Life insurance is often considered an effective way to leave a significant sum of money to your loved ones after you pass away. It can be used to take care of any debt you leave, final expenses, or as a financial anchor to sustain your family (at least temporarily). But life insurance is so much more than that. It’s a complex financial tool and can be a profitable investment vehicle.
Types of Life Insurance
There are two types of life insurance policies.
Term Life Insurance
Term life insurance (or pure life insurance) policies offer coverage for a specific period (one or two decades). These policies come with significantly smaller premiums, though factors like your age and pre-existing conditions may change that. Term life insurance policies have one goal, providing your survivors with a healthy financial sum in case of your untimely death, so they cannot be used as an investment vehicle. If you outlive your term life insurance and pass away after it’s over, the survivors won’t get the benefits.
Whole Life Insurance
A Whole life insurance or permanent life insurance will pay your survivors whenever you pass away. It’s significantly more expensive (about 15 times) compared to term life insurance. But whole life insurance might have a cash value competent built into that, which is essentially an investment.
Life Insurance As An Investment
Whole life insurance with cash value investment offers certain benefits:
- You can grow your wealth in a tax-deferred environment. It’s an important option to consider, especially when you’ve exhausted contribution room in other tax-deferred accounts.
- Accelerated benefits can help you take care of several out-of-pocket medical expenses in case you develop certain health problems.
- You might be able to borrow against your whole life insurance.
- It’s an important component in the estate planning of high-net-worth individuals since it allows them to pass on their considerable wealth to the next generations without accruing brutal estate taxes. But that’s only a benefit for individuals with a net worth of more than $11.4 million (lower for some estates).
Is Life Insurance A Worthy Investment For You?
The answer to this question varies from individual to individual, your life goals, and the expected financial situation of your survivors when you pass away. Whole life insurance can be a very expensive way to invest for most individuals, even if its cash value component offers tax-deferred growth.
And since you can convert a term life insurance into whole life one, a smart idea would be to buy a term life insurance. For a 40-year old male, the average term life insurance annual rate is about $341, and the whole life insurance rate is a bit above $6,000. If you buy a term life insurance to ensure that your family is provided for in case of your untimely death and invest the additional sum you would have invested in whole life insurance (about $5,660 in this example), you may be able to achieve better growth than what whole life insurance offers. However, it would depend a lot on the investment asset you choose.