Invest Life Insurance Payouts: A Guide For Surviving Children

Life insurance is a difficult topic for parents to consider, especially when it comes to their children. While the idea of a child's death is distressing, life insurance is not only about providing a death benefit. It can also be a long-term financial strategy that offers significant economic advantages to the child in the future. Permanent life insurance policies, such as whole life insurance, can include provisions or riders that allow the insured to increase their coverage over time, regardless of any changes in health. This can be especially useful if the child develops health issues or has a family history of medical problems, as it ensures their future insurability. Additionally, permanent life insurance policies build cash value over time, which can be borrowed against or withdrawn for any reason. This could be useful for parents who want to help their children with future expenses like buying a house or repaying student loans. However, it's important to weigh the pros and cons of life insurance for children, as it may not be the best investment strategy for every family.

Life insurance can offer a benefit to loved ones when you pass away but it can also be a financial asset during your life

Life insurance is often viewed as a means of providing financial support for loved ones in the event of the policyholder's death. However, it can also serve as a valuable financial asset during one's lifetime. Permanent life insurance policies, such as whole life and universal life insurance, offer the added benefit of building cash value over time, which can be accessed in several ways.

Whole life insurance is the most common type of permanent life insurance. It offers a death benefit and allows the policyholder to accumulate cash value. A portion of the monthly premium is allocated to a cash value account, which grows over time at a guaranteed rate. Universal life insurance functions similarly, allowing policyholders to grow an asset by accruing interest. Under the universal life umbrella is variable universal life insurance, which enables policyholders to invest their earnings into accounts of their choosing, such as mutual funds, potentially earning more over time.

There are several ways to utilise life insurance as a financial asset during one's lifetime:

• Taking a loan from the policy: It is possible to borrow against the cash value of a permanent life insurance policy. However, it is important to read the fine print, as any outstanding balance at the time of the policyholder's death will be subtracted from the beneficiaries' inheritance.
• Using the policy as collateral: In some cases, a life insurance policy can be used as collateral for a loan, potentially making it easier to obtain loan approval or secure a better interest rate.
• Withdrawing funds: Policyholders can make withdrawals from their policy, which they are not required to pay back. However, if the withdrawal amount exceeds the policy's investment gains, taxes will apply.
• Receiving "accelerated benefits": Some policies offer the option to receive benefits during the policyholder's lifetime if an unexpected or extreme medical emergency arises, such as cancer or a heart attack.
• Surrendering the policy (cash-out): Policyholders can cancel their coverage and receive the cash value they have built up, less any fees charged by the insurance company.

It is important to note that permanent life insurance policies generally carry higher premiums than term life insurance policies, and they may involve managing various investments and fees. Therefore, it is crucial to carefully consider one's financial goals and consult with a financial advisor before choosing a life insurance policy as an investment strategy.

Whole life insurance policies allow the owner to build cash value over time

Whole life insurance policies are a type of permanent life insurance, meaning they cover the insured for their entire life. Whole life insurance policies are distinguished by their cash value component, which functions similarly to a retirement savings account. This means that, over time, the policyholder can build up a cash value that can be withdrawn or borrowed against. This is in contrast to term life insurance, which only provides coverage for a certain number of years and does not have a cash savings component.

Whole life insurance policies typically feature level premiums, meaning the amount paid every month remains the same. The cash value of a whole life policy usually earns a fixed rate of interest, although this can vary depending on the specific policy and insurer. The cash value of the policy can be accessed by the policyholder through withdrawals or loans. Withdrawals are typically tax-free up to the value of the total premiums paid, while interest is charged on policy loans at a rate that is generally lower than that of a personal loan or home equity loan. However, withdrawals and outstanding loan balances will reduce the death benefits paid out to beneficiaries.

The cash value of a whole life insurance policy is built up over time, with a portion of each premium payment going towards the policy's death benefit and another portion allotted to the policy's cash value. This cash value can increase over the life of the policy and can be used for various purposes, such as paying for large purchases or supplementing income in retirement. The ability to build cash value over time makes whole life insurance a popular choice in the life insurance market, despite its higher premiums compared to term life insurance.

