Life insurance can be a strategically worthwhile investment…under certain circumstances. You may have heard the phrase “Buy term and invest the difference” when discussing whether to invest in permanent life insurance (whole life, universal life and variable universal life.) For most people, this is good advice, as term life provides the lowest cost benefit for your survivors when you die and permanent life carries costs that can be avoided by investing in other tax-deferred instruments that perform just as well.
But every individual situation is different, and for some, a permanent life insurance policy can have value beyond a cash benefit when you die.
Unlike term policies, which typically expire around retirement age, permanent life policies last a lifetime. One of their selling points is that, in addition to a death benefit, they can carry a cash value that you can access in a number of ways, as we wrote about here, tax-free up to the basis value of the account. In some situations, this feature can be used as a means to manage tax exposure, particularly when the holder dies and the beneficiary faces a significant burden.
Permanent insurance involves numerous fees and commissions. It doesn’t make sense to take on those additional costs if you can simply invest in an IRA or 401(k) account. No one is arguing that insurance investments deliver higher returns than these traditional options. That’s because your insurance cash value money is likely being placed in the same sorts of investments available through your IRA or 401(k) accounts. Insurance fees are an additional cost you needn’t bear.
In an example published by Forbes.com, a person was quoted an annual premium of $8,700 for a permanent life policy. She could purchase the same coverage in a term life policy for only $700 per year. With an 8% projected growth rate, over 30 years the permanent life policy projected to yield (after expenses) around $600,000. Not bad. But if she went with a term policy and invested the $8,000 difference in a Roth IRA instead, over the same period and with the same 8% growth, she’d yield $980,000 – tax free.
If you are worried about tax exposure, particularly for your heirs, have nowhere left to turn for tax-deferred growth investments and have an investment portfolio in need of balance, whole life products can become attractive investments. On their own, they may not be your best investment, but as a part of an overall investment strategy a whole life policy might be used to balance other investments while offering the potential for cash value as well as protecting heirs when you die, even if that’s when you’re 100 years old.