If you’re thinking about buying a life insurance policy you may be wondering, is life insurance a wise investment? You’ve heard that some kinds of insurance allow you to “borrow” against the accumulated cash value as a tax-sheltered investment account. The truth is, this can be a good thing for some people but for others, not so much.
Term vs. Whole Insurance
Details can differ depending on the insurance provider, but generally there are pluses and minuses to both term and whole life insurance.
Term life insurance allows you to buy coverage for a set number of years. If you pass away before it ends, your beneficiaries get the payoff.
Some pros and cons:
- Premiums are less expensive than with whole life.
- Once your term of coverage has passed, there is no death benefit.
- Term doesn’t include a savings feature.
- Sometimes you can convert a policy to a permanent policy.
Whole life insurance, on the other hand, is a permanent policy as long as you make premiums on time. It also has an investment component.
Pros and cons:
- Premiums are more expensive, but fixed so they won’t increase as you get older.
- Value increases over time.
- Your policy accumulates cash you can borrow against and its tax-deferred.
- Taking cash out of the policy may reduce the death benefit.
- Your coverage is for your entire lifetime.
- If you have to cancel a policy you can be charged a penalty.
Is Whole Life a Good Investment?
Although premiums are higher than with a term policy, some people benefit from owning a whole life insurance policy.
If you become strapped for cash:
- You have the ability to borrow off of your whole life plan, tax-free.
- You may be able to quit paying premiums and let the accumulated cash value pay them until you’re on your feet again.
- Your broker might be able to sell your policy through a settlement broker or provider.
Buying permanent life insurance as a financial investment is generally good a good idea if:
– You have a high net worth and can use your policy investment to minimize estate taxes.
– You have a disabled dependent who will need substantial assistance.
– You need the liquidity for a business that has limited, if any, stockholders other than yourself.
– You have a very high income and have invested to the limits of your 401(k), IRA and Roth IRA.
Life insurance in general can be a good investment for reasons other than financial. If you have a financial debt that your beneficiaries will be burdened with after your death, life insurance can give you peace of mind and protect your loved ones. Talk to your broker to determine what kind of life insurance policy is right for you and your dependents.
For more information about a variety of issues pertaining to life insurance, see the articles in the eInsurance Life Insurance Journal. To get life insurance quotes, and for more information, visit our Life Insurance web page.