Investment Through Life Insurance - The Basics
Investment Through Life Insurance - The Basics
A life insurance policy can go well beyond simply providing for the beneficiaries of the policyholder after their passing. The right type of policy can actually act as a vehicle for investment or savings. If a person is interested in saving money in addition to what they are placing a retirement plan, it may be wise to consider a life insurance policy as an alternative to a traditional savings account. Typical life insurance coverage, put simply, provide death benefits to a policyholder's beneficiaries after they have died. Certain types of life policies can generate additional cash value which can be accessed before the policyholder's death.
The types of life policies that are designed to provide cash value to the policyholder are often called investment policies and are, almost without exception, permanent coverage. A permanent life insurance differs from a term life policy since, as long as the premiums are paid and the policy is kept active, it never expires. A term life insurance expires after a set number of years and provides no additional value to the policyholder if they happen outlive the term. A permanent policy can actually accrue additional value through interest or investments.
Permanent coverage come in one of three basic forms. There are whole life coverage, universal life, and variable policies. In addition, there are policies that combine some of the attributes of variable and universal policies. A typical whole life policy does not accrue any additional value beyond the money paid in buying the insured individual in the form of premiums. An investment policy such as a universal life insurance policy accrues additional income in the form of interest which is set at a fixed rate by the insurance company. A variable policy earns additional income because a portion of the premiums are invested into mutual funds, stocks, or bonds.
Life insurance policies can be an excellent investment in some cases. If an individual purchases one of these policies early in life with a long-term goal in mind and is not averse to the risks associated with investment in the market, a variable policy can provide a substantial amount of additional income. Individuals that are not comfortable with the risks that come from a variable policy would be better suited by a universal policy since the additional income is predictable and consistent. Permanent policies are often not a good option for individuals that are in their later years since these policies need time to grow.
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