Is Permanent Life Insurance a Good Investment?
When you need to save additional money outside of a retirement plan, life insurance may serve as a viable alternative to a savings account. Life insurance provides death benefits in exchange for premium payments, but permanent life insurance also can provide cash value savings suitable for retirement income. The cash values generated by permanent life insurance may or may not be a good investment, however, depending on the kind of policy that you choose.
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Types
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Life insurance policies designed to emphasize cash value savings are sometimes referred to as investment policies. Investment policies generally are considered to be limited pay whole life insurance, universal life insurance, indexed universal life insurance and variable universal life insurance.
Significance
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An investment policy builds cash value savings that can be used to generate an income during retirement. The cash value savings grows over many years according to an interest crediting formula outlined by the policy contract. A whole life policy earns interest on a fixed rate set by the company and may include dividends, depending on the insurer. A universal life insurance policy earns interest based on a declared fixed rate set by the insurer. An indexed universal life insurance policy earns interest on the upward movement of a stock market index only. A variable policy earns interest based on mutual funds inside of the policy.
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Benefits
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Cash value policies offer tax-deferred growth. The policy's cash value may be accessed on a tax-free basis through policy loans or withdrawals. Policy loans generally are preferred. This means that the interest a company charges to you may be as low as zero percent.
Disadvantages
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Cash value life insurance may or may not be guaranteed. Whole life generally provides guaranteed death benefits and cash values. However, all forms of universal life insurance are based on assumptions made by the insurance company. Your policy could lapse as a result of increased insurance charges or poor policy performance. Additionally, your cash value account grows slowly over time. In the first 10 years of the policy, you may not see any significant growth, and, in fact, may see negative interest rate growth in the policy. This means that it may take 10 years for you to recover the premiums that you've paid into the policy before you see positive returns.
Considerations
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It's important that you understand how your life insurance policy works. With whole life insurance, you pay premiums and receive the cash value promised by the company. However, with universal life insurance, you must know how your policy operates because each company is different in how the policies are designed. The cost of insurance, the investment options and the way that the cash value builds up inside of the policy depend on the design of the contract and the assumptions made by the insurer.
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References
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