Obtaining life insurance is a benchmark for many adults when building their portfolio. Earning income is one thing but protecting it for your loved ones upon your death is quite another. The primary objective of life insurance is providing that financial support after you’ve passed, but there are other benefits to permanent life insurance that you may enjoy now.
Most permanent life insurance policies can build cash value over time as a portion of your premium is allocated to investments in some capacity. They can be considered a financial asset because of this ability. This cash value is marked as an asset when calculating your net worth. Similar to IRAs and mutual funds, a permanent life insurance policy provides you with options to help build a diversified and holistic wealth management portfolio.
There are several types of asset-building permanent life insurance policies to look at:
Whole life insurance
Whole life is the only permanent insurance with a guaranteed cash component, typically growing between 2% and 3.75% depending on the product. “Participating” policies are also eligible to share in the profits with the company in the form of non-guaranteed dividends. As the cash value grows over time, you are able to borrow that money via policy loan or cash withdrawal. Important to remember that the payout to your beneficiaries may be impacted if loans are not paid back.
Universal and variable universal life insurance
Although these policies do not have a guaranteed cash component, you are still able to borrow against or withdraw any cash value that has accumulated in the policy. A major benefit to universal life is a much more flexible premium when compared to whole life. Universal life polices can grow via a fixed interest rate set by the insurance company or can be tied to an indexed performance (think S&P 500) with caps and floors. Variable universal life is the only insurance policy where you can choose your investments, usually with the help of your advisor.
Hybrid life/asset-based long-term care insurance
Many traditional long-term care insurance policies that are never used for care during a policyholder’s lifetime are lost upon passing. There is no recovery of premium. A hybrid life insurance policy provides a balance of coverage for long-term care, and if not used, the funds are provided through the death benefit. Most reduce the death benefit “dollar for dollar” so can be used in both capacities for shorter long-term care events.
Why Build Cash Value?
There are multiple reasons to use your life insurance policy as an asset. It could become an additional source of income for retirement. The cash value created in the policy can be a way to provide tax-advantaged dollars with loans and withdrawals as, if properly structured, any loan or withdrawal would be received tax-free. With the uncertainty of the markets and future tax policy, you can hedge against risk by using your life insurance as an asset to stabilize your income. The leverage and protection provided by the potential of increased cash value could help you weather current and future stock market or tax policy storms.
As with every decision with regards to your financial plan, there are risks involved. Before deciding to travel down this road of using your life insurance as an asset, speak with a financial professional to determine the best course of action. And if you don’t have a financial professional, well, you’re in luck. We happen to know a few.