Did you know that life insurance can be used as an investment? In this article, we’ll explain how you can use life insurance as an investment.
Whether you’re already invested in other investments and looking for a way to diversify your portfolio or just getting started, this article explains why now may be the perfect time to invest in life insurance.
What is life insurance and how does it work?
Life insurance provides a financial safety net for your loved ones in the event of your death. It’s typically purchased as a standalone policy, to provide a death benefit that will replace the financial resources of the beneficiaries if you die.
In a traditional life insurance policy, the death benefit is typically calculated based on several factors, including the amount of the premium paid, the age of the insured (or the beneficiary), and the health of the insured.
Typically, the death benefit is a certain percentage of the face value of the policy (the amount you borrowed to buy the policy).
For example, if you buy a $100,000 a-30-year term policy at a 7% interest rate with a death benefit of $90,000, if you die during the first year, your beneficiaries will receive $90,000.
How does life insurance as an investment work?
As an investment, life insurance works similarly to any other type of investment. You purchase a policy that has a death benefit.
The death benefit is exactly like any other asset owned by the insurance company. If you choose to cash out your policy at any time, the death benefit is what you get to keep.
If you want to keep the policy in place and allow it to continue to grow, you’ll need to contribute additional funds to the policy. There are a few key differences between using a life insurance policy as an investment and using it as a standalone policy.
Let’s take a closer look. First, life insurance as an investment is typically purchased as part of a larger portfolio of investments. This allows you to use a portion of your retirement or other investment assets to purchase life insurance coverage.
This can help diversify your assets across different types of investments and reduce your overall risk.
Benefits of life insurance as an investment
Low-cost, tax-free investment – One of the biggest benefits of using a life insurance policy as an investment is that it’s tax-free. With most types of investments, you pay taxes on any distributions from your investments. With life insurance, you don’t pay taxes on the death benefit.
Tax-free growth – As we mentioned, the death benefit is like any other asset owned by the insurance company. You can cash it in at any time and take your share of the growth without paying any taxes. You, as the insured, own the full death benefit at the time you purchase the policy and throughout the entire duration of the policy.
Increased cash flow – Another benefit of using life insurance as an investment is that you receive a steady stream of income from the death benefit regularly. Every year, you’ll receive a death benefit amount that’s equivalent to the amount you initially paid for the policy.
Limitations of life insurance as an investment
Longevity risk – One limitation of using life insurance as an investment is that it’s based on your expected longevity. If you live a long and healthy life, you’ll likely receive a larger death benefit than if you live a short life with many health issues.
Investment risk – While purchasing a life insurance policy as an investment can help to reduce your overall investment risk, the life insurance company is still taking an investment risk. If you cash out your policy at a later date, the death benefit will be tax-free, but the amount you receive will be entirely dependent on the health of the person who is the beneficiary of the policy.
No diversification – While using a life insurance policy as an investment can help to reduce your overall investment risk, there is no diversification or diversity among your investments. All of your money is in one specific type of asset – a life insurance policy.
Should you invest in life insurance?
We think it’s important to always be thinking about ways to increase your retirement savings. Even if you’re already saving a significant portion of your income (as many people are), money invested in life insurance can help to significantly boost your monthly retirement savings.
With that in mind, we think it’s important to remember that investing in life insurance poses a high level of risk. Even with the best insurance company in the world, if you cash out your policy at a later date and your beneficiary dies, you’ll lose all of your investment.
How to buy a policy with a high death benefit
One way to invest in life insurance is to cash out your existing policy with a high death benefit and purchase a new policy with a lower death benefit.
Let’s say, for example, that you have a $500,000 a-30-year term policy currently in force. If you cash out the policy at age 100 and your beneficiary receives $500,000 at death, you’ll be left with a $0 death benefit.
Regardless of how long you live, that’s all you’ll receive as a death benefit. Now let’s say you have $100,000 currently saved in a high-yield savings account.
You could invest that $100,000 in a high-risk investment (like stocks or real estate) or you could use it to purchase a new $100,000 term life insurance policy with a low death benefit.
How to buy a policy with a low death benefit
Another way to invest in life insurance is to purchase a new policy with a low death benefit. Let’s say you have $100,000 currently saved in a high-yield savings account.
You could invest that $100,000 in a high-risk investment (like stocks or real estate) or you could use it to purchase a new $100,000 term life insurance policy with a low death benefit. Regardless of how long you live, that’s all you’ll receive as a death benefit.
Now let’s say you have $500,000 currently saved in a high-yield savings account. You could invest that $500,000 in a high-risk investment (like stocks or real estate) or you could use it to purchase a new $500,000 term life insurance policy with a low death benefit.
Bottom line
Life insurance can be a great way to diversify your retirement savings, boost your monthly income in the event of your death, and provide financial security for loved ones in the event of your death.
If you choose to invest in life insurance, it’s important to remember that the investment is high-risk and may not be worth the risk if your beneficiary dies.
