How To Use Life Insurance As An Investment Not Just A Last Resort
There is, without a doubt, no type of insurance we like to think about less than life insurance. Its a financial product that, by its nature, is geared toward answering questions of when and how youll die, possibly even prematurelyand, subsequently, how the nearest loved ones in your life will fare after you’re gone.
Life insurance can be a vital tool, helping mourning family members deal with the monetary impact when someone passes away. The payout from life insurance can mean the difference between your survivors struggling to get by and having a decent financial cushion.
But life insurance doesnt always have to be thought of as simply an unmentionable rescue package should the worst happen. It is, like any other type of insurance policy, a complex investment with its own pros and cons. And depending on how you select and manage it, life insurance can become a smart weapon in your overall financial arsenal.
As with any part of your financial life, early attention to your insurance needs is rewarded. Its common for people to approach life insurance with an Ill handle that later attitude, says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial. a somber topic, and many people assume they will have time to sort out the details of coverage later down the road,” she says. ” you might be putting your loved ones at risk of having to cover financial obligations out of pocket if you continue to put it on the back burner.
Why Do Credit Unions Invest In Life Insurance
Many credit unions utilize CUOLI as an investment strategy to fund, or cost-offset, benefit programs designed to reward and retain key employees. However, CUOLI is very flexible and is not just limited to executive reward programs as it can also offset other employee benefit programs including healthcare and other group benefits.
CUOLI also offers returns that can compete favorably with the more traditional credit union investments and may potentially offer less interest rate volatility versus investments with mark-to-market concerns.
Although past performance is not indicative of future results, currently CUOLI returns have a significant spread versus other credit union permissible investments. The cost of waiting to invest increases every day a credit union keeps funds in a low-to-no yielding asset versus using those funds for a CUOLI purchase.
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*Hypothetical values and growth rates were used to illustrate concept only and may not be used to project or predict investment results. The 5 Year US Treasury, 15 Year MBS , and 20 Year MBS are all hypothetical representations of investments available to credit unions. These examples dont represent actual returns. Actual returns will fluctuate and expenses may vary dependent on selling agent or broker.
Weighing Pros And Cons
Experts tend to agree that one of the main selling points of BOLI is its tax-favored treatment. By far the biggest disadvantage is you pay for the insurance policy up front, McCandless says. The premiums can be a sizable capital commitment that might range from $250,000 for an individual to upwards of $8 million for a group of 15 bank executives.
BOLI is an illiquid asset. It works well if the bank holds the policy until the death of the individual, which tends to make it a long-term asset. Banks can surrender the policy at any time for the cash surrender value, but they would be required to pay taxes on all gains received since they bought the policy. If its a modified endowment contract policy, the bank would have to pay an additional 10% excise tax on those gains.
Banks should consider what they are doing strategically with their capital before committing funds to BOLI given its long-term nature, McMillan says. BOLI acts as an accounting offset, because it doesnt generate cash flow. The cash render growth within the policy is an other income earnings. So, if a bank has a low cash flow or is in need of cash, BOLI may not be the right product. BOLI might also not be a good option for a bank that is in a negative tax situation, or if it has some carry forward losses, McMillan adds.
It is kind of like making a really long-term loan, McCandless says. You have to be very prudent in the insurance companies you choose to work with.
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Model Proven Methods For Success
The trick to building wealth is to do what the financial institutions and their executives DO, not what they tell investors to do.
Banks tell us to put money in CDs at incredibly low rates for safety, but do you think they are investing in certificates of deposit? We are advised to invest in mutual funds, but do you think that financial institutions put their assets into mutual funds and cross their fingers?
Of course not! Banks and other financial institutions are investing into real assets such as life insurance and, of course, real estate.
How can you follow the example of banks and profitable institutions?
Un-plug yourself from how weve been programmed to act and invest. Re-examine your assumptions. Find out how wealth is really built and sustained. Divest yourself of conflicts of interest and recommendations from an industry that benefits when we do what they say, not what they do.
A great first step is reading the recently released Magna Carta of the Prosperity Economics Movement: Busting the Financial Planning Lies: Learn to use Prosperity Economics to Build Sustainable Wealth. Its available now on Amazon in both paperback and Kindle eBook versions.
