Is life insurance an investment or a safety net? Depending on the type of policy, it can be both! Certain types of permanent life insurance have a cash value component that grows over time and could rightfully be called an investment.
This article will discuss life insurance safety and investment strategies, from how they can help with retirement planning to wealth preservation.
Contact Medical Profiles Inc. online or call today at (832) 251-3926 to schedule a paramedical exam!
Life Insurance and Investments: The Similarities
Most whole, or permanent, life insurance policies have a cash value component that accrues interest over time. When you pay your monthly premiums, a portion of the money goes into the cash value component where it grows tax-deferred. This is similar to how other tax-deferred retirement vehicles work, such as a 401(k) or traditional IRA.
Life Insurance and Investments: The Differences
However, there are some significant differences between life insurance and safety investment options, meaning you should manage them separately.
First, life insurance cash value grows usually lower than traditional investment options for security. It can also take a few years before a cash value component starts to grow in value. Traditional safety-focused investments, on the other hand, grow at market rate and are changing value all the time.
Second, life insurance provides guaranteed returns, while traditional investments do not. Returns on life insurance differ depending on the specific policy issuer. With traditional investments, you can lose the money you invest, and it’s not insured. The flipside is that investments can generate higher returns if they are successful.
Third, payouts from investments and life insurance are different. Death benefit payouts from life insurance are, with a few exceptions, tax-free, and beneficiaries don’t have to pay taxes on the cash value they inherit. With traditional investments, you will have to pay capital gains taxes on any revenue from sales.
Last, whether life insurance pays dividends depends on the specific policy issuer. With traditional securities, dividend payments depend on the type of investment.
Investing in Life Insurance for Retirement
Life insurance: an investment or a safety net? Although technically distinct from your retirement investment accounts, life insurance can still act as a solid investment for safety needs.
Save More Money
Most traditional retirement investment accounts have an annual limit on contributions. If you have already reached the maximum contribution limit for an IRA, you could invest the remaining funds into your life insurance cash value component to put that money to work.
Retirement Income
You can use the cash value component of your life insurance policy as a source of retirement income. As long as you withdraw less than the amount you have paid into the policy, you won’t have to pay taxes.
Tax-Free Loans
You can also take out a loan against the total cash value of your policy if you need additional funds for retirement expenses or projects. As long as you pay back the loan before you die, you won’t have to pay any taxes. If you pass away before you pay off the loan, the lender can take the remaining amount from your death benefit and your beneficiaries may have to pay a tax bill.
Cover Medical Care
Life insurance rider options can also help shoulder the cost of medical care and provide investment safety. Health care is one of the largest retiree expenses, so an additional long-term care policy or insurance rider can stop expensive medical care from depleting your retirement funds.
Paramedical Exams for Life Insurance
Whether it’s an investment or a safety net, buying life insurance is a smart choice. If you need to schedule a paramedical exam for a life insurance application, contact Medical Profiles online or call today at (832) 251-3926.
