Personal Finance Questions and Answers for Young Professionals

5 Responses to “Using Life Insurance as an investment vechicle”

1. 
   jboynton Says:
   November 19th, 2007 at 5:42 pm

   Yes, in fact, this is one of the best ways to invest your money. The real benefit is that this money grows and is not taxed when withdrawn.

   Almost all investments are taxed what’s called a ‘capital gains tax’. This means that the government reduces the cash value of an investment when one decides to ‘cash in’. Why would the government do this? The answer is basically that the government collects tax on any money that a person earns, and even though you might not consider investment income as earned income, the government does.

   However, because investment income isn’t usually a person’s ordinary income, investments are taxed at a different rate (usually 15%) which is less than ordinary income tax (usually between 20-30%). Life insurance legally avoids both of these taxes and is received tax free. In addition, you can have a life insurance policy for your family or business and use the premium as a non-taxed investment deposit.

   Finally, as the investment within the insurance policy grows, the cash value can be used to either pay the premiums or reduce them. If the investment account performs very well, one can pay their policy just from the cash within the policy.

   Financial Advisors like to explain this final concept with the analogy of a home purchase. You can buy a two family home with a down payment on the mortgage. The second unit in the home can be rented out to someone else and the rental income can be used to pay off the mortgage. Sound good? It works with life insurance too.

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2. 
   pbucelwicz Says:
   November 19th, 2007 at 8:00 pm

   How does one invest in life insurance? I know I have life insurance with two different employers. Are you only allowed to ‘cash in’ when you are dead?

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3. 
   jboynton Says:
   December 12th, 2007 at 3:21 pm

   There are different types of life insurance. The one type that people most commonly buy is called term insurance. This is also the type of insurance that is most commonly offered by employers.

   Term insurance guarantees a certain benefit, also known as the ‘face amount’, in the event of death. The death benefit is the amount of money given to the assigned beneficiary after the death of the insured. The premium paid for this type of insurance typically remains the same for the length of the ‘term’, which is usually offered in increments of 10, 20 or 30 years. Once the term is over, the insured can continue with the same policy, but the premium usually sky rockets to a price that would often be better applied to whole life, universal life, or variable life insurance, i.e. the other three types of life insurance.

   Because of this premium lapse feature, which occurs at the end of the term, term insurance is often described as “renting” life insurance; whereas, the other types are described as “owning” life insurance. Many term policies can be converted into one of the three other types before the end of the term without any negative consequences. If a term policy continues beyond the term, known as ‘lapsing’, a new policy will often require a new application and reviewed underwriting (this term refers to medical examinations and insurance carrier reviews on the proposed insured’s risk rating).

   Universal and variable life insurance are the two types of life insurance that offer the option of investing the premiums. These life insurance contracts can take many forms. Essentially, the insurance policy is built upon two accounts, one for which the insurance carrier controls and is used to build a benefit for the insured’s assigned beneficiary, and one for which the insured uses as an investment. The investment account is typically comprised of one or more mutual funds. This fund grows on part of the paid-in premium and accumulates tax deferred with compounding interest.

   People use life insurance as an investment in order to build their cash value without encountering capital gains tax. Additionally, the insured may take a loan from such a life insurance policy and pay it back at a favorable rate. I would recommend this type of policy for anyone that can afford it. Although, this type of life insurance is more expensive than term insurance, it offers great future potential for cash accumulation.

   One last note: Life insurance offered by one’s employer is called “group life”. This is a life insurance policy offered to an entire workforce for a discount. Your life insurance within this group policy cannot be converted into an individual policy. This is one major reason why it is important to have an individual policy on the side of this. An individual policy will allow you to control the features and benefits of your life insurance, and continue to be insured whether or not you continue your employment with the company.

   As we get older, our health naturally deteriorates. The earlier a person secures a life insurance policy, the cheaper it will be for the rest of that person’s life. Inevitably, the majority of us will buy a life insurance policy. Life insurance is bought because we care for someone (wife, children, extended family, business associates, etc) or because we owe someone money and do not want the debt to be carried on to those we leave behind. In the event that you buy life insurance for someone you care about, the benefit is typically meant to substitute the amount of income that you contributed to support that person’s life for the rest of the beneficiary‘s life. Regardless, everyone should have this type of insurance and most people will buy it by the end of their lives. The longer one waits to buy it, the more expensive it will become. This is why people should buy this type of insurance at a young age.

   For a free life insurance quote, visit:

   http://www.boyntonins.com/customforms2/

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