Life Insurance as an Investment to Build Wealth and Financial Security
Life insurance investment plays a crucial role in estate planning and passing on wealth to future generations. For high earners and estate planners, life insurance isn’t just about protection; it can also be a powerful part of a larger wealth-building strategy. Explore how to use life insurance to build wealth and protect the people who matter most to you.
How to Leverage Life Insurance Beyond Basic Protection
Life insurance policies offer peace of mind and can be a flexible part of your investment planning. Here's how they can help:
Cash Value Growth: Permanent life insurance, such as whole and universal life, includes a tax-deferred savings component. This insurance is vital for long-term financial planning. It differs from term life insurance, which provides coverage only for a specified period. Permanent life insurance complements retirement accounts and other investments.
Strategic Access to Funds: You can typically borrow against the cash value of a permanent life insurance policy. There are no credit checks or tax implications associated with this process. Unlike traditional retirement plans, which often penalize early withdrawals, this option provides flexibility. You can use the cash for major expenses, such as starting a business, paying tuition, or handling emergencies. This way, you keep your investment portfolio safe and secure.
Estate Planning: Permanent life insurance enhances your estate planning by providing your beneficiaries with a tax-free death benefit. This benefit can be used to pay estate taxes, helping beneficiaries divide assets fairly. For high-net-worth individuals, permanent life insurance is crucial for safeguarding their life's work and establishing a lasting legacy.
Key Life Insurance Policies for Investment Strategies
Life insurance policies vary significantly among companies, especially in terms of long-term financial growth. When planning your investments, consider these three primary types of permanent life insurance.
Whole Life Insurance
Best For: Cash Value Accumulation
Whole life insurance offers fixed premiums, a guaranteed death benefit, and steady cash value growth.
Ideal for investors seeking financial strategies that offer long-term stability and predictability.
As a conservative asset, it can complement more volatile investments.
Universal Life Insurance
Best For: Flexible Growth and Adaptive Planning
Universal life insurance policyholders can modify their premium payments and death benefits as their financial needs evolve.
The insurer determines the interest rate on the cash value, which may also be affected by market index rates.
This method provides a flexible plan that can be adjusted later as needed.
Variable Universal Life Insurance
Best For: Investment Control
Variable universal life insurance provides access to investment subaccounts, including mutual funds.
This type of policy can grow over time, but it also involves a higher risk.
It's often part of a Life Insurance Retirement Plan (LIRP) strategy. This makes it a good choice for investors who know how to manage investments and follow market trends.
Considerations to Keep in Mind
Consider the following advantages and disadvantages before including life insurance in your wealth-building plan:
Permanent life insurance requires a long-term commitment and comes with higher premiums. However, this policy type offers substantial long-term value, as its benefits increase over time.
The tax benefits of a policy depend on its structure and usage, usually following IRS rules. This allows the policy to grow tax-deferred and offers tax-free death benefits.
Variable universal life policies, as investment-linked products, can offer higher returns. However, they also carry investment risks. The cash value performance is not guaranteed, as it depends on the chosen sub-accounts.
When Term Life Insurance Makes Sense
While term life insurance doesn't build cash value or wealth, it remains a suitable option for many investors. Here’s why:
High coverage, low cost. With term policies, you receive substantial death benefits at an affordable rate. This coverage replaces your income, pays off debts, and supports your family's needs while you're working.
Flexible by design. Term life insurance provides a flexible, short-term solution for managing risk. You can select coverage periods that align with your primary financial needs, such as a mortgage or college expenses.
SelectQuote Can Help You Get Started
Life insurance planning is more than protection. It helps you create a lasting financial legacy. For over 40 years, SelectQuote has helped families protect what matters most. We make it easy to compare policies from highly rated carriers.
Our licensed insurance agents are here to help you find the right life insurance investment solution for your priorities. Whether you're focused on building long-term wealth or securing dependable coverage, we're here to support your goals.
Your legacy is one-of-a-kind, and your life insurance should be too. That's why SelectQuote offers personalized quotes and an experience tailored to your needs.
Disclaimer: Life insurance planning is a personal financial decision. Consult a licensed financial advisor or tax professional who can help you understand how different policy types align with your investment or estate goals.
Other FAQs for Using Life Insurance as a Financial Asset
Is it better to invest in a 401(k) or life insurance?
Each has a different goal. Companies design 401(k) plans to serve specific purposes. Employers create these plans to help employees save for retirement. They provide tax-deferred growth and sometimes match contributions. Life insurance, particularly permanent policies, provides financial protection, offers tax advantages, and allows access to cash value.
How to use life insurance to create generational wealth?
Permanent life insurance provides significant benefits for estate planning and financial security. These policies provide a tax-free death benefit to your beneficiaries. Plus, some plans allow you to accumulate cash value over time.
How is life insurance used to lower taxes?
Life insurance provides several tax benefits. Typically, beneficiaries aren’t subject to income tax on the death benefit. The policy’s cash value grows tax-deferred. When properly structured, loans taken against the policy can also be tax-free.
