Life insurance is commonly associated with protecting your loved ones financially when you die. But it can also be a savvy investment while you’re still alive, especially if you get permanent life insurance. So for this guide, we’re asking the question, “is permanent life insurance a good investment?”
Let’s find out.
Thinking about your future
If your parents are anything like ours, then your mum was always advising you to invest any money you had, reinforcing the importance of safeguarding your future. And if you were anything like us, all you really cared about were the snazzy things you could buy with said money. Money comes, and money goes. Then shiny things appear.As we get older, however, we realize mum was onto something and that investing in our future is pretty darn important. But how do you make the right investment choices, and what options are available?
That’s where permanent life insurance comes in. Now, you’d be forgiven for thinking that life insurance was all about what happens when you pass away. Fortunately, when it comes to permanent life insurance, you don’t need a date with the Grim Reaper to reap (excuse the pun) the benefits.
What is permanent life insurance?
Permanent life insurance is a term used for life insurance that doesn't expire. Unlike "term," which lasts for a specific period of time, permanent goes on for as long as you keep making the payments.
And, unlike "term," permanent life insurance allows you to build cash value that grows tax-deferred and can be accessed tax-free in cash later in life. That means you don't need to pass away for it to become accessible.
Of course, there's a death benefit when you die, too, as well as riders like long-term care, critical illness, and more. Essentially permanent life insurance is more than just protecting your loved ones when you pass–it's an investment for your future.
But just in case you need some more information to answer the question “is permanent life insurance a good investment?”, here are some handy facts for you.
Different types of permanent life insurance
Within permanent life insurance you have “whole life’ and “universal life” options. The way in which your specific policy works largely depends on the type of permanent cover you opt for:
- Whole life – With whole life insurance, you get more consistency, with fixed premiums and guaranteed cash value accumulation.
- Universal life – Taking out universal gives you more flexibility in the premium payments, death benefits, and the savings element of their policies.
Both whole life and universal life typically consist of two portions: an investment portion and an insurance portion. We imagine it’s the investment portion that has caught your attention, so let’s dive into whether permanent life insurance is a good investment for you.
Is Permanent Life Insurance a Good Investment?
Paying money for something that will only be useful once you die isn't the easiest sell in the world (though sometimes very necessary, especially if you have a family to leave money to). But when it comes to using permanent life insurance to accumulate and access tax-free cash, well, the game changes, and it’s much more appealing.
There’s a guaranteed return on investment with permanent life insurance, which gives you access to cash while you’re still alive. More importantly, permanent life insurance begins to really show its value after 10-15 years of paying into the policy.
That means you can start to build up a significant amount of cash over the long term. And if we’re talking about investing, it’s hard to argue against the long-term benefits of permanent life insurance.
There are other reasons why permanent life insurance is a good investment, such as:
Tax-advantaged growth
The investment component allows you to grow wealth and access the returns tax-free. That's a huge bonus for someone thinking about their financial future, as it means you don't pay any taxes on interest, dividends, or capital gains on the cash-value aspect of your policy if you decide to withdraw. It's very similar to retirement accounts like Roth IRAs and Roth 401ks – expect you get the death benefit too.
Lifetime coverage
Again, unlike term life insurance, you don't lose your coverage after a set number of years with permanent life insurance. If you expect people to depend on you financially when you're older, then permanent life insurance takes on even more importance.
Cash value flexibility
One thing we haven't touched upon yet is the benefit of accessing the cash value of your permanent life insurance. If you need money for, let's say, a home or to pay for your child's college, you can take out the cash value. And there aren't penalties like you get with a 401k for withdrawing early. If you’d like, you can pay it back and have it keep growing, or you don’t have to. It’s up to you.
Accelerated benefits
Your permanent life insurance policy comes with a death benefit, and you may even be able to receive anywhere between 25 percent and 100 percent of the policy before you die. It can come into effect if you develop specific conditions, such as a heart attack, stroke, invasive cancer, or end-stage renal failure.
Retirement income
Because your cash value grows like a savings account, you can potentially plan for your retirement. The money you accumulate each month can supplement your retirement later in life, giving you extra security as you grow older.
Well, that all sounds great, but what’s the catch?
There’s no catch, as such. But permanent life insurance is more expensive than term cover. You will pay higher premiums, which doesn’t appeal to everyone. Those higher premiums, however, come into play because you and your family are getting more value than if you took out a term life insurance policy, which lasts for a limited time and if you don’t die during that period then you don’t get any benefits (or money back).
In conclusion: Making the right decision for your future
So, is permanent life insurance a good investment. We think so, even though we know that thinking about your future isn’t always at the top of the agenda, especially when you’re younger. But if the pandemic has shown us anything, it’s that things can change very quickly without much notice. And while we don’t want to get all morbid on you, having a plan in place is never a bad idea.
Fortunately, with permanent life insurance, you can think about the bigger picture and not just when you pass away. It can give you financial freedom later in life and help with higher costs. That’s a winning formula if you ask us, and permanent life insurance is definitely worth your consideration when thinking about your future and financial freedom.