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Is life insurance an investment?

Typically, life insurance is an investment in you or your family’s future, but it also can have features that can help you set aside money now that you can access for future needs.

Common investment types like stocks or mutual funds allow you to put funds towards something that may appreciate in value as the investment matures.

While you may think of life insurance premiums only as a way to fund a death benefit, many life insurance policies allow you to put a portion of your premium towards a cash value that can grow. Your insurance policy’s cash value can also be withdrawn from or used as a loan, allowing you to use the funds as you like – even to put them into other investment vehicles.

Life insurance policies such as variable life insurance or equity indexed life insurance allow you to use that cash value directly within traditional investment vehicles like indexed stocks or mutual funds.

Similarities between investments and life insurance

With the cash value from a permanent life insurance plan, you can use your policy to build further stability for your savings and retirement. This happens through some similarities between life insurance policies and investment accounts, such as:

Interest

Savings accounts, retirement accounts, and permanent life insurance policies all accumulate interest.

Dividends 

Like some investment options, certain life insurance policies pay dividends over time.

Tax benefits 

Like some retirement accounts, you can make tax-free withdrawals from a permanent life insurance policy, provided the withdrawal does not exceed your cash basis in the policy. You can also take out tax-free loans from a permanent life policy.

Even with these similarities in mind,  the differences between life insurance policies and conventional investment options are significant enough that you should not mistake one for the other.

Differences between investments and life insurance

The differences between traditional investments and life insurance can put into perspective just how different these two financial options are. Life insurance policies contain several stipulations that make saving through them different from investing:

Limits to use

The money you’ve paid towards a permanent life policy mostly goes towards the policy’s death benefit. While cash value will build over time, you will not be able to access most of the money you’ve paid towards the policy.

Withdrawals and loans

What you withdraw from your life insurance policy will be deducted from your death benefit, which is the main purpose of your policy.

Which types of life insurance include options to invest?

There are several types of permanent life plans that offer investment-like qualities:

Whole life insurance

Whole life insurance plans offer lifelong coverage as long as premiums are paid. While some of the premiums you pay go toward the death benefit, a portion will also go toward building cash value.

Your insurer invests money in the cash value account, and you’ll have the opportunity to withdraw it during your life in the form of loans, withdrawals, or a policy surrender. The money invested in a whole life insurance policy will have guaranteed returns, making it easy to understand how much the policy will be worth over time.

Variable life insurance

With variable life insurance, the policy’s cash value operates like a brokerage account, regulated by the Securities and Exchange Commission. You can then use this cash value to invest in securities, bonds, and mutual funds.

Variable-universal life insurance

Some policies will offer a mix between the benefits of variable life insurance and universal life insurance, which is a permanent life policy that allows you to transfer money between your death benefit and cash value. This means you get the opportunity to invest cash value from a variable plan while also retaining some of the flexibility of a universal plan.

Indexed universal life insurance

This kind of policy takes the cash value of your universal life insurance plan and allows your insurer to invest that money in an index or fund that mirrors a stock market. While you’ll still retain the ability to transfer money between your death benefit and your cash value, you’ll also be able to grow your cash value based upon the growth rate of the market index your insurer has chosen.

Despite these options being available, potential investors should first consider whether there are investment alternatives that can offer more value to their financial plans in the long term.

Investment alternatives to life insurance

There are several investment alternatives to life insurance plans, including:

401(k)s beyond

With many employers offering matching programs for 401(k)s, and with a higher rate of return than permanent life insurance, investing in a 401(k) will prove less costly to your financial plan overall than purchasing and growing a permanent life insurance plan.

IRAs

IRAs offer a more stable manner of growing your savings than a permanent life insurance policy does. While withdrawals from IRAs are also tax-deferred like permanent life insurance savings withdrawals, the upfront costs of permanent life insurance plans can make saving money more difficult for most families than contributing to an IRA.

Savings and CD accounts

Although savings and certificate of deposit accounts may grow at a slower rate than the cash value of a permanent life insurance plan, their upkeep costs significantly less and they carry much lower risk than variable life or even indexed life insurance policies.

Anyone seeking to invest money to prepare for their future should consider these options. Keep in mind, also, that none of these options are exclusive. While permanent life has a cash value component, term life insurance (or any life insurance) is part of comprehensive financial plan to provide a healthy mix of coverage.

Can you use life insurance as an investment for retirement?

Life insurance can provide a financial lifeline that’s an investment in your future. Having peace of mind that a policy will protect loved ones if the unexpected happens can ease the burden of having to set aside additional money for end-of-life expenses or legacy planning. A life insurance policy can provide loved ones with enough money to cover estate taxes, pay for funeral costs, or receive an inheritance. By investing money into a life insurance policy that provides an adequate death benefit, you can rest assured that loved ones will be financially cared for, even if other financial investments aren’t enough to support them.

How to build a lifelong financial plan

Building a sound financial plan to last your life should include a healthy mixture of investments in life insurance coverage, savings, and retirement accounts.

Every life insurance customer has unique needs For some, the savings afforded by a permanent life policy will provide flexibility to their financial strategy to match the consistent security of a term life policy. Regardless of your options you should always consult a financial and tax advisor before making any investment.

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