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Life Insurance vs. Savings: What's the Difference?
We’re told about the importance of savings accounts from a young age and how they help us prepare for the future. But what if you could build wealth and protect your loved ones if the worst should happen at the same time, essentially combining life insurance and a savings account into one? Well, it turns out you can with a permanent life insurance policy.
Here’s everything there is to know about life insurance vs. savings and which option is best for you:
Does life insurance work like a savings account?
Most people think of life insurance as protection for their loved ones should they pass away. And while life insurance does just that, it also has several benefits while you’re still alive–such as acting as an investment vehicle where you can build up savings through wealth accumulation.
With a permanent life insurance policy, you can access something called “cash value,” which works similarly to a savings account. Perm life insurance coverage is essentially split into two components: cash value and death benefit. When you pay into the policy, you’ll fund both of these pots.
As a result, your cash value and death benefit grow over time. You can then access the cash accrued later in life to spend on whatever you wish, much like a savings account. Of course, there’s also a growing death benefit, which you can leave to your beneficiaries when you pass away.
Life Insurance vs. savings: what are the key differences between them?
Should you really consider a permanent life insurance policy over a savings account? Let’s take a look at the two side by side to see their key differences.
A savings account does what it says on the box: it lets you save for the future. But there are strings attached, such as paying tax on the interest accrued over time. Not only are life insurance savings tax-free (more on that shortly), but you also get the added bonus of a death benefit.
Although 71% of Americans have some form of a savings account, the majority of them only have between $1,000 and $5,000 in actual savings. It’s not much to depend on, especially when you begin to factor in costs later in life and after you pass away, such as funeral expenses.
Five thousand dollars doesn’t leave you with any financial freedom unless your only worries are paying the Netflix subscription. In contrast, a life insurance policy allows you to build accessible wealth when you’re still alive while providing financial protection to your loved ones when you die.
As a matter of fact, you can grow your cash 6-8% on average annually, compared to a measly 0.1% in your savings account. That’s many times more growth and much more wealth in your retirement future.
Therefore, a permanent life insurance policy covers more bases and still offers the savings benefit. So you get your Netflix subscription taken care of (plus loads of other stuff), and you can help your loved ones out by leaving them a financial sum when you pass away.
Can you combine the two?
It’s not either-or, and many people opt for a permanent life insurance policy and a savings account, usually some form of a 401(K) provided by their employer. This way, you can maximize your financial security in the long term and set aside some money for a rainy day.
A life insurance policy covers you in a way that savings can’t. However, most savings accounts don’t require a monthly premium, so you can set up savings alongside your perm policy and access the cash from both of them later in life.
**Are there any other benefits to permanent life insurance?
A permanent life insurance policy doesn’t only offer a cash-value element and a death benefit. It has other factors that come in handy and can work out in your favor over the long term, from its fixed-rate premiums to tax-free interest.
Unlike a term life insurance policy, permanent coverage has only one premium that you pay for your entire life. There’s no increase, which means the amount you’re offered when you sign up always stays the same. And because life insurance is cheaper the younger you are, there are plenty of benefits to getting it in your earlier years.
While most savings accounts require you to pay tax on your earnings, a permanent policy won’t see you pay anything to the taxman. When you withdraw your cash value, you can take it out as a 0% loan with no tax requirements. After you pass, the loan is repaid with your death benefit, with the leftover money being passed onto your loved ones.
In conclusion: a better way to save
It doesn’t need to be life Insurance vs savings and can instead be a little bit of both. But if you only choose one, just remember that permanent life insurance allows you to save and build wealth over time while also protecting your family should the worst happen. It offers more than a savings account and lets you cover every angle, so there are no nasty surprises later in life.