Is Life Insurance a Smart Investment?
There are several variations of life insurance plans, but they generally fall into two categories: permanent and term. Term policies function similarly to other types of insurance policies you may carry, like car insurance; you pay money each month (for a certain period of time or term, hence the name), and if something bad happens—in this case, your early death—there’s a benefit paid out. Permanent life insurance, on the other hand, has an investment component, and allows policyholders to accumulate a cash value.
Pros and Cons of Permanent Life Insurance
There are many arguments in favor of using permanent life insurance as an investment. However, many of these benefits aren’t unique to permanent life insurance. You can often get them in other ways without paying the high management expenses and agent commissions that come with permanent life insurance. Here are a few of the most widely advocated benefits of permanent life insurance.
This means you don’t pay taxes on any interest, dividends, or capital gains on the cash-value component of your life insurance policy until you withdraw the proceeds. However, you can also take advantage of tax benefits with a number of different retirement accounts, including IRAs, 401(k)s, and 403(b)s.
You can keep most policies up to age 120, as long as you pay the premiums.
Another touted benefit of permanent life insurance over term life insurance is you don’t lose your coverage after a set number of years.
You can borrow against the cash value.
If you need money to buy a home or pay for college, you can borrow against the cash value of a permanent life insurance policy.
You can get accelerated benefits if you get sick.
You may be able to receive anywhere from 25% to 100% of your permanent life insurance policy’s death benefit before you die if you develop a specified condition such as heart attack, stroke, invasive cancer or end-stage renal failure.
Pros and Cons of Term Insurance
When you buy a term policy, all of your premiums go toward securing a death benefit for your beneficiaries. Term life insurance, unlike permanent life insurance, does not have any cash value and therefore does not have any investment component. If you’re still alive when the term ends, the policy simply lapses and you and your beneficiaries don’t see any money.