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Most people think of life insurance as a way to protect their loved ones financially in the event of their death. But life insurance can also be a valuable investment, providing protection and potential growth.
In this blog post, we’ll explain life insurance, how it works as an investment, and some examples.
What Is Life Insurance, And Why Do You Need It?
Life insurance is a contract between an insurance policyholder and an insurance company. The policyholder pays a premium in return for the insurer’s promise to pay a certain sum of money (the death benefit) to the beneficiary upon the insured’s death. Life insurance aims to provide financial protection for the family or other designated beneficiaries in the event the insured dies. Most people buy life insurance to protect their loved ones in case something happens to them, but there are other reasons to have life insurance, including:
- To cover funeral expenses
- To pay off debts, including a mortgage
- To provide income for dependents if the insured person dies
- To create a legacy for heirs
Why Is Life Insurance Valuable?
Insurance policies are helpful because they provide financial security if something happens to the policyholder. For example, if the policyholder dies, the insurance company pays the death benefit to the beneficiary, which can help cover funeral expenses, debts, and other costs.
How Does Life Insurance Work As An Investment?
Most life insurance policies accumulate cash value over time. The policyholder can access this cash value in various ways, including through a loan or by surrendering the policy. The cash value can also be left to grow, providing a financial cushion for the beneficiary if something happens to the insured.
Life insurance policies are considered an investment. Therefore, they offer growth potential depending on how you manage the cash value.
Do Tax-Advantaged Products Offer Life Insurance?
They do! A Charitable Remainder Trust is a tax-exempt structure that typically lasts for a beneficiary’s life. It allows you to defer the taxes you would otherwise pay when selling assets and receive a substantial tax benefit with the promise to donate some of the trust’s assets to charity at the end of the trust term. But what happens if the owner passes away? Would they lose all of their investments?
You can set up Charitable Remainder Trusts with insurance!
What Is A Wealth Replacement Trust?
A Wealth Replacement Trust (WRT) is a life insurance policy held to hedge against the assets in a Charitable Remainder Trust. The purpose of a WRT is to provide financial security for the family of the Charitable Remainder Trust beneficiary if the trust beneficiary dies. In addition, you can use the WRT to replace assets lost when the insured died.
Therefore, if you had a CRT, it would insure your money and make sure it will make it to your heirs if you die during the trust term. And second, it can “replace” any wealth that is ultimately transferred to the charity of your choice when the trust ends.
Why Are Life Insurances Valuable Investments?
Life insurances are helpful as an investment because they provide a tax-advantaged return on your money. In addition, life insurance policies are typically low-risk investments, meaning that you are unlikely to lose your principal investment.
What Are Some Examples Of Life Insurance Investments?
Some Examples Of Life Insurance Investments Include:
- Term life insurance: A term life insurance policy is an insurance policy that provides coverage for a specific period (the “term”). For example, the beneficiary receives the death benefit if the policyholder dies during the term. Term life insurance is typically less expensive than permanent life insurance policies and is a good option for those who need coverage for a specific period.
- Permanent life insurance: A permanent life insurance policy is a life insurance policy that provides coverage for the life of the insured. It includes both death benefit and cash value components. The death benefit pays out upon the insured’s death, while the policyholder can access the cash value at any time. Permanent life insurance policies are more expensive than term life policies, but they offer greater flexibility and potential for growth.
- Universal life insurance: Universal life insurance is a type of permanent life insurance that combines features of both term and whole life policies. It offers flexible premiums, payment terms, and a death benefit that pays out either in whole or over some time. Like whole-life policies, universal life policies also have a cash value component that the policyholder can access.
Life insurances have a variety of different policies to choose from. And while all life insurance policies offer some form of the death benefit, the type of policy you choose will determine how you receive that benefit and what happens to your investment if you die during the policy term.