Whole Life Insurance Is A Good Investment For Retirement And For Safeguarding Your Assets
Whole life policies are guaranteed to build cash value over time, and this cash value can help you pay for big-ticket items like a new home or launching a business. Upon retirement when your liked insurance needs decrease, you can use that money to supplement your income during down markets. Instead of selling off portions of your portfolio when prices are depressed, you can use your policy’s cash value while the market is down, giving your other assets time to recover.3
Consult An Expert Before Taking A Loan On Your Cash Value Life Insurance
Permanent life insurance is more than a payout for your beneficiaries. It’s an opportunity to build wealth and fund your retirement through the cash value your policy accrues. If you’re considering taking a loan against your permanent life insurance policy, consult an accountant and financial advisor first.
You want to understand any tax implications, the impact on your death benefits in case you don’t pay back the loan, and how other assets are protected. This decision can’t be made in a vacuum because everyone’s needs vary. Involving an accountant and financial advisor can help you avoid making a decision that is not financially sound or advantageous for you.
What Is Whole Life Insurance
There are two main types of life insurance: term and permanent. As a type of permanent life insurance, whole life stays with you throughout your life . Once you purchase a policy, as long as you continue to pay your premiums, you will be assured of a death benefit after you pass away.
But theres more to whole life policies than that. They also feature an investment component. Your premium payments go toward funding your death benefit and paying administrative costs, but a portion also gets tucked into a savings account where it grows throughout the life of the policy. This amount, called the cash value, can be borrowed from during your lifetime if needed.
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How To Use Whole Life Insurance To Create Wealth
Single premium life insurance is a valuable investment when it comes to wealth creation and transfer. With this type of life insurance, a single premium is deposited, creating an immediate death benefit that is guaranteed until the owner passes away.
Also, can lifeinsurance make you rich? Permanent life insurance is more than a payout for your beneficiaries. Its an opportunity to build wealth and fund your retirement through the cash value your policy accrues. If youre considering taking a loan against your permanent life insurance policy, consult an accountant and financial advisor first.
People ask , how do you make money off wholelife insurance?
, is whole life insurance good for high income earners? Permanent life insurance for high net worth individuals Term life insurance is best for most people its simple and affordable but high-earners who have already maxed out other tax-deferred savings accounts could consider wholelife insurance because it has a cash value component that gains value.
Whole Life Insurance Is Great For Reinvesting Your Dividends
One of the benefits of purchasing whole life coverage from a mutual company is the fact that you will be eligible to receive dividends4, if declared. Many policy owners use their dividends to purchase additional coverage which provides more death benefit protection, more cash value accumulation, and more dividend earning potential. If you prefer, however, you can simply take your dividends in cash or use them to pay future premiums.
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The Factors That Make Life Insurance Ideal For Cash Accumulation
This is not intended to be an exhaustive list by any stretch. There are dozens of factors that could make life insurance ideal for accumulating wealth. But some of the most common ones that come up over and over with our clients and potential clients are:
- The cash value remains stable and earns a steady rate of return. Yes, the overall return can vary a bit over time depending on dividend interest rates for dividend-paying whole life insurance and interest credits in an indexed universal life insurance policy but if you are making the premium payments, your policy will accumulate cash at an increasing rate over time. When you need it or when you want it for the matter, the cash will be there.
- The death benefit pays your beneficiary the proceeds with any income tax due. Ive already discussed this one above but its worth reiterating. For most people, who will not have an estate that is subject to federal estate tax, life insurance death benefit proceeds pass to your designated beneficiary free taxes.
- Lastly, remember you always have access to the majority of your cash value in the form of policy loans. You do not have to be 59.5 or require some financial hardship to tap it. Its a very simple process of calling the life insurance company and making the request. Typically speaking, you will have the money electronically deposited in your bank account within a few days depending on the company.
Strategies For Using Life Insurance To Create Multi
We met with two separate clients recently who had a similar net worth. One client had already leveraged life insurance in her estate plan, while the other hadnt considered life insurance yet. As a result, the first client was set to leave substantially more money to her heirs than the second client. This was just one example of how the strategies chosen to transfer wealth from one generation to the next can make a big difference.
Weve found that those who incorporate life insurance into their estate plans come away with a level of tax efficiency that is unmatched by the alternatives. They also avoid much of the volatility and overall uncertainty associated with traditional stock and bond investing.
Here are some of our time-tested strategies that can help you create multi-generational wealth:
Maximize your IRA, Social Security, pension, or annuity. Our strategies for each of these vehicles all have a similar goal: to accelerate your payments and fund life insurance instead.
If you do an analysis of how IRA accounts get taxed if left directly to your heirs, youll be amazed at the inefficiency. Not only are those account values includable in your estate tax calculations, but the eventual distributions are also subject to ordinary income tax.
Plan Carefully to Create a Legacy
Once again, the objectives here are clear: You are trying to take your hard-earned money
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How To Build Wealth With Permanent Life Insurance
If youve ever thought about getting life insurance, theres every chance its because you want to leave a nest egg to your loved ones when you pass. What many people dont know, however, is that the death benefit is just one element of life insurance. It can also be a type of savings account, letting you build wealth throughout the years while youre alive. How? Thats what were here to tell you with this guide on how to build wealth with permanent life insurance.
What Types Of Insurance Can You Use
Any type of permanent insurance works but the most common ones are whole life and universal life. Both let you build up cash value tax-sheltered and defers tax until withdrawal. While you can choose the deposit amount and investments for a universal life policy, whole life is more rigid with its premium and investment.
