Life insurance may seem like a simple concept on the surface; you pay an insurance company a premium and the company pays your beneficiaries. But permanent life insurance policies like whole life insurance contain an investment component, and this is where things can get a bit complex.
When you pay a premium for a term life policy, it has two basic parts; the first covers the cost of insurance and the second pays administrative costs.
In a whole life insurance policy, you pay more than just the cost of insurance and administration, and this excess will accumulate in a cash-value account. The account grows at a fixed rate as a savings account, the benefit of which lies in the cash account’s tax treatment and flexibility.
Whole life cash accounts can grow tax-deferred, which means that the interest that you’ve paid isn’t taxed, as long as the money is in the account. This way, the money can grow more quickly than it would outside of your account. All of your interest stays and earns even more interest in the future. This cash value can be used in retirement to supplement your income. Permanent life insurance policies will let you borrow against the value present in your cash account without even withdrawing it or needing to pay any taxes.
For very-high-income people, a whole life insurance savings strategy is suggested, especially if they need life insurance. Another practical option for high-income individuals could be a tax-deferred, nonqualified annuity if they don’t need life insurance.
It should be noted that whole life insurance comes with high premiums and a high investment cost when dealing with variable universal life insurance. Often, an investor can find less expensive investment options apart from life insurance. The longer the investment time, the more important these costs become.
If you are planning on purchasing a whole life policy, there are a number of riders and acronyms involved, and it is advisable that you hire an honest advisor with experience designing policies to reduce cash value. Personalizing a policy for a client means blending term insurance into the whole life policy. This pays them fewer commissions and adds more money to your policy. Some agents unfortunately aren’t willing to present these policy designs.
