Life insurance is usually seen as a way to protect your loved ones financially if you pass away unexpectedly. However, some life insurance policies can also be used as an investment tool.

A life insurance investment plan combines the benefits of a traditional life insurance policy — such as a guaranteed death benefit — with the opportunity to build cash value over the life of the policy. This cash value grows over time and can then be used for various financial needs such as supplementing retirement income or paying for a family member’s college.

Investing in a life insurance plan can be a sound financial strategy. The cash value of these plans grows on a tax-deferred basis. This means you won’t pay taxes on the interest, dividends, or capital gains on the cash value until you withdraw the money. The death benefit associated with life insurance investment plans ensures that your loved ones will have financial support after your passing. This benefit is also often paid out tax-free.

What’s the best life insurance policy for investment for you? Here’s everything you need to know about the best life insurance to invest in and which plan may be right for you.

Types of Life Insurance Investment Plans

The three most common types of life insurance are whole life insurance, universal life insurance, and variable life insurance. Each type offers unique features and benefits. Which plan is the best life insurance for investment for you will depend on your unique situation.

Whole Life Insurance

Whole life insurance is the most straightforward form of permanent life insurance. It offers a death benefit along with a savings component, known as the cash value, which grows at a guaranteed rate over time.

Features and Benefits:

• Guaranteed Cash Value Growth: The cash value in a whole life insurance policy grows at a predetermined rate set by the insurance company. You can rely on this growth regardless of market conditions, providing a stable investment component. The cash value usually grows quickly while you are younger, but growth can slow as you age and more of your premiums go toward covering the cost of insurance.
• Fixed Premiums: Whole life policies have fixed premiums that do not increase as you age. This predictability makes budgeting easier, as you know exactly how much you need to pay for the duration of the policy.
• Permanent Coverage: As long as you pay the premiums, the coverage lasts for your entire life. This permanent coverage means you don’t have to worry about renewing the policy or losing coverage as you get older.
• Tax Benefits: The cash value growth is tax-deferred, and the death benefit is generally tax-free to your beneficiaries.

Example:

Suppose John, a 30-year-old, buys a whole life insurance policy with a $500,000 death benefit and a fixed annual premium. Part of his premium goes toward the death benefit and part toward building cash value, which grows tax-deferred. By the time John retires at age 65, he has built up a substantial amount of cash value that he can use to supplement his retirement income, or borrow against.

Universal Life Insurance

Universal life insurance offers more flexibility than whole life insurance. It allows policyholders to adjust their premiums and death benefits within certain limits.

Features and Benefits:

• Flexible Premiums: You can choose how much to pay within a set range, allowing you to adjust your premium payments based on your current financial situation.
• Adjustable Death Benefits: You can increase or decrease the death benefit, subject to passing a medical examination for increases and potential surrender charges for decreases.
• Cash Value Growth: The cash value of a universal life policy earns interest based on a rate determined by the insurer, which may vary according to prevailing economic conditions.
• Loan Options: Like whole life insurance, the cash value can serve as collateral for loans, providing financial flexibility during the policyholder’s lifetime.

Example:

Mary, a 40-year-old entrepreneur, opts for a universal life insurance policy because of its premium flexibility. During years when her business does well, she pays higher premiums, which speeds up the growth of the cash value. During leaner times, she reduces her premium payments, lowering her monthly costs. The flexibility of a universal life policy helps Mary manage her cash flow while retaining coverage.

Variable Life Insurance

Variable life insurance is similar to universal life, but with an added element where the cash value can be invested in various accounts resembling mutual funds. This type of policy offers the potential for higher returns based on the performance of these investments.

Features and Benefits:

• Investment Options: You can choose from a range of investment options for the cash value, from stocks and bonds to money market funds.
• Flexible Death Benefits and Premiums: Like universal life insurance, variable policies offer adjustable death benefits and, in some cases, flexible premiums.
• Risk and Reward: The potential for higher returns comes with higher risks; if the investments do not perform well, the cash value may decrease, but if they do well, it can significantly increase.

Example:

Tom, a 35-year-old with a keen interest in the stock market, chooses a variable life insurance policy for its investment options. He selects a diversified portfolio of funds within his policy, aiming to maximize the growth of his policy’s cash value. Over the years, Tom’s investments perform well, significantly increasing the cash value of his policy, which he can use to help fund his retirement plans.

Key Features and Benefits of Life Insurance Investment Plans

Life insurance investment plans can help you manage and grow your financial assets during your lifetime. There are several key features and benefits of life insurance investment plans that can make them an attractive component of a balanced investing strategy.

Guaranteed Cash Value Growth

One of the primary attractions of many life insurance investment plans, particularly whole life and certain universal life policies, is guaranteed cash value growth. This feature ensures that part of your premium payments always goes into a cash value account, which grows at a guaranteed rate set by a formula from your insurance provider.

