“Life insurance is a terrible investment,” it’s “too expensive” and “the fees and commissions are a rip-off”. Sound familiar? Too bad it isn’t true. Life insurance can actually be a perfect way to diversify your portfolio while growing and compounding your money, tax-free. Most people don’t realize all that it has to offer – like how it won’t go down in value, even if there’s a big drop in the stock market, or how in the state of Arizona, after two years it can be creditor or bankruptcy protected. Best of all, you can use it to fund your child’s college education. Life insurance is one of the most misunderstood avenues of investment, but when used correctly, it can also be one of the most profitable and secure. So before you dismiss the idea of adding cash value life insurance to your portfolio, here are a few dos and don’ts to consider.
1. Don’t be intimidated by the fee structure – Life insurance companies have a bad reputation for charging very high fees and commissions. No doubt if you’ve started researching it at all, you’ve encountered a lot of people who advise against permanent life insurance for this reason alone. But guess what? Permanent life insurance actually has lower fees over the long term than a traditional mutual fund. While life insurance companies do charge higher commissions upfront, the fees then taper off, whereas with a mutual fund the fees actually get bigger every year. One simulation compared a life insurance policy with a traditional mutual fund over 40 years. Based on average fee structures, they found that if the same amount of money went into each account each year, a mutual fund would cost you almost eight times as much in fees! In order for a mutual fund to have the same low total fees as a life insurance policy after 40 years, you would have to find a mutual fund with an annual fee of 0.15 percent. Considering the average is between 1.5 and 2 percent as reported by Forbes, you’ll have a hard time beating a life insurance policy. Better yet, you won’t have to hold it for the whole 40 years to see the benefit. Using this model, after just 10 years, the mutual fund resulted in more fees than the life insurance policy, and by the 20-year mark the difference was more than double. Will you pay more in fees the first year with a life insurance policy? Yes. However, in the long run you will be saving incredible amounts of money.
2. Don’t believe in buying term and “investing the rest.” – Mainly because you won’t. It sounds nice in theory because term insurance (which is strictly for death benefit protection) is cheaper and you can put the remainder into other investments. Sorry, it doesn’t play out that way. Research has shown that less than one percent of people that choose this route actually end up investing the rest. Do yourself a favor and invest it all to begin with in a cash value policy, such as a universal life, whole life, or an equity index policy that invests a portion of your premium for growth in the S&P 500. It’s a strong and stable investment and offers other benefits along the way.
3. Do consider the living benefits. – Life insurance doesn’t kick in strictly as the result of a death. With a number of the newer whole life policies, a large portion of your death benefit is available to pay for critical illnesses such as stroke, cancer, Alzheimer’s, heart attacks, etc… and all tax free. They can even provide a monthly cash benefit to pay for costs associated with chronic and long term care. When you consider that in 2013 more than 51,000 Americans over the age of 65 filed medical related bankruptcies (source: NerdWallet Health Analysis), these perks alone can easily make a cash value life insurance policy worth the investment.
4. Do use it for financial strategy. – Assets in a life insurance policy are viewed as separate from your personal finances. If you are putting aside money for a college fund, consider this: When applying for financial aid, money that is held in a life insurance policy is not counted against the student making them more eligible for assistance and scholarships. Likewise, a life insurance policy also works as a great asset protection plan. For example in the state of Arizona, after two years the cash in the policy is protected even against creditor and bankruptcy claims.
5. Don’t undervalue yourself or your spouse. – With all of the responsibilities of running a house and family, you each contribute a great value regardless of a paycheck. Too often I see families that have coverage for the working spouse, but nothing for the stay-at-home spouse who is working just as hard to take care of the family. Do you realize that according to salary.com, the cost to replace them – to pay someone for child care and other house responsibilities – would be over $100,000 a year? What’s your plan if something were to happen to you or your spouse?
6. Do think of life insurance as an investment. – Historically, a policy such as an equity index cash value program has averaged gains between seven and eight percent. One of the chief advantages to this growth is it can be accessed at any time for emergencies, college expenses, even additional retirement income, and all potentially tax free! It also allows you to participate in the upside of the market, accessing indexes such as the S&P 500 or NASDAQ 100, but because you are guaranteed a minimum amount of return, it takes away any risk of the market’s downside. Making such an investment can provide exponentially more money in retirement than a traditional mutual fund or even a 401k – sometimes as much as three times more! In retirement, everything comes down to making sure you have set up reliable income streams, and investing in a cash value life insurance policy is a great way to accomplish that.
Life insurance often gets a bad rap, but it stems from a lack of education. For those that really look into it, they will find it is a great way to provide diversification, significant layers of living benefits, asset protection, and legacy planning. In building your investment portfolio pyramid, a properly designed permanent life insurance policy is the best way to ensure you have a concrete foundation that can grow with you. What better way to gain a steady profit and protect your assets than to also be insuring yourself and your family for the future?
Pat Moran is owner of The Moran Group, where he specializes in providing clients proven wealth solutions and financial strategy.