You’re Protected If Your Life Insurance Company Goes Bankrupt
Insurance company bankruptcies are rare no life insurance companies have declared bankruptcy since 2008. And, previous economic crises have helped the industry better prepare for market instability.
Regulators will usually try to rehabilitate an insurance company before liquidating it. If that doesn’t work, the company’s statutory reserves, reinsurance agreements, and state guaranty associations will help it meet its obligations to customers.
Ready to shop for life insurance?
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Choosing A Financially Strong Life Insurance Company
The first thing you can do to protect yourself from a life insurance companyâs bankruptcy is to choose a licensed insurer that is in good financial health. You can research an insurerâs financial standing with credit agencies such as A.M. Best, Standard & Poorâs, and Moodyâs.
Itâs good to know that there are protections if your provider files for bankruptcy, but itâs better to know that your life insurance company has very little chance of going bankrupt in the first place.
Should I Invest My Money Or Buy A Life Insurance Policy Instead
By Special to MoneySense on February 7, 2019
Which makes more sense if Alessandro wants to leave money to his kids
Q: My wife and I are both 40 and have two kidsages 5 and 7. We are considering buying a joint last-to-die life insurance policy that would cost a fixed $7,105 per year for ten years. Thats a total of $71,050 and the policy would pay $500,000 when the last of us dies. This is a proposition from our advisor after we have made our retirement plan. We have concluded that we have enough savings to retire at 55 with a very comfortable nest egg made up of TFSAs, RRSPs, and defined benefit pension plans, as well as money in non-registered investments.
We do not have any debts except a remaining mortgage of $95,734. We also have life insurance and disability insurance with our employer that would cover our needs if one of us were to die or could not work anymore. The goal of this joint last-to-die policy would be to transfer money tax- free in the future as all other needs are covered either by our savings or our employee benefits.
Alessandro
A: Alessandro, youre doing well, and with that comes different opportunities such as life insurance. There are a couple of points in your question worth discussing.
First, the insurance. Why do you want it? And does it make financial sense to have it? Second, your mortgage. Is the interest tax-deductible?
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Faqs Related To Fixed Deposit Vs Life Insurance
No, fixed deposit accounts do not provide risk coverage. However, you can get assured returns on your investments with your FD account.
You can invest in a fixed deposit account for a minimum tenure of 7 days.
Yes, you can withdraw your fixed deposits to meet your emergency expenses by giving prior notification to your bank.
Yes, you can get tax benefits under section 80C and 80D of the Indian Income Tax Act, 1961 by purchasing life insurance policies.
Fixed deposit is an investment product meant for savings while life insurance is an insurance product primarily designed for risk coverage and savings.
Yes, you can take loan against your FD.
Is Life Insurance A Good Investment
Term life insurance can still be an important part of your overall financial picture if you’re the main source of income or financial stability for any other person in your life.
For most people with basic financial needs of for those who have no complicated financial assets to protect, whole life insurance is not a good way to make investment income. This also applies to variable life insurance and universal life insurance products.
But this doesn’t mean these products are without value either. They are simply not big moneymakers. Their goal is to keep your loved ones secure. That said, they are not very risky either. These products do have some tax-advantaged aspects. They’re guaranteed to not lose value, and values don’t rise or fall wildly, as some other types of investments can. For these reasons, they might be just the thing for newer or more timid investors.
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The Financial Double Standard
Banks retail financial products such as checking and savings accounts, CDs, credit cards, mutual funds, and mortgages. But if you walk into a bank and try to put your money where the bank puts much of theirs, they wont be able to help you. Why? Because they dont sell the financial product they use themselves to:
- grow cash reserves at rates several times higher than that of bank savings accounts
- enjoy tax-deferred growth and tax-free gains
- build tax-advantaged cash position much faster than typical retirement vehicles allow
- increase liquidity and stability through building cash position
- fund future needs and prepare for rising costs
- protect themselves from the unexpected loss of key people.
As Denver Nowicz of Wealth for Life explains,
Banks, when it comes to investing their own moneydont follow conventional wisdom and put their cash into mutual funds, stocks, hedge funds, term life insurance or risky real estate deals. Instead, they place a large portion of their vital reserves, known as Tier One Capital, into high cash value life insurance or permanent insurance.
Banks invest billions into high cash value life insurance. Surprisingly, for many banks, life insurance is their largest asset class.