Unlike other more volatile investments, the guaranteed growth in a life insurance plan provides a stable accumulation of value. The cash value also earns interest, which compounds over time, meaning the interest itself earns interest. This can increase the total value of the cash component significantly over the years.

Tax-Advantaged Savings

The savings component of life insurance investment plans offers significant tax advantages. The cash value in a life insurance policy grows tax-deferred, meaning you don’t pay taxes on the growth until you withdraw it. This allows the investment to grow faster than it might in a taxable account since you reinvest the money that would otherwise go toward taxes. In most cases, the death benefit paid to your beneficiaries upon your passing is also entirely tax-free.

Flexible Premium Payments

In universal and variable life insurance policies, you can enjoy the benefit of flexible premium payments. This flexibility can significantly ease managing cash flow throughout your life.

Depending on your financial situation, you can choose to increase or decrease the amount you pay into your policy. This can be particularly helpful during times when your financial situation might change, such as during a career transition or retirement.

Death Benefit Protection

While the investment components are appealing, the primary purpose of any life insurance policy is the death benefit protection it provides. The death benefit offers a lump sum, which can help cover living expenses, pay off debts, or fund future educational expenses for your beneficiaries, making sure that they are financially secure in your absence.

Investment Options and Strategies

Variable life insurance policies offer a range of investment options that can tailor your policy to meet specific financial goals. You can choose from a variety of funds, similar to mutual funds, to invest your policy’s cash value. This diversification can help manage risk and increase potential returns. You have the freedom to adjust your investments according to market conditions or changes in your financial goals.

Factors to Consider Before Investing in Life Insurance Investment Plans

Before you commit to a policy, you should evaluate several important factors carefully to make sure you choose the type of insurance that’s right for you.

Risk Tolerance and Investment Goals

Finding your individual risk tolerance and investment goals is one of the most important parts of determining the right type of life insurance investment plan for you.

Risk tolerance refers to your ability and willingness to endure market volatility and potential financial losses. Variable life insurance, for instance, may offer higher returns, but it also comes with higher risk due to its investment in market-driven vehicles. On the other hand, if you are more conservative with your money, whole life may be the best life insurance investment for you, since it reliably gives stable, but typically lower, returns.

Are you looking for stability and guaranteed growth, or are you more interested in potentially higher returns? If your primary goal is to accumulate a cash reserve for future needs, a policy with a reliable growth rate like whole life might be preferable.

Policy Fees and Charges

Fees can include administrative fees, mortality and expense risk charges, and fund management fees, especially in policies with investment accounts. High fees can eat into the cash value and overall returns of your investment, particularly in variable life insurance plans where the fees can vary widely based on the funds chosen.

If you decide to withdraw money from your policy’s cash value or cancel your policy altogether, you may face surrender charges and penalties. These are fees levied for withdrawing funds from your cash value or canceling your policy before a certain period, typically within the first few years of the policy.

Policy Performance and Historical Returns

Evaluating the past performance of the policy’s investment components can provide insights, although it’s important to remember that past performance is not indicative of future results.

Look at the historical return rates of the policy’s investment options, especially in the case of variable policies where your cash value is invested in market-dependent funds.

Policy Terms and Conditions

The terms and conditions of a life insurance policy govern your agreement with the insurer. Understanding these is important for avoiding surprises down the line.

Pay attention to the details concerning premium payments, benefits, exclusions, and the conditions under which the policy can be claimed.

Choosing the Best Life Insurance Investment Plan

Before you sign up to get a policy, consider what you need. Are you looking for protection for your family, or are you more focused on using life insurance as a tool for wealth accumulation? How much coverage do you need to ensure your family’s financial stability?

Think about your broader financial goals. Are you planning to use the cash value for retirement, to fund a college education, or as an estate planning tool? If you’re primarily interested in ensuring that your family has sufficient financial resources in the event of your untimely death, a term life insurance policy might be adequate. However, if you’re also looking to build cash value that can serve as a supplemental retirement fund, a whole or universal life policy might be more appropriate.

So, what and who is each insurance investment plan type best for?

• Whole Life Insurance: Offers the least risk with fixed cash value growth, suitable for conservative investors.
• Universal Life Insurance: Typically offers a range of investment options that are somewhat conservative but more flexible than whole life insurance. The performance can vary based on the interest rate environment.
• Variable Life Insurance: Provides a wide range of investment options that can include high-risk market securities. This plan offers the potential for high returns but also comes with increased volatility and potential for loss.

Consult with a Financial Advisor or Insurance Agent

A financial advisor or insurance agent can provide invaluable insights into the different types of life insurance investment plans available. They can help you navigate each option and find the best life insurance to invest in for you.

It can be a good idea to consult with a financial expert before signing up for a policy. An advisor can help tailor a life insurance strategy that integrates seamlessly with your overall financial plan.

Fidelity Life’s team of licensed insurance agents can help you understand each type of life insurance to choose the one that best fits your needs, lifestyle and budget. Contact us at 1-866-912-7775 for more help and answers to your questions.