When we talk about vehicles to build wealth, life insurance may not be on the top of your mind as an option for investment. However, there are plenty of plans and options that allow a person to use life insurance as a way to build wealth- whether for themselves or for their heirs. While there are pros and cons to each, we will dive in here and look at some of the facts around life insurance as a wealth-building tool.
While life insurance is one way to supplement your wealth plan for your legacy, it may not be a replacement for proper financial planning for your retirement needs. Life insurance is not the only way to build wealth and a legacy and should be treated with care and understanding. Be sure to consult with your trusted, fee only, financial advisor to help point you in the best direction for you and your needs. Needs will vary from person to person and there is not typically one blanket approach to investing for your future that will fit all cases.
Types of Insurance Used to Build Wealth
1. Whole Life – Whole life insurance is one of the permanent life insurance policies, meaning it will last until you do, and get paid out after your death. With whole life insurance, there is no expiration on term unless you stop making your payments. The benefit to whole life insurance is that a portion of your premium will be invested in cash savings, allowing a more flexible option to watch your savings grow and have the flexibility to use limited funds from the account. The drawbacks to whole life insurance are the relatively low interest rates around growth as well as the higher premiums that are required. Some people feel that by paying more, they ensure that there will be a death benefit for their beneficiaries at some point, making it feel like money better spent than on a term policy that may or may not be used. Weigh out the pros and cons as well as compare what you would make elsewhere on interest for the extra premium you would be spending on whole life as a part of deciding whether this is the right option for you.
2. Universal Life – Universal life insurance is unique to term life insurance in the way that a portion of the premiums you pay is put in the cash savings with the insurance company in order to allow you to tap into the savings more easily and encourage a cash benefit that is usable before your death as well as a death benefit for beneficiaries to receive after the fact. However, these policies can have an end date somewhere around your early 90’s to early 100’s where they may be a limited payout and ending. Check in to specifics of your proposed policy. Unlike whole life insurance however, you get to choose the breakdown of how much goes where (within specified limits.) This gives you more control over the set up of your funds and how much you will favour cash over death benefit and vice versa.
3. Indexed Universal Life Insurance – The same as the universal life policy described above, except for one major difference: the amount that you set aside for savings can be invested in index funds to help fuel your balance growth that much quicker. Be aware, however, that with this option there is more volatility due to the fact that funds are invested in the market (although index funds tend to be a lower risk due to diversification).
There are pros and cons to each of these insurance solutions that are regularly used for wealth building. The important concept to remember is what your goals are and what avenues you are using to build wealth. There will always be new ways to build wealth, however, with commitment and solid research and strategy, you will be able to find ways to build wealth for you and your family.