Insurance agents and insurance companies often make out life insurance as an alternative to traditional investments. In as much as some policies have characteristics that are investment-like, but are they really good investments?
Basic Concepts of Life Insurance
We need to know the basics of how an insurance policy works to be able to properly evaluate life insurance as an alternative investment. Every life insurance has two main components: what you receive known as the death benefit and what you pay known as the premium. Insurance companies do not offer free policies.
Term insurance or basic life insurance does not have the component of cash value. Each year you pay a premium to the insurance company each year, and the company writes a cheque to your beneficiaries if you die during the term of the policy. Federal income taxation is not applicable to the payable death benefit. Term policies that were purchased a number of years back still had a premium that gradually increased every year. For the fact that each aging year you are closer to death and hence more costly to insure, the increasing premium compensates the insurance company. The longer the period level of the premium the higher it will be charged.
Permanent life insurance – permanent life insurance comes in various types of policies including; adjustable life, universal life, indexed life, whole life, and variable life, each having its own expenses and risks. The idea of using a permanent policy for investment is the same regardless of the type. Having to pay the internal insurance charges for the life insurance benefit is the main disadvantage of insurance as an investment.
Seeing as there’s a basic understanding of life insurance, we can go ahead and outline some things to help you decide if you should be considering life insurance as an investment.
Rule number one is don’t buy insurance if you don’t need insurance. As you get older, the cost of insuring yourself drastically increases, so why burden yourself with insurance costs if you don’t need it. Invest your retirement money in Roth IRA and Roth 401(k) if you qualify and if you like the taxation of life insurance policy. Qualified withdrawals are generally free of income tax, and contributions are made with after tax dollars. It is similar to the life insurance policy but without the associated costs that come with life insurance.
A cash value policy may be an advantage if you do need insurance, this is because you will be paying for the insurance cost whether you purchased a permanent or term policy. Maximize the contributions to your IRA or 401(k) plans before allocating funds to cash value policy. Nothing I better than 529 college savings plan if you are planning for your children.
Getting a cash value life policy may make sense for you as part of your retirement strategy if you have a lot of money to invest and you need a life insurance. One must be cautious when it comes to the complexity of income taxation and permanent life insurance. Kindly seek the advice of a qualified tax and insurance professionals for assistance with your insurance needs.