How To Profit From Life Insurance Policies

Life insurance is a financial product that can provide a safety net for your loved ones after you pass away. But is it possible to make money from it while you're still alive? The answer is yes, and there are several ways to do so. You can sell life insurance as an investment and earn a commission, or use it as a retirement vehicle by borrowing against your policy's cash value. Life insurance can also help cover final expenses and estate taxes, ensuring your beneficiaries are not burdened with these costs. Additionally, the cash value of permanent life insurance policies can be accessed and used for various purposes. However, it's important to carefully consider your options and seek professional advice before making any decisions, as converting your life insurance policy into income can have complex financial implications.

Whole life insurance explained

Whole life insurance is one of the main types of life insurance, the other being term life insurance. Whole life insurance covers you for your entire life, while term life insurance only covers you for a fixed period. Whole life insurance policies are permanent and remain active as long as the premiums are paid on time. The beneficiaries will receive a set death benefit upon the insured's death.

The insured pays fixed premiums, which are allotted into several categories:

• Partial funding for the policy's death benefit
• The insurer's operating costs
• Contributions to the cash value account, which can serve as an emergency fund that the policyholder can access or borrow against

Your beneficiaries are entitled to a tax-free, lump-sum death benefit at the moment of your passing. There are no use restrictions on this benefit. While it can cover costs associated with your death, such as estate planning, burial, funeral, and debt settlements, your beneficiaries aren't required to use it for those purposes.

The amount of the death benefit doesn't change during the policyholder's lifetime, but any outstanding loans against the cash value component of the policy will be deducted from the death benefit the beneficiaries receive. The policy can expire at its "maturity date", usually when the insured reaches the age of 100 or 120. Some companies pay out the cash value and close the policy at this point, while others grant policy extensions or continue the policy with no changes.

The Cash Value Component

The cash value component is a benefit for the insured while they are alive. It works as a safe investment and savings account that the insured can access throughout their lifetime. Returns on the cash value amount are "guaranteed", meaning that the insurer pledges to uphold a minimum interest rate over the life of the policy. The cash value account is funded with a portion of the premium payments and earns interest on a tax-free basis.

Eligibility and Cost

Eligibility for whole life insurance is determined by various factors, including age, gender, employment information, medical history, and lifestyle. Insurers generally require a medical exam, but some companies offer a no-exam life insurance alternative. Whole life insurance rates are considerably more expensive than other types of life insurance and can cost up to 10 times more than term life insurance. The cost depends on factors such as age, gender, medical history, smoker status, hobbies, and occupation.

Who Benefits from Whole Life Insurance?

Whole life insurance is suitable for people who want long-term protection and can afford the high premium rates. This includes parents who want to ensure their children's financial well-being, couples who want to cover living expenses for a spouse or partner, older adults who want to cover financial obligations and funeral costs, and business owners who want to ensure the operation of a business after the owner's death.

Who Doesn't Benefit from Whole Life Insurance?

Whole life insurance may not be the best choice for people in average income brackets, older adults who need to boost their retirement savings, and buyers looking primarily for investment opportunities. The cash value component grows slowly, and the high premium rates may not be compatible with average wages.

Universal life insurance

The flexibility of universal life insurance means that it can be a good option for those who are self-employed, own a business, or have fluctuating income. However, it is important to monitor the cash value of the policy, as underperformance or underpayment could cause the policy to lapse.

There are no tax implications for borrowing against the cash value of a universal life insurance policy, but interest will be charged on the loan amount, and any unpaid amounts will be taken from the death benefit. Some withdrawals from the policy may also be taxed.

Term life insurance

When you buy a term life insurance policy, the insurance company determines the premium based on the policy's value and factors such as age, gender, and health. The younger and healthier you are when you purchase a term life policy, the lower your premiums are likely to be. Term life insurance policies are also customizable, allowing you to choose the length of coverage that best suits your needs.

While term life insurance does not have a cash value component, it can still be a valuable investment in the sense that you are paying relatively low premiums for the peace of mind of knowing that your beneficiaries will receive a substantial death benefit if you die during the policy term. This can be especially beneficial for young families or those with financial dependents, as it provides a financial safety net at a low cost.

However, it's important to note that if you outlive the policy term, the policy simply lapses, and you don't receive any money back. Additionally, term life insurance premiums increase with age, so renewing a policy after it expires will result in higher premiums.

In summary, term life insurance is a good option for those who want substantial coverage at a low cost for a specified period. It provides peace of mind and financial protection for your loved ones in the event of your early death. However, it is important to consider the limited duration of coverage and the possibility of increasing premiums with age when deciding if term life insurance is the right choice for your needs.

Permanent life insurance

There are several types of permanent life insurance policies, including:

• Whole life insurance: This is one of the most common types of permanent life insurance. It covers the insured for their whole life and has fixed premiums that do not change with age or health status. Whole life insurance policies also accumulate cash value in a secure account.
• Universal life insurance: Universal life insurance allows the insured to adjust their premiums and death benefit within limits. This type of policy may be particularly useful if the insured can work with a financial professional to determine how to best invest their cash value.
• Variable universal life insurance: This type of policy has flexible premiums and a savings component, but more factors influence how the savings can grow. The savings portion, or cash value, grows based on the investment methods chosen by the insured.
• Indexed universal life insurance: This type of policy has the same basic parts as a permanent life insurance policy, but the cash value grows based on a chosen stock market index.

The main benefit of permanent life insurance is that it lasts through the policyholder's entire life cycle. However, it is more expensive than term life insurance. Permanent life insurance may be worth considering for people who need coverage regardless of when they die, want to use life insurance to leave an inheritance, or want a policy to cover final expenses.

Life insurance for retirement

Life insurance is a complex investment with its own pros and cons. While it is primarily designed to provide a financial safety net for your beneficiaries after you die, it can also be used as a tool for building cash value and saving for retirement.

Permanent Life Insurance

Permanent life insurance, which includes whole life insurance and universal life insurance, provides coverage for your entire life and accumulates a cash value that can be used as a loan source or collateral for a loan. This cash value grows tax-deferred, and you can withdraw or borrow against the funds to pay for expenses while you are alive. The cash value in a permanent life insurance policy can be a useful source of funds during retirement, especially if you purchase the policy when you are young and allow the cash value to grow over time.

Term Life Insurance

Term life insurance, on the other hand, covers your life for a specified period, usually 1, 5, 10, 15, 20, 25, or 30 years. Most term policies do not build cash value, but they are much cheaper than permanent life insurance policies. If you are considering using life insurance for retirement, term life insurance may not be the best option as it does not offer the same cash value growth potential.

Considerations

When deciding whether to use life insurance for retirement, it is important to consider your coverage and investment needs. Life insurance may not be the best way to build wealth, and there may be other investment options on the market that are more suitable. Additionally, keep in mind that withdrawing money from the cash value of your life insurance policy will reduce the death benefit for your beneficiaries.

In conclusion, life insurance can be used as a retirement vehicle, especially if you purchase a permanent life insurance policy and allow the cash value to grow over time. However, it is important to carefully consider your financial goals and needs before making any decisions.

Frequently asked questions