Family Matters. Secure their Future with Life Insurance.
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Investing with Life Insurance

Aside from stable rates and lasting coverage, the big draw of permanent life insurance is the investment component of such a policy. Whole life coverage only offers a savings vehicle, but all other permanent policies-including universal, universal variable, and variable-have a built-in investment vehicle. How each of these products invests the premiums paid is different. Some options limit investments to low-risk options, while others channel funds into higher-risk vehicles with higher returns. Similarly, these policies vary in how much discretion the policyholder has in dictating where the invested dollars of his/her premiums go.

When Insurance-Related Investments Pay Off

Before we discuss the nuanced differences among the options, it's worth reviewing whether it's indeed expedient for you to choose such a product. To determine whether an investment-infused policy is the correct option, ask yourself the following three questions:

  1. How large of a death benefit do you need? For most prospective buyers, opting for permanent insurance means that the added cost of such protection reduces the amount they can afford. If this is the case for you and you'd end up purchasing a smaller death benefit than you really need, stick with term offerings.
  2. How long do you need a policy? Term plans will cover you when you're younger and healthier and thus unlikely to use your coverage. Typically, most people don't need life insurance once they hit retirement. However, if you know that you will need protection even when you're older, a plan like this makes sense.
  3. How substantial are the tax savings relative to the added expense? The tax savings of these products are very valuable because your investments grow on a tax-deferred basis, meaning you do not pay a dime on the money until you decide to withdraw the cash value of your plan. As valuable as those savings may be, though, they still might not outweigh the added expense of carrying this protection.

Variations among the Popular Offerings

Below, we've provided a brief summary of how the investment component of three permanent options works:

  • Universal - the way the cash value aspect of universal policies works depends on which category they fall into:
    • Interest-sensitive - this type of product is not technically an investment because it is tied to a particular interest-rate index and not the market per se
    • Equity-indexed - also known as variable life, this ties the cash value of your policy to the financial markets. Your money will be put into a variety of stocks, bonds, and equities. This essentially merges insurance with a mutual fund. The risk of such investments is usually low, and policyholders may be able to decide to an extent how their premium dollars are invested by specific providers.
  • Variable universal - this is a form of whole coverage that merges the flexible premiums and death benefit of universal life with the investment opportunities of variable policies. Policyholders may or may not have a say in how their money is invested, but they do assume the risk of all investments selected, as with these options.