Investing in Life Insurance

Life insurance is a bad investment, but investing in life insurance can  be a good idea.  I know that sounds like double talk.  The key is what  you do after you decide that you need life insurance.

Let’s  say that you decided that you need to buy some life insurance to  protect the things you care about.  You can choose to pay the lowest  available price.  Typically, that’s 10 year level term insurance.

That  might be a good decision depending on your circumstances.  But after 10  years, the cost may go up as a result of you being older.  In addition,  you might not be in the same health as today.

Federal tax  law allows us to “pre-fund” the cost of life insurance to keep the  premium level, even if you keep the policy permanently.  Many times, you  can even pay it faster if you want, as fast as over 7 years.

Why would someone want to pay more?

The  extra money that you put into the policy is really saved to pay your  premiums in the future.  Just because you pay a level premium doesn’t  mean that your chances of dying won’t go up over time.

A  permanent policy can help to budget the money as a level amount.  This  is similar to how some power companies allow customers to pay a level  bill every month rather than having huge bills in the winter.

There are advantages to saving inside your life insurance policy:

  • The extra money you put into the policy is not too easy to spend.   This can make it a good place to let savings accumulate safely.
    • When we bought our first house, my dad borrowed from his life insurance policy to give us part of the down payment.
    • We paid him back, even though it was not really a loan, but the  life insurance savings allowed him to help us when it might have been  tough otherwise.
  • Term premiums have to be paid every month; if you miss a payment,  you lose your coverage.  Many permanent policies allow you to miss a  payment or two and still keep your coverage.
    • Why?  Because you are prepaying the coverage already.  They can just  dip into the money you have saved to pay the future premiums  automatically.  This may help you keep your coverage during a tough  time.
  • The money inside a life insurance policy typically accumulates tax deferred.  Some of the benefits are:
    • All of the costs of the policy including the cost of insurance  charge (like the term premium) can be paid with the policy values,  including the accumulated interest.
    • The death benefit is not subject to income tax.
    • You can borrow from your policy without paying tax even if the money you borrow is really interest earned inside the policy.
    • You can withdraw money from your policy and take your investment back first, leaving the interest inside the policy.
    • The catch is that you will pay taxes if you surrender the  policy.  Even if you surrender, you may be able to keep deferring the  taxes if the funds are transferred directly to a new life insurance  policy or an annuity.

Sometimes, term insurance  is the best idea.  But sometimes it isn’t.  Even if you have a term  policy, many of them can be converted to a permanent policy.  Check with  an agent who can tell you whether you have that option.

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