Whole life insurance policies offer several advantages, including lifetime coverage, a guaranteed death benefit amount, predictable premium payments, and the ability to use the cash value for loans, withdrawals, or premium payments. However, there are also some disadvantages to consider, such as higher costs compared to term life insurance, slower cash value growth than other policies, and limited flexibility in adjusting premiums and death benefits. Overall, whole life insurance can provide financial security and peace of mind for individuals and their families.

Universal life insurance policies allow the owner to grow an asset by accruing interest

Universal life insurance is a form of permanent life insurance that offers flexible premiums and a death benefit. It also has an investment savings element, allowing policyholders to grow an asset by accruing interest over time. This interest is set by the insurer and can change frequently, although there is usually a minimum rate that the policy can earn.

Universal life insurance policies function similarly to whole life insurance policies, in that they allow policyholders to grow an asset by accruing interest. However, unlike whole life insurance, universal life insurance policies have flexible premiums and the interest rate is not guaranteed. The interest rate on a universal life insurance policy is set by the insurer and can change frequently.

Policyholders can borrow against the accumulated cash value of their universal life insurance policy, and there are no tax implications for doing so. However, interest will be charged on the loan amount, and any unpaid amounts may be deducted from the death benefit. Policyholders can also make withdrawals from their policy, but some of these withdrawals may be taxed.

It is important to carefully manage a universal life insurance policy, as there is a risk that the policy could become underfunded if the cash value drops too low. In this case, large payments would be required to keep the policy active. Additionally, if interest rates drop, the cash value may not grow as much as expected.

Overall, universal life insurance can be a useful tool for those seeking lifelong coverage and the ability to adjust premium payments and death benefits. It offers the potential for cash value growth, although this is not guaranteed, and there is a risk of large payment requirements or policy lapse if not carefully managed.

Permanent life insurance can be a hedge against market risk

Whole life insurance is the most common type of permanent life insurance. It offers the policyholder the ability to accumulate cash value in addition to a death benefit. A portion of the premium you pay every month goes into a cash value account. The premiums on these policies typically won't increase over the life of the policy.

Universal life insurance functions similarly to whole life insurance, allowing policyholders to grow an asset by accruing interest over time that can be borrowed against. However, the premiums aren't set and are subject to change. There are also no guarantees on the rate your money will earn over time. Under the universal life insurance umbrella is variable universal life insurance, which enables policy owners to invest their earnings in the accounts of their choosing, such as mutual funds, potentially earning more over time.

Life insurance can be a valuable hedge against market volatility, especially during retirement. Market volatility is one of the biggest threats to financial security in retirement. Even if you've diligently saved and invested throughout your life, a poorly timed downturn in the market can devastate your retirement nest egg. By having other sources of income available during a market downturn, such as the cash value of life insurance, you can reduce the impact of market volatility.

The cash value of permanent life insurance policies grows tax-deferred and can be a source of funding you can access at any time for any reason. It is not subject to the ups and downs of the market and is guaranteed to never lose value. This makes permanent life insurance a reliable hedge against market risk.

Permanent life insurance can be used to pay for children's college tuition

Permanent life insurance, such as a whole life or universal life policy, can be used to pay for children's college tuition. This is because permanent life insurance provides a death benefit and can build cash value. A portion of each premium payment for these types of life insurance policies goes towards building cash value efficiently, as it grows tax-deferred. The earlier you take out a whole life policy, the more affordable the premium tends to be, and this premium never changes. The longer you have the policy, the more cash value it can build.

Whole life insurance is usually the most conservative type of permanent insurance because it provides guaranteed cash value growth over time. A whole life insurance policy from a mutual company can also pay dividends. A universal life policy gives policyholders more payment flexibility than a whole life policy, as premiums can vary within a certain range to help account for variations in income. However, the cash value may also provide lower returns, depending on how it's allocated. It takes a while for the cash value to build but may eventually grow to a sizable sum that can be borrowed against to help pay tuition.

It is important to note that permanent life insurance policies tend to be much more costly to maintain than other college savings vehicles, like state-sponsored, tax-advantaged 529 plans. Additionally, there may be unexpected challenges when it comes to withdrawing funds from a life insurance policy. For example, income tax may need to be paid on withdrawals, and there could be a penalty if the policyholder is under a certain age.

Frequently asked questions