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Can Life Insurance Make You Rich
Before discussing how life insurance can financially boost your life, and the life of the beneficiary of your policy, it is important to understand what the purpose of life insurance truly is. Term life insurance is meant to provide temporary financial protection against a death, for a low cost to the owner. Permanent life insurance is meant to do the same, but for the entire life of the insured person. Permanent life insurance does have a cash value account that can grow, so it can also be used as a savings and investment vehicle.
You should not look at life insurance as a lottery ticket. It is meant to provide financially for heirs, to offset the financial cost of losing someone. It can also help facilitate transfer of wealth to future generations while avoiding estate taxes. Life insurance is a financial tool, and it can be quite complex. Ethical considerations aside from viewing death as a financial windfall, permanent life insurance can be quite complex and it can be quite easy to lose money owning a policy if you dont understand how exactly it works.
How Long Does It Take Before I Can Draw On The Cash Value Of My Policy
Generally, youll want to leave the cash value alone for a decade or so. At the beginning of your policy period, most of your premium will go to administrative fees and building the death benefit. It will be some years before there is significant accumulation in the cash value portion of the policy.
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How To Determine The Cash Value Of A Life Insurance Policy
How long does it take for whole life insurance to build cash value? The cash value of whole life insurance can accrue slowly or more rapidly depending on the policy design and also on the age and health of the insured. Most of the time we find that the policy design is the primary factor for better cash value accumulation.
Weve also included a table farther along in the article that illustrates the growth of whole life insurance with cash value.
Does The Plan Really Work
This all sounds good on paper, but does it really work? To simplify things and help you make a good decision, I have modelled your situation and run a few different comparisons. You can view the outcome in this video.
To model this out I have made the following assumptions:
The important thing to note is that there is more money available to come out of your corporation tax-free with the insurance concept than without.
100% stock portfolio
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Life Insurance As An Investment
Maybe our hate relationship with life insurance will change if and when we will look at Life Insurance as an Investment:
- Life insurance is an asset and helps diversifying a portfolio.
- This asset can be used to provide income in retirement.
- The death benefit of life insurance policies is tax free, and this also includes the investment gains made on the cash value portion of the policy. Many have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, a significant wealth increase can be realized, tax free, when compared to tax exposed or tax advantaged investments.
Types Of Cash Value Life Insurance
There are a few different kinds of life insurance that have cash value including:
While all these types of life insurance claim the benefits of cash value, whole life insurance is the only permanent life insurance product that builds equity through the policy design. All other permanent cash value life insurance policies are built with a renewable term insurance component, so they cannot ever build equity through the life insurance component. The cost of insurance will keep rising and the policy will never be paid up but will merely be leased on a renewable basis. Whole life insurance cash value continues to build throughout your life, which is a living benefit of the policy you can use while youre alive.
If whole life insurance is new to you, you may want to read more about how it works here.
|Get a working knowledge of how each type of life insurance policy works. After reading this 10-page booklet you’ll know more about life insurance than most insurance agents.|
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Strategies Used To Create Wealth With Life Insurance
A financial planner and life insurance agent can help you review what options will work for you, however here are three examples of how some use life insurance to create wealth:
How To Create Wealth With The Rockefeller Formula
In my last posts, I spoke about creating a Wealth Capture Account, as part of the Rockefeller Formula, to make saving money something that was automatic for you, so that you grew wealth without having to think about it.
Here, I look at creating an account for your non-essential spending.
Account #2: Living Wealthy Account
This account is to save money for guilt-free spending on eating out, shopping, vacations, courtside tickets or whatever luxury brings you value, helps you relax, or restores your energy. We recommend that you save 3% of your income in your Living Wealth Account.
Dont underestimate the value of this account. The point of it is to allow you to splurge a little, even while building wealth. If you budget too tightly and never allow yourself enjoyment, its not sustainable. It gets old quickly. This account helps you maintain a healthy, productive, relaxed mindset while youre working toward your 5 Day Weekend.
When you combine these two accounts, ideally you should be saving 18% of your income. So what do you do with the money youre accumulating?
Create Wealth with the Rockefeller Formula
Heres a big picture overview :
Cash Flow Insurance is the perfect wealth-creation tool for entrepreneurs and investors. Your money isnt locked up away in the stock market until youre age 59½, as with 401s and IRAs. Instead its always available to borrow from to accelerate your business growth or to purchase investments.
I explore this further in my next post.
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What Should I Consider When Using Life Insurance For Investment
While there are many benefits to using your life insurance policy as an investment, there are also some potential downsides that are worth considering. The first is that permanent life insurance policies typically cost much more than term life insurance policies. For low to middle-income families, it doesnt make much sense to spend this much money on life insurance, particularly if you dont have many extra funds to move into your cash value savings. A term life insurance policy with lower premiums may end up being the more practical option. Permanent life insurance policies can also present problems if your income tends to fluctuate. You may be able to afford your insurance premiums now, but what happens if you lose your job or encounter serious expenses in the future? These are important questions to consider.
Another important thing to consider is that these investment accounts come with significant risk. There is always a chance that your money might not accumulate the way you expect it to, which could leave you without the funds that you were expecting. The investments that insurance companies use arent always the most competitive either. You might be better off putting your money towards another investment strategy that is more likely to yield a high return.
Who Needs Cash Value Life Insurance
High-net-worth individuals those with at least $1 million in liquid assets often have permanent life insurance policies for tax benefits, endowments, and gifts. The cost is considerably higher than term life insurance because permanent life insurance is also a wealth-building tool.
The average person may not be able to afford a $1 million permanent life insurance policy. Think of permanent life insurance coverage like equity in a home. You may not be able to get your dream home right off the bat, but you can get a starter home that also builds you wealth. With permanent life insurance, start with a smaller death benefit and increase it over time. And if you can’t afford a permanent life insurance policy, get a term life policy that can be converted to a permanent policy.
Williams also suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.
Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.
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