You already know that it’s among the most certain ways to ensure your loved ones’ welfare. But you may also be asking: Is life insurance a good investment for retirement?
Like other financial planning issues, much depends on your specific circumstances. However, with some knowledge of how life insurance can work as an investment, you can see how good of a fit it is for your situation.
Here’s some information that can help you answer the question.
How life insurance works as an investment
There are two types of life insurance: term and permanent. Term policies are not investments in any way because your premium covers the fee and administration costs, so there’s nothing left to build value.
Some permanent or whole life insurance policies include the fee, administration costs, and an amount that goes into an investment component of the plan.
The investment account under the policy grows at a fixed rate, similar to a savings account. We call this the policy’s cash value.
Advantages of life insurance as an investment
Life insurance might make a good investment for you because of:
You won’t have to pay interest on dividends, capital gains, or the cash value of your policy. While this is a welcome advantage to those who need whole-life insurance anyway, it’s not enough to persuade someone, especially a modest or average earner, who was thinking of taking out a term policy.
The tax deferment only starts to make an appreciable difference after net worth passes the threshold that triggers estate tax.
However, wealthier individuals who have maximized their tax-favored accounts can use it for this purpose and get a significant return on investment, or ROI.
Because the interest from the cash value stays in the account, it gathers more interest. This has a compounding effect on its growth, meaning the effective appreciation rate increases with time.
The fixed rate remains the same, but cash value increases faster because interest is feeding back into the base amount.
Ability to withdraw or borrow against the money
You can withdraw the money from the account and use it to supplement your retirement income. Or, you can use it to pay your premium, essentially making your policy fund itself — at least in part.
Should you need to take out a loan, another advantage is that lenders accept the balance in the account as security.
With retirement plans such as a 401(k), you incur penalties when you withdraw money for non-retirement purposes. Others like the 457(b) don’t even give you the option.
Disadvantages of life insurance as an investment
Purely as an investment, you may consider life insurance an underperformer because of:
- Low returns: typically, returns from the cash value of permanent life insurance policies are lower than those for alternative types of investments.
- High fees: if the main objective is to simply have life insurance, the much higher fees of a permanent policy over a term plan may not justify the solidly average returns.
Is life insurance a good investment for retirement? Hear from experts before entrusting your future to a policy
You can only ever know if this is a good investment for you after an expert assesses your specific situation. Our readers have found the OWFLI to be consistently helpful with all matters about investment and retirement. We especially recommend them for the care they take to personalize advice to each individuals’ financial situation.
If you need more clarity, especially for your exact circumstances, do reach out to OWLFI’s friendly team of experts.