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Life insurance can be a great addition to a regular financial plan. If something happens to you, your life insurance policy will provide a death benefit to your loved ones that can be used to pay off the final expenses, pay off debts or cover daily expenses.
Whole life insurance is possible if you buy life insurance. This type of policy combines whole life coverage with a portion of the cash value. The value of the money is compounded at a fixed rate, so you know how much money you will make over time.
But is whole life insurance a good investment?
What is Whole Life Insurance?
Whole life insurance is permanent life insurance that can pay you for as long as you live. As long as the payment is made, the process will not end. When you die, the policy provides a death benefit to the beneficiary of your life insurance policy.
Whole life insurance premiums do not change over time. And a portion of each paycheck is deposited into a premium account where it earns interest.
The capital stock grows at a guaranteed rate of return on taxable income. You can borrow from the currency or withdraw money from it. If you decide to surrender your whole life insurance policy, you can take the “surrender value,” which is the cash value minus any surrender value.
The current interest rate for whole life insurance is 4.65%.
Is Whole Life Insurance A Good Investment?
Whole life insurance should generally not be considered a “sale” vehicle.
Michele Lee Fine, founder and CEO of Cornerstone Wealth Advisory in Jericho, New York, says: It’s best to think of whole life insurance as a tax-advantaged, income-sharing option.
In the early years of the plan, most of the money you pay in premiums goes to the death benefit, with the rest of the money going to administrative costs. The balance goes into your premium account.
Over time, more of your money goes into a premium account. The money in this account grows at a guaranteed rate of return. Life insurance companies often invest in government-backed bonds and mortgages.
Most wholesale whole life insurance policies are premium-paying premiums, which you can add to your premium account from time to time. The longer you pay in the plan, the more money you will make over time.
Determining the growth rate of whole life insurance can be more difficult than other purchasing strategies. “Unlike any other investment group, whole life offers guaranteed year-to-year, tax-free income growth without market risk or volatility,” says Fine.
On the other hand, if you want life insurance primarily to provide a death benefit and nothing else, whole life insurance is not a good use of money. Universal life insurance can often provide a death benefit at a lower cost.
Advantages and Disadvantages of Using Whole Life Insurance as an Investment
Whole life insurance can offer both advantages and disadvantages. Here’s a rundown of the major pros and cons.
- Whole life insurance offers tax-deductible value.
- The money collected can be used to pay the premium.
- Being able to borrow against the cash value, or take out a loan, can be important if you don’t have other sources of income to rely on.
- Your beneficiaries receive no cash value when you die. They receive the benefits of the policy (minus the balance and outstanding debts), regardless of how much you have made. The premium goes back to the insurance company.
- It may take a few years before you can pay off the big bucks before you start earning big.
- Whole life policies can be very low compared to the amount of returns you can get with other investments.
- Withdrawing money or taking out a loan and not paying it back reduces the death benefit that is paid when you die.
Whether the benefits increase for you, or vice versa, depends on what you’re looking for, says Howard Sharfman, managing director of Chicago-based NFP Insurance Solutions.
“If you’re looking for a stable, predictable long-term investment from a tax-free vehicle with very little risk, then whole life is an excellent investment,” says Sharfman. “If you’re looking to maximize profits even if you’re at risk and have limited time, then it’s not the right choice.”
When Is Whole Life Insurance Not A Good Investment?
Although there are many benefits associated with whole life insurance, it may not be the right choice if you meet the following conditions:
- You only need life insurance for a long time. If you only need life insurance for 10, 20 or 30 years, then paying more for whole life insurance may not make sense. Term life insurance is the best choice of real life insurance at a good price.
- You have a high risk tolerance. Whole life insurance tends to appeal to people who are low risk or want a safe, guaranteed way to make money.
- You want to control your money. Whole life insurance provides a fixed rate of return on the cash value, with no purchase options. You will not benefit from the rise of the market.
- You are looking for a high return. The interest and benefits earned with a whole life policy can lag behind the benefits you can get elsewhere.
Whole life insurance also requires a bit of patience, as it may take some time to start seeing the value of the money increase. Sharfman says those looking to outperform the market or have short-term needs may want to consider other savings and investment options.
When Is Whole Life Insurance Beneficial?
Whole life insurance can be attractive if:
- You want to leave money to your beneficiaries even after you die. Whole life insurance can ensure that you can leave a death benefit to loved ones, without seeing your payout increase over time.
- You want a steady income. Whole life insurance can also bring more stability if you want to play the game. The value of money grows slowly every year, but it is not affected by the volatility of the market.
- Retirement accounts are becoming more and more popular every year. A 401(k) or Individual Retirement Account (IRA) can be your long-term savings plan. If you can increase the contributions to the plan each year, you can look to whole life insurance to squeeze some tax benefits as the value of the money increases tax-deferred.
- I want to have money to work with later. Creating value for money in life insurance is as common as you are they want to use the money value. For example, you can use the money to increase your retirement savings or to put your children through college.
Don’t confuse cash value with death benefit. Creating cash value does not create wealth for the beneficiaries of your life insurance. When you die, the beneficiaries do not receive the money. They receive the policy’s death benefit, which is the face value minus your previous withdrawals and your repayments.
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