the sake of it. If you don’t need the insurance component, it’s not really worth it as there are better investment options out there.
- Cost and eligibility. Insurance premiums vary depending on an individual’s age and health history. If you have a pre-existing condition or are already in the later stages of life, investing in a permanent insurance policy might get more expensive than they’re worth.
- Withdrawal terms. Life insurance policies aren’t explicitly designed to be investment vehicles, so they all have varying withdrawal policies. If you want to use life insurance as an investment, you need a policy that lets you withdraw your cash value or investment without any hassle.
Advantages of Using Life Insurance as an Investment
Now that you understand the factors that you need to consider for life insurance to work as a good investment, you need to look at the advantages to gain a clearer idea of what to expect.
- Death benefit. A life insurance policy offers death benefit coverage for the policyholder’s beneficiaries. This feature is unique to life insurance, as most–if not all–investment vehicles don’t have this benefit.
- Tax-related benefits. Not only can you receive tax-exempt death benefits with life insurance policies, but also the potential for growth of cash value on a tax-deferred basis.
- Potential for higher returns. When compared to traditional fixed-income investments such as bonds, certain life insurance policies like variable life insurance offer greater potential for higher returns through their investment features.
- Estate planning. Life insurance can also be used as part of an estate plan to help pay estate taxes and make sure that your assets are distributed according to your wishes.
- Possibility of insurance annuities. Annuities are a financial solution offered by insurance companies. These contracts provide a reliable source of revenue throughout the policyholder’s lifetime so that they can rest assured knowing their future is secure.
Risks of Using Life Insurance as an Investment
Incorporating life insurance into your financial plan can be advantageous. However, keep in mind that there are also some potential risks.
- No guarantee. Life insurance investments still carry a certain level of risk, similar to any other investment type. You will always run the risk of not making profitable returns when investing, and life insurance is no different.
- Risk of losing value. Some life insurance policies link the cash value and death benefits. This means that when you invest in your policy’s cash value, you could be putting at risk what you’re paying for: a guaranteed death benefit. If this is something important to ensure before investing, do not forget to review your plan’s terms of service!
- Little control over investments. With a life insurance policy, you do not have full control over your investments. You are limited to the options provided by the insurer and have to trust that the company will manage your investments as you want them to.
- Complexity. Insurance policies can be profitable when included in long-term financial planning, but they can be quite complex, especially if insurance isn’t your forte. Be sure to read and understand the terms before signing up for any life insurance policy.
Life insurance isn’t just a way to plan for your family’s future after you’re gone; it can be an effective tool in constructing sound financial strategies.
With proper expertise and knowledge, life insurance can become much more than a reminder of one’s mortality – it can also create opportunities that offer long-term benefits.
Navigating the world of insurance can be tricky and complex, making it difficult to invest in insurance. To make it easier for you, Magnum Insurance offers comprehensive life insurance policies that can help you build your financial future.
For more details, call us today and get a free quote!
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