Obtaining life insurance is a benchmark for many adults when building their portfolio. Earning income is one thing but protecting it for your loved ones upon your death is quite another. The primary objective of life insurance is providing financial support after you’ve passed. There are other benefits to permanent life insurance that you may enjoy now.
Most permanent life insurance policies can build cash value over time. Then a portion of your premium is allocated to investments in some capacity. They are a financial asset because of this ability. When calculating your net worth, the cash value is marked as an asset. Similar to IRAs and mutual funds, a permanent life insurance policy provides you with options to help build a diversified and holistic wealth management portfolio.
There are several types of asset-building permanent life insurance policies to look at:
Whole life insurance
Whole life is the only permanent insurance with a guaranteed cash component, typically growing between 2% and 3.75% depending on the product. “Participating” policies are also eligible to share in the profits with the company in the form of non-guaranteed dividends. As the cash value grows over time, you can borrow that money via policy loan or cash withdrawal. Remember, if you don’t pay back your loans, it may impact your beneficiaries’ payout.
Universal and variable universal life insurance
Although these policies do not have a guaranteed cash component, you’re still able to borrow against or withdraw any cash value that has accumulated in the policy. A major benefit to universal life is a much more flexible premium when compared to whole life. Universal life policies can grow via a fixed interest rate set by the insurance company or can be tied to an indexed performance (think S&P 500) with caps and floors. Variable universal life is the only insurance policy where you can choose your investments, usually with the help of your advisor.
Hybrid life/asset-based long-term care insurance
If a policyholder never uses their traditional long-term care insurance, often those funds disappear upon the policyholder’s passing. There is no recovery of the premium. A hybrid life insurance policy provides a balance of coverage for long-term care, and if not used, the funds are provided through the death benefit. Most policies reduce the death benefit “dollar for dollar”, when being used for shorter long-term care events.
Why Build Cash Value?
There are multiple reasons to use your life insurance policy as an asset. It could become an additional source of income for retirement. The cash value created in the policy can be a way to provide tax-advantaged dollars with loans and withdrawals. And, if properly structured, any loan or withdrawal would be tax-free. With the uncertainty of the markets and future tax policy, you can hedge against risk by using your life insurance as an asset to stabilize your income. The leverage and protection provided by the potential of increased cash value could help you weather current and future stock market or tax policy storms.
Every decision regarding your financial plan involves risk. Speak with a financial professional before deciding to use your life insurance as an asset. Determine the best course of action. And if you don’t have a financial professional, well, you’re in luck. We happen to know a few.