Life insurance can be broken into two broad categories: Term Insurance and Permanent Life Insurance policies. Term insurance policies generally cover you for a temporary period of time, e.g. 10 or 20 years. Permanent policies on the other hand, can cover you for your lifetime.
Permanent policies can be further sub-divided into three additional categories: Term 100, Universal Life and Whole Life. The latter two policies have several variations and a qualified independent broker can find the best fit that’s right for you.
The primary difference between Whole Life and Universal Life is that on a Whole Life policy, the investment component is built into the premium, but on a Universal Life policy it is separate. In addition, Universal Life policies offer a wider variety of investment options.
The number one quality of any life insurance policy is making sure it fills your need. Assuming your needs are met and a permanent policy is within your budget, the next question is whether it’s a sound investment?
Opinions on this subject vary, in part because life insurance as an investment is a very misunderstood topic. The following are the advantages and disadvantages of using life insurance as an investment:
Advantages
Proceeds within the policy and the Maximum Tax Actuarial Reserve (MTAR) limits grow on a tax sheltered basis. Whole Life policies set the premium, so as not to exceed the MTAR limit, and Universal Life policies set a maxium premium, which keeps the MTAR limit in mind.
The investment portion on an increasing death benefit Universal Life Policy and the dividends on a Whole Life policy are added to the face amount and are paid out on top of the policy face amount tax free.
You can use the investment component on a permanent policy to pay for future premiums, allowing you to pay future premiums with pre-tax dollars, rather than after-tax dollars.
Many Universal Life policies have minimum investment rate guarantees in excess of 4% (these rate guarantees have reduced in the last few years). This is a great feature for the risk adverse investor in today’s low interest rate environment.
Disadvantages
Many permanent policies have surrender penalties if the plan is cancelled within the first few policy years.
Permanent policies are generally an inadvisable investment if you don’t have a permanent life insurance need because you’ll be paying a higher mortality charge for the life insurance.
If you would like more information, or would like to receive a customized quote, please don’t hesitate to call our office at 1-866-899-4849 or visit our Whole Life or Universal Life quote pages.
