Is Life Insurance a Favorable Investment?
Life insurance can be broken into two broad categories: Term insurance and permanent life insurance policies. Term insurance policies generally cover you for a temporary period of time, e.g. ten or 20 years. Permanent policies on the other hand, can cover you for your lifetime. Permanent life insurance products can be further sub-divided into three additional groups: Term 100, Universal Life and Whole Life. There are several sub-types of the latter two policies. An independent and experienced broker can help you to find which of them is best for you.
The primary difference between Whole Life and Universal Life is that on a Whole Life policy, the investment part is built into the premium, but on a Universal Life policy it is divided. In addition, Universal Life policies offer a wider variety of investment options. However, the most important thing when selecting a life insurance product is that it has to fulfil your needs. If your needs are met and the premium for a permanent life insurance is reasonable for you, the next key aspect is whether it is a sound investment.
As this is a very often misunderstood topic, the attitudes to the matter may be very contradictory. The following are the pluses and disadvantages of using life insurance as an investment:
Advantages
* The growth of the proceeds within the insurance and the MTAR limits are on a tax sheltered basis. Whole Life policies adjust the premium, so as not to exceed the MTAR limit, and Universal Life policies set a maximum premium, which keeps the MTAR limit in mind.
* Both the investment part on an increasing death benefit Universal Life insurance and the dividends on a Whole Life insurance are added to the face amount and paid out on top of this face amount, tax free.
* On a permanent insurance, you can use the investment component to pay for future premiums. This way, you will be able to pay with pre-tax dollars, rather than after-tax.
* Many Universal Life policies have minimum investment rate guarantees in excess of 4%. This is a great advantage for investors who don’t like to risk, especially in today’s low interest rate environment.
Disadvantages
* Many permanent insurance products have surrender penalties if the plan is cancelled within the first few policy years.
* Generally, it is not a good idea to choose a permanent policy, if you don’t need a permanent life insurance, since the mortality charge for the life insurance would be higher.
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