As we become more independent throughout adulthood and make larger purchases, insurance becomes a more important part of life. If you’re trying to purchase a home, you need to insure it to get a mortgage and protect yourself from major financial loss. Car insurance is required, as you’re liable if you cause an accident. Many people insure expensive devices like laptops, cameras, cellphones, jewelry, antiques, etc. Of course, you can also insure yourself.

The topic of life insurance may be especially relevant to you if you have people you provide for. Life insurance can be expensive, and the policy you choose can have a lasting effect on your loved ones, so it requires ample consideration. In some ways, choosing a life insurance policy can be considered an investment decision, as you have to make sure you’re putting your money into something that will benefit you (and those around you) in the future. 

This article will give insight into whether life insurance can be viewed as an investment or not, discuss some benefits of whole life insurance, and talk about what kind of people might profit from viewing life insurance in this way.

Are All Kinds of Insurance “Investments”?

Most people would say “no,” and for one very good reason. Insurance policies are there to protect things you already have, so you’re essentially paying in advance to help lessen the financial strain of any damage that might occur in the future. Investing doesn’t work that way.

When you invest your money, you’re hoping to get a return and earn more money than what you originally had. With insurance, there’s a chance that you pay for the policy your entire life without using it even once. For example, you might insure your house and then never get the chance to get a return on the money you put into the insurance, simply because your house never got damaged, robbed, set on fire, etc. This is one of the reasons why many consider insurance policies to be unnecessary, as they feel that they can ultimately lead to huge losses of money, especially if they’re never used.

Having said that, life insurance doesn’t always fall into the same category as other kinds of insurance. Many people consider it to be an effective way to provide for your family — and other close ones — in case something happens to you. You can get several different benefits from having life insurance, and investing in a policy may end up leaving your family with more money than they would have had without the policy (meaning that the life insurance policy can work like an investment with a “return over time”). We can even go further and say that life insurance acts as a hedge against the financial risk that your loved ones would be under if you happen to pass away. 

Understanding Tax Benefits From Life Insurance

One of the most significant benefits that come with life insurance is tax-related. Good tax planning consists of two vital steps — one is to reduce the amount you pay while you’re alive, and the second one is to make sure your inheritors pay as little as possible in taxes after you pass away. By having permanent life insurance, you have the potential to kill these two birds with one stone.

If you have permanent life insurance, you get the opportunity to transfer all of your assets to chosen beneficiaries without them being subject to income tax. Some life insurance policies also help reduce estate taxes through different strategies, one of which involves an irrevocable life insurance trust (ILIT). The goal here is to reduce the impact of estate taxes, as the current estate tax exemption amount for 2022 is $12.06 million for one individual.

Simply put, investing in life insurance can help your family preserve its wealth over time. Another important thing to note here is that regardless of how much your assets are worth, your beneficiaries won’t have to pay anything in the way of income taxes on the money that’s allocated to them. Not many financial instruments can offer the same.

Not only is the federal deficit increasing, but so is the possibility of a healthcare crisis and uncertainty surrounding the future of existing government programs such as Medicare and Social Security. Having a life insurance policy is a way to ensure that you will have the money to cover your needs and the needs of your loved ones, regardless of what the government does. 

Getting Cash Value From Permanent Life Insurance

As you have probably already figured out, having a term life insurance policy is not considered an investment because you and your beneficiaries get nothing out of it if you don’t pass away in the predetermined period. However, whole life or permanent life insurance policies can be considered an investment in more ways than one. We already discussed the tax benefits that come with such policies, and now, we can go on to talk a bit about the cash value you can earn from permanent life insurance. 

Let’s first start by talking about what cash value insurance is. Explained in the simplest possible way, it’s a kind of insurance policy that has a cash value account that accrues tax-deferred interest. This component of the policy is typically used to accumulate money over time and earn interest without the amount being affected by taxes. 

With whole life insurance, you have the option of the cash value benefit. In many cases, part of this cash value benefit includes dividend payments, which you can use in several different ways. You can turn these dividends into cash, use them to pay premiums, and more. Here’s a short summary of how the whole life insurance cash value component works: 

  • You pay a fixed monthly amount, and you get a guaranteed death benefit.
  • The premium payment doesn’t change over time, and cash value accumulates at a certain rate.
  • If you receive dividends, you can trade them for cash value or use them to make insurance payments, among other things.

Of course, one downside of this policy is that it tends to be a lot more expensive than other policies since it comes with certain guarantees and benefits from the life insurance company. 

Is Life Insurance Really an Investment? 

This is a tricky question, and you might get different answers depending on the person you’re asking. Perhaps the best way to answer it is just to say “sometimes.” Whether your life insurance will be an investment strategy depends entirely on your circumstances and the kind of income you have and want to preserve. 

Also, you have to keep in mind that not all life insurance policies are made equal, and some of them (the temporary ones) cannot even be considered investment tools, just because it’s impossible to know whether you will get any long-term benefits from them. 

Having said that, a permanent life insurance policy can be considered an investment for some individuals. This particularly applies to people who own a lot of assets. For those people, a life insurance policy can be a terrific way to preserve the value of money, avoid paying massive amounts in taxes and get a cash value component that gives them a sense of safety for their retirement years. Along with that, it’s an instrument that enables them to transfer their assets to beneficiaries while avoiding huge tax payments, especially if they’re looking to pass down real estate. 

In Conclusion

Deciding whether or not to put your money towards a life insurance policy isn’t an easy decision to make. Many factors have to be considered, such as your age, your income, the assets you own, your investment strategy, and also how valuable it might be for the people that rely on your income to live. Keep in mind that this is not the kind of decision you can make by simply conducting a quick Google search, as it largely depends on both external and internal factors.

Even if you’re sure that you need life insurance, choosing the kind of policy that is best suited to you and your situation can be tricky, especially for people who have never had to consider life insurance before. For this reason, we recommend discussing this topic with a financial planner before making any moves. The Certified Financial Planners at Alpha Wealth Funds are here to help clients make the best financial decisions for their future and the future of their families. If you have questions about life insurance, contact us today.

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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