Permanent Life Insurance: Is it a Waste of Money or a Valuable Investment?

By: Anwar_Hossain

When it comes to purchasing life insurance as an investment, you've probably heard the saying, “Buy term and invest the difference.” This advice is based on the idea that term life insurance is the best choice for most individuals because it is the least expensive type among the many life insurance options and leaves you with enough money for other investments.

Permanent life insurance, on the other hand, allows policyholders to accumulate cash value but comes with expensive management fees and agent commissions. Many financial advisors consider these charges a waste of money.

When you hear financial advisors advocating life insurance as an investment, they аre referring to the cash value component of permanent life insurance and the ways you can invest and borrow this money. So when does it make sense to invest in life insurance? When are you better off buying term and investing the difference?

Let’s take a look at some of the most popular arguments in favor of investing in permanent life insurance and how other investment possibilities compare to them.

Arguments in Favor of Using Permanent Life Insurance as an Investment
There are many arguments in favor of using permanent life insurance as an investment. The issue is that these benefits aren’t unique to permanent life insurance. You often can get them in other ways without paying high management expenses and agent commissions. Here is a few of the most widely advocated benefits of permanent life insurance.

1. You get tax-deferred growth.
This benefit of the cash-value component of a permanent life insurance policy means you don’t pay taxes on any interest, dividends, or capital gains in your life insurance policy until you withdraw the proceeds. You can get this same benefit, however, by putting your money in any number of retirement accounts, including traditional IRAs, 401(k)s, 403(b)s, SIMPLЕ IRAs, SЕP IRAs and self-employed 401(k) plans.

If you’re maxing out your contributions to these accounts year after year, permanent life insurance might have a place in your portfolio and can provide some tax advantages.
 
2. You can keep your policy until age 100, as long as you pay the premiums.
The key advertised benefit of permanent life insurance over term life insurance is you don’t lose your coverage after a number of years. A term policy ends when you reach the end of your term, which, for many policyholders, is at age 65 or 70. But by the time you’re 100, who will need your death benefit? Most likely, the people you originally took out a life insurance policy to protect— your spouse and children— are either self-sufficient or have also passed away.

3. You can borrow against the cash value without paying taxes or penalties.

You can also use money you put in a savings account— one on which you don’t pay fees and commissions— to buy a house or send your kids to college. But what insurance agents really mean when they make this point is if you put money in a tax-advantaged retirement plan, like a 401(k), and want to take it out for a purpose other than retirement, you might have to pay a 10% early distribution penalty plus the income tax. Furthermore, some retirement plans, like 457(b)s, make it difficult or impossible to take out money for one of these purposes.

Conclusion

That being said, it’s generally a bad idea to jeopardize your retirement by raiding your retirement savings for some other purpose, penalties or not. It’s also a bad idea to confuse life insurance with a savings account. What’s more, when you borrow money from your permanent insurance policy, it will accrue interest until you repay it, and if you die before repaying the loan, your heirs will receive less death benefit.

By Anwar Hossain

© 2018 Anwar Hossain - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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