 Life
Insurance as an Investment
Life insurance as an investment
Term insurance provides coverage for a pre-specified period. For
example, term insurance is designed to protect a mortgage or provide
income for your family in case of your death. You pay the term insurance
premium each month and as long as you pay the premium your policy
will stay in force. Once the contract reaches maturity (usually
in 10 years) you need to renew your policy at a higher price. If
you die while you're paying the premium your estate gets a large
sum of money.
In contrast, permanent or whole life insurance remains in force
until you die. You pay the premium on a monthly basis for a pre-specified
term, which can range between 10 to 20 years. A portion of your
monthly payment pays the insurance and the life insurance company
that provided the insurance invests the remainder. Eventually you
don't pay any premiums but your estate still receives a large payment
upon death.
Whole life polices have been criticized because their investment
returns are low. Thus you were often advised to buy life insurance
protection with a term policy and invest the difference between
term and whole life payments in a separate investment vehicle, such
as mutual funds, stocks, or bonds. Once you have built up a large
pool of assets you don't need the insurance because the assets will
provide security and stability in the event of an unexpected death.
However, there is a new, more flexible product called universal
life insurance. While the life insurance company controls the savings
in a whole life policy, the savings in a universal life plan are
owned and controlled by the policyholder. Insurance companies offer
a large variety of investment options for this savings component,
including mutual funds. Thus, you have the ability to meet your
life insurance needs and increase your return on investment.
The major advantage of a universal life policy is tax-advantaged
growth. When you pay the policy premium, a portion of the premium
pays for the insurance and a portion is invested. However, when
you are ready to withdraw the money from your investment, your cost
basis ( the portion not subject to tax) is higher with a universal
life policy. The cost base for a universal policy is equal to the
sum of all your premiums - the amount of money you have invested
plus the money you have used to buy life insurance. This is very
useful because increasing your cost base will ensure you pay less
tax once you sell your investments within the universal life policy.
Universal life insurance provides a powerful combination of life
insurance and tax-advantaged investment opportunities. Investors
should realize that universal life insurance premiums work twice
as hard as other premiums. They should also know that choosing the
right product is an important element in the overall success of
this strategy. Finally, the benefits of this strategy are magnified
if you are in a higher tax bracket.
About the author: Tony Reed is the author of "Life
insurance as an investment", please visit his website Life
Insurance for more information.
Article provided by ArticleWorld.net
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