If you're in the market for life insurance, you can choose a term insurance policy, which provides a death benefit to your heirs and nothing more. Another option is permanent, or cash-value, insurance, which is more expensive but also offers a cash accumulation feature that can serve as an investment. While the return on investment of a cash-value life insurance policy is relatively low when compared to other types of investments, it does offer some important benefits.
Cash-value life insurance comes with a guaranteed rate of return, which provides investment safety. When you purchase a whole life policy, you will receive a schedule indicating the exact value of your cash account as the years go by, which is guaranteed by the insurer. Even more-risky life insurance types such as universal life and equity-indexed life, where the cash value can fluctuate based on the performance of a separate investment account, offer a minimum guaranteed rate of return.
If you have difficulty sticking to an investment plan, perhaps due to a lack of discipline or a desire to spend your money on consumer goods, life insurance introduces the element of forced savings. As long as you continue to make timely premium payments, you will also make regular contributions to the policy's investment feature. Because cash-value policies are typically designed to cover a period of many years, you can develop a relatively large nest egg over time.
Cash-value life insurance offers the important feature of tax-deferred growth. As your career progresses and you move into a higher tax bracket, the tax-deferred feature can become an even more valuable method of sheltering your income. You also can withdraw funds from your cash account at any time by taking out a low-interest loan, which is not considered taxable income. Your heirs can receive tax benefits upon your death, because life insurance proceeds are provided to beneficiaries on a tax-free basis.
If you become disabled and are unable to work for a period of time, it can be difficult to maintain an investment program. For a small additional cost, many life insurance companies offer a feature known as "Waiver of Premium." If your disability lasts beyond the designated time frame, typically six months, the insurer will begin to pay the premium for you and may even refund the premiums you paid going back to the onset of your disability. This allows you to continue your insurance and related investment program even if you have no source of income.
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