Nearly as many Americans don’t own life insurance as do, research shows, but the COVID-19 pandemic has heightened awareness about the value of having a policy.
Still, determining which type of life insurance policy is best for individuals and their families can be complicated. Mark S. Gardner (www.RetireWellDallas.com), president of Retire Well Dallas, says consumers need to understand the differences – including how policies act as investment vehicles.
“What would happen to your dependents if you pass away without any life insurance in which you have independently invested?” Gardner says. “Are you leaving enough other assets to provide for them? I advise that everyone investigate having life insurance coverage on your own, as a supplement to whatever insurance is offered to you at work.”
Gardner explains how different types of insurance policies work as an investment:
Whole life. “You generally make fixed premium payments for life,” Gardner says. “The death benefit and cash value are predetermined and guaranteed, subject to the company’s ratings and balance sheet. The cash value may be accessible via policy loans or withdrawals. This can affect the cash value, death benefit, and even policy guarantees the insurance company gives.”
Premium finance life. This is when someone arranges for a bank to pay their premiums and they pay only the interest on the bank loan. “Over time, the investor’s cash buildup grows and they can pay off the loan to the bank, as well as use the available cash for tax-free distributions,” Gardner says. “This strategy acts as another paycheck for you to live off for your retirement, coupled with Social Security, retirement funds, and outside investments like real estate and stocks.”
Additionally, Gardner says, should one not have long-term care coverage, this policy could have a well-being component that should you not perform two out of the six daily functions, then funds can be withdrawn to assist in one’s health matters. “This is a great alternative to maxing out your 401(k) plan, because when you withdraw funds from it, Uncle Sam taxes you,” Gardner says. “I feel it is like a Roth IRA on steroids due to the leverage and tax-free income when one borrows out of their policy.”
Universal life. With this type of insurance, the policyholder may pay premiums at any time, in any amount (subject to certain limits), if the policy expenses and the cost of insurance coverage are met. “The cash value will grow at a declared interest rate, which may vary over time,” Gardner says. “The cash value may be accessed via policy loans or withdrawals, but those can affect the cash value, death benefit, and policy guarantees.”
Indexed universal life. Indexed universal life insurance is similar to universal life insurance. Gardner says it gives the policyholder a choice of allocating cash value amounts to a fixed account or a fixed-index account. “The amount of insurance coverage can be changed,” he says. “The cash value will grow at an interest rate declared annually and based on the performance of a stock index, which may vary over time. If there are any negative index changes, your cash value is protected. In these ways, it is similar to how a fixed index annuity functions: growth potential linked to rising index values and protected in the case of falling index values.”
Variable life. As with whole life insurance, you pay a level premium for life. However, neither the death benefit nor cash value is predetermined or guaranteed. “They fluctuate depending on the performance of investments, in what are known as ‘subaccounts,’” Gardner says. “A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be allocated. This type of coverage has its rewards when you invest in a bull market; however, you pay anywhere between 3-5% alone for management fees for the mutual fund investments for each subaccount. And should the market drop like it did in 2000 and 2008, your coverage could be hurt dramatically.”
“Permanent life insurance is attractive for reasons other than lifelong coverage,” Gardner says. “The cash-value and savings components may be tools for tax-advantaged wealth building and tax-reduced retirement income.