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Life Insurance as an Investment

Saturday, November 26th, 2011

According to the Financial Industry Regulatory Authority, a variable life insurance policy is considered to be an investment, so anyone who has one should take care to treat it as such.

What is a variable life insurance policy? It is a permanent policy that provides the insured party with life insurance coverage and protection that, in addition, has cash value. This is possible because a portion of the premium amount goes towards life insurance, while the remainder goes into a cash value account. The money in the cash value account gets invested into a variety of investments, similar to a mutual fund, that are selected by the insured party. Continuing to use mutual funds as a comparison, the overall value of the account likewise rises and falls in accordance with how the underlying investments are currently performing. Fluctuations of the account are to be expected, and may at times be extreme, depending on the state of the economy as a whole. Many individuals will utilize these accounts in the future, post-retirement, to supplement their income and so factor their value into their overall retirement portfolio.

In order to maximize the cash-value growth potential of a variable life insurance policy, it must be funded sufficiently and accordingly. The fundamental way to accomplish this is for the insured party to make adequate premium payments on a regular basis. This becomes all the more important during times of economic uncertainty and poor investment returns nationally. Should payments be made amounting to less than originally outlined at the time the policy was purchased, the result will be a large, negative impact on the amount of cash available to the insured from the policy in the future.

Periodic monitoring of how the policy is performing is especially important. The insured party will, on occasion, find the need to “rebalance” his account by reallocating funds. This is much the same as with any other type of investment account. The redistribution of funds is necessary to ensure that the individual does not inadvertently assume more risk than was initially intended when the account was first established.

If an individual has the means to afford to do so, it is worthwhile for him to consider purchasing a large, tax-sheltered permanent life insurance policy, because that earns money that is tax-deferred at the same time that it is providing coverage. This purchase will enable him to leave a large sum of tax-free money behind for his heirs upon his passing. The way permanent coverage works is a relatively simple matter of buying and holding. The insured party purchases a policy, funds the policy at regular intervals. Then, in some 20 or 30 years, he may consider transferring the value to a different policy via a tax-free exchange, should they encounter a better option. Otherwise, he may opt to hang on to the policy until death. Either way, it will function as an asset to secure loans and will provide some sort of financial security for his heirs.

Another approach is to follow the popular adage to “buy term and invest the difference.” Because term policy premiums are so much less than permanent policy premiums, they are a preferable choice for people without a surplus of capital, but who instead have a large amount of liability, such as multiple children, multiple debts, etc. While term insurance will not build any cash value, it is available at a competitive fixed rate for a set number of years which may be a better fit for some people’s budgets. They then have the opportunity to invest the remainder of their money elsewhere by other means. This option is ideal for individuals who are concerned with protecting themselves from their current liabilities, yet who are not overly concerned with a large payoff upon their death. More often than not, this is the situation with most people seeking life insurance coverage.

No matter which type of life insurance coverage an individual chooses, it’s all a matter of long-term financial planning.

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