How To Use Life Insurance To Build Wealth?
Life insurance policies come in two main categories, term and permanent, and each has its own set of advantages and disadvantages. Permanent life insurance policies can accumulate cash value and are often used as an investment tool to accumulate wealth. This article will highlight the benefits of permanent life insurance policies and explain how they work to build wealth.
Benefits of Permanent Life Insurance Policies
|Tax-deferred investment||Invest on a tax-deferred basis, meaning exempt from paying taxes on any interest, dividends, or capital gains on the plan’s cash value, unless one withdraws the proceeds.|
|Coverage for life||Coverage for the insured’s entire lifetime, unlike term life insurance, which ends coverage after a set number of years.|
|Borrowing against cash value||Borrow against the cash value of a permanent life insurance policy without incurring penalties, unlike in tax-advantaged retirement plans such as 401(k).|
|Accelerated benefits||Insureds may be able to receive between 25% and 100% of their policy’s death benefit even if they are still alive if they develop a critical illness and use the money to pay for medical bills.|
Permanent life insurance policies allow policyholders to accumulate cash value in addition to the death benefit. Policyholders can use these funds to pay their premiums, take out a loan at a lower rate than banks offer, and supplement their retirement income. The cash value accumulates as the premiums policyholders pay are split up into three portions. One part of the payment goes toward the death benefit, another covers the insurer’s operating costs and profits, and the rest is allotted to the plan’s cash value. The life insurance company generally invests this money in a conservative-yield investment.
However, cost is among the biggest drawbacks of permanent life insurance plans. It requires policyholders to pay higher premiums compared to term life coverage. Permanent policies can also have tax implications if the beneficiaries opt to surrender coverage or if the insured dies with outstanding loans. Additionally, borrowing from the cash value or accessing accelerated benefits can reduce the payout amount.
Investopedia recommends utilizing the accumulated cash value in permanent life insurance policies rather than simply ignoring them. Don’t let cash value that has built up in your policy go to waste; cash value in your policy at your death goes back to the insurance company, not your heirs.
The table below illustrates how a cash value accumulates in a $100,000 whole life insurance policy with premiums paid out of pocket starting at 35-years old for a non-smoking male.
|Policy year||Age||Annual premiums||Cash value||Death benefit|
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