If you’ve ever thought about getting life insurance, there’s every chance it’s because you want to leave a nest egg to your loved ones when you pass. What many people don’t know, however, is that the death benefit is just one element of life insurance. It can also be a type of savings account, letting you build wealth throughout the years while you’re alive. How? That’s what we’re here to tell you with this guide on how to build wealth with permanent life insurance.
Permanent policies: life insurance, but different
Most of us think about life insurance as something you get to protect the people you love in the event of your death. One perception of life insurance is that it’s for people who have recently had kids. And while that is true to some extent, it’s only one aspect of life insurance.
When you factor in a permanent policy, the entire dynamic changes. It becomes something you should seriously consider if you're in your twenties, thirties, forties, or even a senior. That's because it allows you to build wealth through something called cash value.
What's the cash value? We'll cover that in a bit. But what you need to know right now is that a permanent life insurance policy acts as a form of a savings account while also growing the death benefit. As a result, it looks after you and your family, both in life and death.
How does permanent life insurance let you build wealth?
Ah, yes–the cash-value aspect. With a permanent policy, you pay into two pots: the death benefit and cash value. The former grows your death benefit with each monthly payment, but it’s the latter that helps you build wealth.
With the cash-value aspect, you can grow your wealth each month and build savings over the years. Then, when you want to tap into the money you’ve accumulated, you can do so by withdrawing it–while you’re still alive.
The average permanent life insurance policy allows you to grow your cash value by 6-8% annually. That’s pretty significant compared to the standard 0.1% in a typical savings account. So you’re getting more growth and even more money to play around with later in life.
What does that mean for you?
It means all the good news. No, but really, it's easy to underestimate how much you can save with a permanent life insurance policy. On top of that, it's a safer bet than other investment types like stocks and bonds, which can suffer from market volatility.
There are also tax benefits with a permanent life insurance policy (more on that shortly) than traditional 401(k)s. Essentially, using a perm policy as a savings account can set you up well later in life.
You might want to use the money you build to pay for your kid’s college, or maybe you just fancy buying that sports car you’ve had your eyes on. The choice is yours, thanks to the money you would have built with a permanent policy.
Other benefits of permanent life insurance
So permanent life insurance is great for building wealth, which is a game-changer. But it has other benefits, too. It's pretty all-encompassing and acts as a valuable investment when you take into account what else it's capable of.
Tax-free
Whatever you save with your life insurance, you do so tax-free. That's right; you don't pay a penny to the taxman. One of the ways you can access your cash value is by taking out a loan against yourself at 0%. And because you can't pay tax to yourself, the money accessed is entirely tax-free. After you pass, the loan is repaid via the death benefit. However, because the death benefit has also grown in this time, you'll still have something to leave to your loved ones.
Customizable riders
You can add riders to your permanent life insurance policy, customizing it to suit your needs in the process. Some of these riders cost extra; others are offered free. A popular rider is long-term care, which provides assistance to you later in life if you don't have a family to look after you. Another option is accelerated death benefit, which allows you to tap into the resources of a policy if you fall sick or are injured and unable to work.
Locked-in premiums
A permanent policy is more expensive than the other life insurance options on the market, with higher premiums, meaning you pay more. At first, this might seem like a negative. But dig a little deeper, and permanent life insurance suddenly looks like the better investment. With a perm policy, you pay the same amount at 35 as you would 55–the premium never increases. With other life insurance options, you might pay a lower premium, but it goes up if you want to renew once the policy expires. A perm policy doesn't expire, so you don't have the same problem.
Are there other options?
Variable life insurance
A different type of permanent life insurance, variable universal life has a built-in savings component that is low cost but offers high growth investment options. You even have the flexibility to access funds at any time and tap into the wealth you’ve built.
Variable universal life insurance works by having investment subaccounts where you can benefit from cash value. It works in a similar way to a mutual fund, with exposure to specific market fluctuations able to generate significant returns.
A VUL policy offers increased flexibility and growth over the traditional cash value element found with a life insurance policy. There’s also the added benefit of having money to protect your family and help with the challenges they would face if you passed away.
Term life insurance
You can opt for a term life insurance policy instead of a permanent one. It’s generally the cheaper option but doesn’t have anywhere near as many of the benefits. Unlike permanent life insurance, a term policy only covers you for a set period of time, usually between 5 and 30 years.
Once the length has expired, you will no longer be insured. Of course, you can extend your policy, but you will be charged premiums at the new renewal rate. For example, if you took your initial policy out at 25 and renewed it at 55, you'll pay for life insurance as a 55-year-old. That means a higher premium.
The other option is group life insurance through your employer. This can be a handy bonus, but you might want to consider an individual policy too. Group life insurance is typically capped at $50,000, and you can only use your employer's preferred provider. If you leave the job, you will also lose your group life insurance.
In conclusion: a wealth builder you can’t ignore
The game changes when you look at life insurance through the prism of a permanent policy. Suddenly, you’ve got an excellent combination of a death benefit and the ability to build wealth with permanent life insurance. With tax-free cash accumulation, you can explore perm policies while thinking about the future and not just what happens when you pass away. That’s enough of a reason to get excited about permanent life insurance if you ask us.