Living Benefits: Life Insurance as An Investment

    May 10, 2023
    | 4 minute read

    A life insurance payout is usually something you only think about when a loved one dies. However, just like any type of insurance, your life insurance policy has a lot of value right now! One of the major hidden benefits of a life insurance policy is its savings benefits (aka living benefits).  

    Depending on how you use your life insurance, it could end up being one of the most powerful pieces of your financial plan.  

    Living benefits of life insurance; Fine-tune your policy with riders

    Living benefits allow you to utilize your life insurance policy while you’re still alive. Often called riders, living benefits work as “add-ons” to your term or permanent life insurance policy.

    Riders provide extra financial protection. Here are a few popular riders:

    • One of the most popular riders is a return of premium rider, which refunds the premiums you made throughout the life of your policy if you outlive your term. 
    • A critical illness rider would pay out if you were diagnosed with a covered illness.
    • You could also choose a long-term care rider, which would provide payments to cover long-term care services.  

    Living benefits can also relate to the cash value savings component of some insurance policies. Cash value policies can help you fund your dream retirement, pay off debt or even cover college tuition. 

    Types of life insurance: permanent vs. term

    There are two main types of life insurance: term and permanent. The difference between them is the length of time your policy covers and the cost of the monthly/annual premium.

    Another major difference is the relative financial rewards you could gain.  

    Term life insurance usually covers 10-30 years and is known for being affordable and customizable. You can also “ladder” term policies for long-term savings and financial benefits.  

    Permanent life insurance (also called whole or universal) covers a lifetime and is generally more expensive than term life. However, permanent life insurance offers more robust living benefits and usually includes a cash value that you can access in addition to the policy death benefit (the lump sum paid when you pass away while your policy is in force).

    This makes it a popular choice for small business owners, parents, double-income families without children and anyone who wants to diversify their financial plans.  

    Investing with life insurance: how cash value life insurance works

    Cash value life insurance policies (like whole life or universal life) combine permanent (lifetime) coverage with an investment account.

    The cash value in your policy’s “savings” account grows interest over time. You can withdraw money from the cash value, access the cash value as a lump sum policy loan, or even use the money to pay premiums on the policy itself. Some people withdraw funds from the cash value to help cover down payments on a home, pay off debts, fund a college education or a dream vacation. 

    Different types of cash value policies include:  

    • Whole life insurance (cash value grows at a fixed rate)
    • Variable life insurance (cash value invested in portfolios like mutual funds)
    • Universal life insurance (based on market performance) 

    Depending on which type of cash value insurance you choose, your policy comes with rules around how you can access that cash value. For example, if you want to withdraw a portion of the cash value, you can do so tax-free with most variable and universal policies, but a whole life policy withdrawal would have risks such as a greater reduction of your death benefit.  

    Best types of life insurance for building savings

    If you want to use your life insurance policy to gain cash value, a permanent policy such as an Indexed Universal life policy (IUL) or a variable universal policy is usually your best option.  

    Best life insurance for building cash savings: 

    • Permanent life insurance options: an Indexed Universal Life (IUL) policy or variable universal life insurance offers good cash value savings potential plus all the security of life-long life insurance coverage.
    • Combo of term and perm: insure certain stages of life while also building cash savings (budget-friendly). 

    Protecting your future (and beyond)

    Above all, life insurance exists to protect your partner, child, business or loved ones from paying off any of your debts when you pass away. The death benefit of your policy should be enough money to cover your outstanding debts (it’s important to cover future debts too) including mortgages and student loans.

    Consider this before withdrawing funds from your policy too – you want to leave behind enough money to cover all debts.  

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