The old saying “It’s not what you make but what you save” truly applies to building wealth. Life insurance is a tool used by wealthy individuals to build and protect wealth over their lifetime. It works for them and it can work for you too.
Life Insurance at its core is a tool for transferring risk of financial loss resulting from death to an insurance company. It works extremely well and daily protects families from poverty and financial despair. There is no doubt that life insurance saves the lives of the survivors. However, what is exciting about life insurance is that it can also be used as a tool for building and protecting wealth while providing that incredibly important death benefit. Your dollar is doing two things at once when contributing to permanent life insurance. One, buying a death benefit and two, building tax deferred cash value in the policy for later use. Later in the blog article, I’ll show you how one dollar can actually do three things with a permanent life insurance policy…crazy I know!
Everyone has opinion about something, especially related to finances. You know the joke…”What financial hot tip or opinion did your bother-in-law share at Thanksgiving”. The problem with opinions, especially financial opinions, is they get intermingled with actual facts. Overtime and repetition, the opinions and facts tend to get blurred. There is also the “Biased” opinion that sneaks in the mix occasionally. These may be partly factual and partly disingenuous based on the intent of the sharer. Opinions and facts about permanent life insurance are not excluded from any of these issues unfortunately.
Here are some interesting “Opinions”
- Permanent life insurance is more expensive than term insurance. True, but the reason it is more expensive is you get a whole lot more features with permanent insurance.Permanent life insurance offers level, life long premiums that build tax deferred cash value. With different types of permanent policies, the premiums can be flexible and the cash value accounts can be invested in different types of accounts. Time and time again the argument is made that one could by term insurance and invest the difference between term and permanent premiums and get a better rate of return. What happens in reality is people do not invest the difference because it is easier to spend the difference over time. Permanent life insurance is akin to a forced savings plan. Many people rely on the systematic contributions to ensure they are saving tax deferred money. I’ve met more people who said the honestly came out better with a forced plan than relying on their own diligence to invest the difference. This also plays into “Biased” opinions referenced earlier. Unfortunately, there are some people who continue to push “Buy term and invest the difference” because it benefits them to have use of your extra money.
- Insurance agents make big commissions. Insurance agents do get paid for their advice and time. There are no free products in the financial industry. Compare the fees of a having a brokerage account over 30 years against a one time commission. There really isn’t any comparison.
- I have to die to use life insurance. No, you don’t have to die to use your policy. This may be on the worst bits of opinion floating around the cocktail party. The truth is you have several options with a permanent life insurance policy.
- You can obviously receive the death benefit. Not to be morbid but if you die early into the policy, it is an enormous rate of return. In fact, if you calculate out for different age points, you may find the return is higher than you would expect.
- If you need money during the policy period, you can take a a tax free loan (up to level of contributions) against the cash value. You are in effect borrowing from yourself …it’s your money. Many people use this to help pay for college, or other big expenses
- If you choose a policy with accelerated benefits, you can use a large portion of your death benefit while you are living. This is also referred to as “Living benefits”. In cases of chronic illness or long term care, this type of benefit can be used to pay for unexpected healthcare costs related to long term care.
- If you reach retirement, you can turn the cash value into a stream of lifetime retirement income.
- Similarly, you can transfer your life insurance policy to an annuity policy using the IRS 1035 exchange.
- I can’t access my money. Yes, you can either take a loan against yourself to keep the policy in force or take the cash surrender value of the policy as described in the policy contract details.
Are there any cons?
Permanent life insurance is a great wealth building tool. However, each persons situation is different and the need for coverage has to be ascertained. As with any savings program, it is a commitment of time and resources and if you think you will need funds in the immediate future, you might be better suited to wait than start a life insurance policy and immediately try to get cash. It does take time for the reserves to build up and therefore you have to be willing to commit. Having insurance is important, especially if you have a family. If funds are tight don’t hesitate to lock in insurance with a term policy. You have to be in reasonably good health to qualify for life insurance so don’t wait if you need it!
We would be happy to help you answer any questions you may have about life insurance and building wealth for the future!