Some people feel owning life insurance is not an “investment” because the purpose is to provide a benefit on death. They feel that if the benefit is “untouchable” until death, how can life insurance be called an investment? The answer is, you can enjoy lifetime benefits as well as the death benefits. The benefits all depend upon the type of policy purchased and can be geared toward your goals, your estate size, and your family needs.
Term insurance is purchased strictly for the death benefit. Oher policies, such as variable life, universal life, and whole life, have both a death benefit component and an investment component. In those cases your total premium is divided by the insurance company. Part of the premium is used to cover the insurance company’s cost of insuring your life, the chance they will have to pay out the death benefit. The balance of the premium is put towards building up your investment component.
Like any other savings program, the more you put away, and the better the return, the quicker the savings will build. When one is younger, the life insurance cost is lower, so more of the premium can be put toward the investment portion. Investment strategies can be based on equity markets, bonds, other portfolios, and many combinations.
Based on the policy options and investment value, you may be able to cancel the policy and receive the cash surrender value, apply the value to increase the insurance, keep the insurance and reduce future premiums – or use life insurance as a line of credit. This can be useful for college tuition, to invest in real property, or for medical emergency arises, etc.
The federal government and some States tax life insurance for estate tax purposes. As a bonus you can avoid estate tax on insurance by using certain trusts in your estate plan.