While life insurance is an essential part of a financial plan when beneficiaries are involved, some financial advisers would recommend using certain types of insurance as investment tools. Universal life insurance is often promoted as a combination of life insurance and investing, but it may not be the best option for you as an investor.
How Universal Life Insurance Works
Universal life insurance is a hybrid life insurance product that combines a death benefit and investing. When you pay premiums to the insurance company, your money goes into a universal life insurance account. This money is invested and earns a return on the investment. Your insurance premiums come out of this account. If you do not pay your premiums, they will simply come out of the investment returns of your universal life insurance account.
One of the issues with using universal life insurance as an investment strategy is that it does not provide you with the same tax benefits that investing in some retirement accounts does. When you contribute money to a retirement account like an IRA or 401(k), you get to deduct the amount of your contribution from your taxable income, which reduces your taxes. When you contribute to a universal life insurance policy, you do not get to deduct the amount of your contribution from your taxable income. Both options do allow tax deferred-growth while the money is in the account, but retirement accounts give you the superior option concerning tax breaks.
Another potential problem of using universal life insurance as an investment is that the returns are generally lacking. When you put money into a universal life insurance policy, you will either earn a basic return on your investment or you will get the opportunity to invest in different investments. If you are given the opportunity to choose where your money goes, you will most likely have few options to consider. By comparison, if you put your money into a retirement account, you could potentially choose from thousands of investments and earn larger returns.
When you engage in financial planning, you most likely to buy some type of insurance to protect your earning power for your family. Most people would be better suited by buying a term life insurance policy for this. With universal life insurance, much of your money will go toward fees for the insurance company. If you do use universal life insurance, you have to keep the policy current once you start taking money out of the cash value of the insurance in retirement. If you let the policy lapse, you could be hit with a large tax bill.