Life Insurance: Investment-Grade Policies Explained

Investment grade life insurance is a type of permanent life insurance that offers added benefits above and beyond term or traditional permanent life insurance. It is commonly sold as a solution to avoid the non-diversifiable market risk associated with investing in the market. However, it is essentially a marketing gimmick as life insurance cannot and should not be categorised as an investment.

Investment-Grade Insurance Contracts (IGICs)

IGICs are unique insurance policies that allow you to grow your investment tax-free. When you need to access the funds, you won't be taxed on the withdrawals. This is in contrast to other channels of saving, such as a 401K or IRA, which are capped. If you want to save more, you might consider putting your money into stocks, bonds, futures, or a diversified fund.

Universal life insurance is a type of life insurance that buys term insurance and invests the difference. Some advisors refer to universal life insurance as investment-grade life insurance without the risk because its main purpose is to overcome the risks associated with investing. Premiums paid on universal policies are usually greater than the cost of purchasing term insurance initially, leaving a portion of the premiums paid to accumulate as cash value.

While whole life insurance is not an investment, nor is it an investment-grade life insurance contract, it can still be part of a sound investment portfolio. Participating whole life insurance provides returns, both guaranteed and through dividends while the insured is living, and it also provides tax-free cash upon the death of the insured. The cash value and equity that develop in participating whole life insurance can be leveraged or withdrawn while the insured is still living and can be used to invest, refinance, and/or create cash flow.

Universal life insurance

Investment-grade life insurance is a type of permanent life insurance that gives added benefits above and beyond term or traditional permanent life insurance. It is also referred to as an Investment-Grade Insurance Contract (IGIC). This type of insurance is commonly sold as a solution to avoid the non-diversifiable market risk associated with investing in the market. However, it is essentially a marketing gimmick as life insurance cannot and should not be categorised as an investment.

When considering universal life insurance, it is important to remember that it is not a true investment. While it can provide returns and tax-free cash upon the death of the insured, it is not an investment-grade insurance contract. Universal life insurance is simply a type of life insurance that can be part of a sound investment portfolio.

Whole life insurance

Investment grade life insurance is a type of permanent life insurance that gives you added benefits above and beyond term or traditional permanent life insurance. It is commonly sold as a solution to avoid the non-diversifiable market risk associated with investing in the market. However, it is essentially a marketing gimmick as life insurance cannot and should not be categorised as an investment.

Permanent life insurance

Investment grade life insurance is a type of permanent life insurance that gives added benefits above and beyond term or traditional permanent life insurance. It is also known as an Investment-Grade Insurance Contract (IGIC) and is a unique insurance policy that lets you grow your investment tax-free. When you need to access the funds, you won’t be taxed on the withdrawals.

One of the key features of permanent life insurance is that it offers guaranteed coverage for life, as long as the premiums are paid. Unlike term life insurance, which provides coverage for a specified period, permanent life insurance does not have an expiration date. This means that the policyholder is guaranteed a death benefit, regardless of when they pass away.

Another advantage of permanent life insurance is the accumulation of cash value. A portion of the premiums paid goes towards the death benefit, while the rest is invested and grows over time. The cash value component can be a useful source of funds during the policyholder's lifetime, providing flexibility and financial security. It is important to note that the growth of cash value may vary depending on the specific type of permanent life insurance policy and the performance of the underlying investments.

There are different types of permanent life insurance policies available, such as whole life insurance and universal life insurance. Whole life insurance offers fixed premiums and guaranteed returns, providing stability and predictability. On the other hand, universal life insurance provides more flexibility in terms of premiums and death benefits, allowing the policyholder to adjust their coverage as their needs change.

Tax-free cash

Investment-grade life insurance is a type of permanent life insurance that offers added benefits. It is also known as an Investment-Grade Insurance Contract (IGIC) and is a unique insurance policy that lets you grow your investment tax-free.

When you invest in a traditional savings account or investment vehicle, you typically have to pay taxes on any gains or income generated. This can reduce the overall return on your investment and impact your long-term financial goals.

However, with investment-grade life insurance, you can access your funds without being taxed on the withdrawals. This can be particularly beneficial if you need to access your money unexpectedly or if you want to use the funds for a large purchase, such as a house or a business venture.

Additionally, investment-grade life insurance can provide tax-free cash upon the death of the insured. This means that your beneficiaries will receive the full benefit of the policy without having to pay taxes on it. This can be a significant advantage, especially if the death benefit is substantial.

Overall, the tax-free nature of investment-grade life insurance can make it an attractive option for those looking to grow their wealth and maximise their after-tax returns. By avoiding taxes on both the accumulation and distribution phases of your investment, you can keep more of your money and potentially achieve your financial goals faster.

Frequently asked questions