Permanent life insurance policies with cash value are sometimes used as an investment tool. However, it’s essential to understand the pros and cons:
Pros:
- Tax-Deferred Growth: The cash value grows tax-deferred, like a retirement account.
- Borrowing Flexibility: You can access cash value through loans without selling an asset.
- Legacy Planning: Death benefits are generally tax-free, providing a way to pass wealth to beneficiaries.
- Stable Returns: Whole life policies can offer steady, predictable returns.
Cons:
- Fees and Commissions: Permanent policies come with higher fees and commissions than other investments, so returns may be lower than standard investments like mutual funds.
- Low Initial Returns: Cash value growth is slow in the initial years due to policy fees.
- Complexity: Managing a cash-value life insurance policy requires an understanding of tax implications and loan impact on death benefits.
- Opportunity Cost: Money spent on high premiums might achieve better returns in a retirement account or low-cost investments.
Life Insurance as an Investment Vehicle