Investment in life insurance – Three key questions to make a decision
When it comes to investment, people generally invest in stocks, bonds, mutual funds and so on. Have you ever thought of investing in life insurance policies? Relevant life legislation is worth investing in. If you talk to a financial advisor, you will be counseled to invest in permanent life insurance policies which includes whole life and variable universal life insurance. When you buy a permanent life insurance, a part of your premium is automatically invested and you can borrow some of it for retirement absolutely tax free. You can also borrow it for the college education of your children and anything else, and with your demise your heirs will get the rest as death benefit. However, you should consider some factors before deciding to invest on life insurance.
How much insurance do you require?
This is important for a number of reasons. Whole life insurance can be quite costly, so you should purchase as much as you need. If you cannot afford it at face value, then it is probably not a good idea to buy it at all. You should remember that the basic reason behind buying an insurance policy is to ensure that in case of your early demise, you family has enough financial support. Also, you don’t have to buy insurance that you don’t need. Most agents in the insurance sector works on commission and they will push you to buy whole life insurance. But you should decide whether you would actually require that amount of insurance or not.
For what time period would you require the insurance?
The main reason for whole life insurance being so much more expensive than term life is that it is meant to cover your entire lifetime. However, the fact is that most people dont require little or even any life insurance once they take retirement. By this time their dependents have become established themselves or if they have a dependent in the form of a spouse then the income from social security and assets left over would suffice. However if you don’t have enough assets, or have dependants who dont have enough income to survive on their own after you pass away then you can choose a higher “life only” payout. Here there will be no pension for your spouse when you pass away as extra pension income is used to pay for a life insurance policy instead. This arrangement is called pension maximization and can come to benefit only if you are in really good health or get a policy at a very low cost.
Will the tax benefits outweigh the cost?
The third question you need to ask yourself is whether the tax benefits offered will outweigh the cost of the life insurance. The premiums you make towards whole life insurance partly goes for a cash value account meant for investment in policy dividends, earnings from sub accounts similar to mutual funds and so on. You can borrow from this sub accounts for purposes like education for your children or retirement without paying taxes. You have to judge whether these benefits are enough for you to buy the whole life insurance.