Life insurance is a financial product (policy) that pays monetary benefits to persons named by the policy holder (beneficiaries) in the event of a specified person's (the insured) death. For example, a husband may purchase a life insurance policy on himself that will pay his wife $100,000 upon his death. While most people have heard of life insurance, many are not aware that there are different types of life insurance to choose from, and that some of these types of life insurance can help people invest money for the future.
A life insurance policy that has an investment component is Permanent Life Insurance
There are different types of permanent life insurance:
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
With a permanent life insurance policy, the policy holder typically has the option to take out a loan against any accumulated cash value of the policy - without having to pay income tax on the loan proceeds. It takes many years for the cash value of a permanent life insurance policy to accumulate to any sizeable amount however, so policy loans are something to consider down the road.
With a permanent life insurance policy, your monthly premium will be higher than it would be for comparable coverage on a term life insurance policy (a policy with no savings/investment component). Some of this extra premium goes toward sales commissions and expenses, but the rest gets placed into investments. Most of the time the permament life insurance policy holder has choices on how to invest that money. Many insurers provide a selection of mutual funds to choose from. As of tax year 2004, money earned from these investments is tax deferred, meaning the policy holder does not have to pay income taxes on earnings or capital gains as long as the policy remains in force.
Another benefit of permanent life insurance is that the policy remains in force until the insured person dies. Term life insurance policies typically expire when the insured reaches a particular age. While this may not be advantageous to all, it can be helpful to some (i.e. - a parent with a dependent, disabled child who needs financial assistance as an adult, person who may place a sizeable estate tax burden on heirs upon his/her death).
Consult with a life insurance professional to help you determine if a permanent life insurance policy is appropriate for your financial goals.