The Overall Price You Pay For An Annuity Can Vary Between Providers
Annuity providers may offer you different income payments for the same type of annuity.
This is because providers calculate the amount of monthly income they can provide based on many factors such as:
- the type of your annuity
- the term of your annuity
- your age and gender
- their operating costs
- the return they expect to receive on their investments
Before buying an annuity, ask for the list of fees and commissions. Make sure you understand the contract restrictions, including penalties and administrative fees.
Once you know what kind of annuity you are interested in buying, compare similar products from several providers.
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What We Can Learn From Bank
A family is not a business, and certainly not a bank. But we always encourage people to think of their finances as their personal economy. What lessons can we learn from banks that we can apply to our own finances?
Banks and other savings institutions who remain healthy put tried-and-true financial advice to work:
- Think long-term, resisting short-term gains and speculation.
- Anticipate and prepare for costs, including unlikely losses.
- Save money in long-term assets with gains that outpace inflation.
- Build equity and ownership in real assets such as life insurance and real estate.
- Avoid speculation for short-term gains with high risk.
- Reduce, defer or avoid taxation, remembering that what matters isnt how much you earn, but how much you get to keep.
- And dont forget Rule #1: Never lose money.
Financial Institutions Dont Follow Their Advice To You
Denver Nowicz was profoundly affected by watching how his family fared from following the traditional advice of financial planning. In spite of savings, investments, and pensions, Denvers parents and grandmother had to rely on him and even move in with him when their own efforts at financial independence had failed.
Nowiczs father owned a business, but could never quite keep up with taxes and inflation. When his health took turns for the worst, his savings did not last long. Nowiczs mother watched her inheritance from her father disappear in the stock market. After her husbands passing, she moved in with her own mother, who had outlived her own small savings and pension, to pool resources. However, the demands of a home and their own medical care proved too much, and they came to live with Denver until their passing.
The experience spurred Nowicz to examine conventional wisdom. What he discovered was that the banks and other financial institutions dont follow the advice given to most Americans:
Banks, when it comes to investing their own moneydont follow conventional wisdom and put their cash into mutual funds, stocks, hedge funds, term life insurance or risky real estate deals. Instead, they place a large portion of their vital reserves, known as Tier One Capital, into high cash value life insurance or permanent insurance.
Banks invest billions into high cash value life insurance. Surprisingly, for many banks, life insurance is their largest asset class.
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When Would Whole Life Insurance Be A Good Investment
Steven Elwell: For very-high-income people who have maxed out their 401 plans, IRA and Roth IRA options, a whole life insurance savings strategy can make sense, especially if they have a need for life insurance. Another viable option for high-income individuals could be the use of a tax-deferred, nonqualified annuity if they dont have a need for life insurance.
Damon Gonzalez: I typically recommend this strategy to people who are already maxing out their 401 plans, Roth IRAs and 529 plans . The cash value is protected from creditors in many states. It also makes sense for someone who has built a good nest egg and wants to diversify part of his or her portfolio into permanent insurance. If you are in a high tax bracket, are risk-averse and will be happy with bondlike returns, you should look at whole life.
What To Know About Credit Or Loan Insurance
This type of insurance is also known as:
- balance insurance
- debt insurance
Not all credit and loan products will offer the same type of insurance coverage. For example, you may be able to get life insurance and critical illness insurance coverage on a line of credit, but not disability insurance.
Compare insurance coverage and cost with the coverage you may have through an individual plan or your employer in case of death, critical illness, disability, or job loss. You can also compare the coverage offered by other insurance products, such as term life and health insurance.
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Reasons Why Life Insurance Is Great Sector To Invest In
Et Wealth Estimates That More Than Rs 82000 Crore Of Investor Wealth Is Lying Unclaimed In Forgotten And Lost Investments There Are Unclaimed Deposits Languishing In Dormant Bank Accounts Maturity Proceeds Of Policies Idling In Insurance Companies And Even The Life Savings Of Individuals Locked Up In Inactive Provident Fund Accounts
- Name and date of birth
- Name and PAN
- Name and pincode
- Name and telephone number.
Tips to avoid unclaimed investments
- Keep family informed about finances
- Always have a nominee
- Write a will today
- Keep updating details whenever there is change
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