Life Insurance as an Investment
The question of whether you should use life insurance as an investment can be a hard one to answer. There are some people that could benefit from using a permanent, whole or universal policy as an investment. On the other hand, the strategy of using a life policy as an investment is not a good one for the average investor.
The reason why using life coverage to invest money is a bad idea is obvious nobody can receive all the money until the beneficiary dies. You can cash in the policy but you will be charged penalties for that and you can borrow against the policy but you will have to repay those loans.
There are other better means of setting tax-deferred income aside for retirement that come with fewer strings attached. These include 401k accounts, individual retirement accounts and annuities. The advantage to these vehicles is that nobody has to die for someone to get the benefits.
People who can Benefit from Life Insurance as an Investment
There are some cases when you should use life insurance as an investment. These are specific situations that only apply to a few people and they include:
€ Individuals that would buy large amounts of life insurance anyway. This might include older married couples with younger children or grandchildren. Husbands or wives who are significantly older than their spouses. Persons with large families. Logan is 66 but he has a twelve year old son so he would need a lot of life insurance. Charles is 80 but his wife Jenny is 62 so they could benefit from life insurance. Sally and Jack are over 60 but they are raising their 8 year old granddaughter so they would also need a life policy.
€ People that might leave a taxable estate behind but want to avoid leaving their relatives a tax bill. In 2012 that would be one worth $5 million or more. Gomez is a successful entrepreneur with an estate worth $10 million dollars. He wants to leave some cash to his children so he buys a $3 million universal life policy for each of them. Gomez takes this course of action because life insurance benefits are not subject to income taxes.
As you can see these are very specific cases where the nature of life insurance actually benefits families or couples. Most people would be better off with other more traditional investments.
Alternatives to Life Insurance as an Investment
There are other investments that provide the tax benefits of life insurance without the strings attached. One of the best is annuities which can provide a guaranteed income to a beneficiary while the person who purchases one is still alive.
James has a disabled son that is dependent on him. James wants to make sure the son has money to live on after he dies. Since James is getting older and might be not be able to care for his son at some point he purchases an immediate annuity. The annuity will provide a steady stream of income that can be used to care for the son.
Remember Charles he might be better off by purchasing an immediate annuity and naming Jenny the beneficiary. This would give Jenny a stream of income starting immediately. Charles could even purchase a lifetime annuity that would ensure Jenny with income until she dies. This way Jenny would receive some income even if Charles got dementia and ended up in a nursing home.
The reason why using life coverage to invest money is a bad idea is obvious nobody can receive all the money until the beneficiary dies. You can cash in the policy but you will be charged penalties for that and you can borrow against the policy but you will have to repay those loans.
There are other better means of setting tax-deferred income aside for retirement that come with fewer strings attached. These include 401k accounts, individual retirement accounts and annuities. The advantage to these vehicles is that nobody has to die for someone to get the benefits.
People who can Benefit from Life Insurance as an Investment
There are some cases when you should use life insurance as an investment. These are specific situations that only apply to a few people and they include:
€ Individuals that would buy large amounts of life insurance anyway. This might include older married couples with younger children or grandchildren. Husbands or wives who are significantly older than their spouses. Persons with large families. Logan is 66 but he has a twelve year old son so he would need a lot of life insurance. Charles is 80 but his wife Jenny is 62 so they could benefit from life insurance. Sally and Jack are over 60 but they are raising their 8 year old granddaughter so they would also need a life policy.
€ People that might leave a taxable estate behind but want to avoid leaving their relatives a tax bill. In 2012 that would be one worth $5 million or more. Gomez is a successful entrepreneur with an estate worth $10 million dollars. He wants to leave some cash to his children so he buys a $3 million universal life policy for each of them. Gomez takes this course of action because life insurance benefits are not subject to income taxes.
As you can see these are very specific cases where the nature of life insurance actually benefits families or couples. Most people would be better off with other more traditional investments.
Alternatives to Life Insurance as an Investment
There are other investments that provide the tax benefits of life insurance without the strings attached. One of the best is annuities which can provide a guaranteed income to a beneficiary while the person who purchases one is still alive.
James has a disabled son that is dependent on him. James wants to make sure the son has money to live on after he dies. Since James is getting older and might be not be able to care for his son at some point he purchases an immediate annuity. The annuity will provide a steady stream of income that can be used to care for the son.
Remember Charles he might be better off by purchasing an immediate annuity and naming Jenny the beneficiary. This would give Jenny a stream of income starting immediately. Charles could even purchase a lifetime annuity that would ensure Jenny with income until she dies. This way Jenny would receive some income even if Charles got dementia and ended up in a nursing home.
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