Investing with Life Insurance
In the world of savvy investing and wealth accumulation, there's an often-underrated player: life insurance. Far from being just a death benefit provider, certain life insurance policies offer a dual advantage – safeguarding your family's financial future while acting as a potent investment tool. This article dives into how you can smartly leverage life insurance for wealth building, focusing on the lesser-known investment opportunities it provides.
Life Insurance as a Wealth-Building Strategy
The idea of using life insurance as an investment might be new to many. However, certain types of life insurance, such as Index Universal Life (IUL) and Variable Universal Life (VUL) policies, offer avenues for cash value growth tied to investment components.
Index Universal Life Insurance: Tied to Market Indices
IUL policies offer a unique way to accumulate wealth. These policies have a cash value component that grows based on the performance of a market index, like the S&P 500. This linkage allows for potentially higher returns compared to traditional whole life policies, with the added benefit of a floor, meaning your cash value won't decrease even if the market dips. This floor guarantees your cash value won't decrease even if the market dips, protecting your principal while offering the opportunity for growth. IUL policies do come with a cap on the upside return as a trade-off for the guaranteed minimum floor protecting your cash value from market downturns.
Variable Universal Life Insurance: Investment Options Galore
VUL policies go a step further, offering the option to invest the policy's cash value in various investment accounts outside of the indices, similar to mutual funds. This offers the potential for significant growth, depending on how well your chosen investments perform. VUL policies (Variable Universal Life) provide a wider array of investment options compared to IUL, potentially leading to much higher growth. This flexibility, however, comes with inherent risk.
Unlike IUL policies with their guaranteed minimum floor, VUL policies lack this protection. If the investments you choose perform poorly, the cash value of your policy can decline. This downside risk is a critical factor to consider when selecting a VUL policy.
Death benefit guarantees ensure a minimum payout regardless of investment performance, offering some security for your beneficiaries.
Variable Universal Life Insurance/Variable Life Insurance policies are subject to fees and charges. The policy values will fluctuate and are subject to market risk and to possible loss of principal. The guarantees in the policy are based on the claims paying ability of the issuer.
The Power of Cash Value in Life Insurance
Tax-Deferred Growth
One of the most compelling reasons to consider life insurance as an investment is the tax-deferred growth of the cash value. This feature allows your investment to grow without being hampered by yearly taxes, a significant advantage over many other investment options.
A Loan on Your Own Terms
You can borrow against the cash value of your policy without a credit check or the need to justify the loan's purpose. This provides a flexible financial tool for opportunities or emergencies. Remember, while these loans are tax-free, they do accrue interest and can reduce your death benefit, or the portion of money that goes to your beneficiary when you pass away, if not repaid. But it can also be a useful bucket of money you have to pull from at anytime, for almost anything if you need.
Below are some of the most common reasons you might utilize your cash value out of IUL/VUL policies as loans:
Emergency expenses: Unexpected medical bills, car repairs, or other urgent needs can be covered with a loan from your cash value.
Supplement income: During periods of unemployment or reduced income, a loan can help bridge the gap.
Major purchases: A down payment on a house or funding your child's education can be facilitated with a cash value loan.
Debt consolidation: By using a lower interest rate loan from your policy, you can consolidate higher-interest debt.
Business opportunities: Funding a business venture can be an option, though it's important to use caution and consider alternative financing methods.
If you pass away and your loan has not been repaid, it will just be taken off of the death benefit amount given to your heirs. For example, if you bought a $1 million insurance policy, and took $100k as a loan that you never paid back, your beneficiaries would inherit $900k when you pass away instead of $1 million.
Financial Security with Added Estate Planning Benefits
While you're accumulating cash value, you're also securing a death benefit for your beneficiaries. This dual advantage ensures that while you're using life insurance as a financial tool for yourself, you're also safeguarding your family's future.
Permanent life insurance policies like IUL (Indexed Universal Life) and VUL (Variable Universal Life) go beyond cash value for estate planning. Their death benefit can be a tax-free windfall for your heirs. This benefit can be used to pay estate taxes when you pass on, making sure your estate stays intact for your beneficiaries when you pass on. Estate tax can be up to 40% of an individual’s estate above the exemption threshold. Additionally, these policies can be held within irrevocable trusts, further shielding the death benefit from estate taxes and offering more control over how it's distributed.
The laws changes the federal exemption threshold, or those who are exempt from paying estate tax, but as of 2024, estates with a total value exceeding $13.61 million are subject to federal estate tax. This means the vast majority of estates won't owe any federal estate tax. However that value is expected to decrease in 2026, when that value will be brought down to approximately $7 million. This change could significantly increase the number of estates subject to estate tax.
Policy Length and Cost
Keep in mind that unlike term insurance which is only for a set period of time, permanent policies last an entire policy owner’s lifetime. For that reason, these policies tend to cost significantly more than term life insurance. This is due to the fact that you will in essence definitely pass away at some point, and therefore will definitely receive these funds.
Conclusion: An Unconventional Path to Wealth
Life insurance as an investment tool offers an unconventional path to wealth that combines growth potential with financial security. Whether it's through an IUL or a VUL policy, the opportunity to build cash value in a tax-efficient way, while also providing for your loved ones, makes life insurance a compelling option for investors.
So, if you're looking for a multifaceted investment strategy that goes beyond the stock market and real estate, consider the potential of life insurance. It's not just a safety net; it can also be a ladder to financial success.
Every financial journey is unique. Make sure this strategy aligns with yours by scheduling a free consultation with an advisor below.