Life insurance is more than just a monthly payment, rather it is a key player in the framework of saving for your financial future. While the concept of life insurance is complex, I can help you break it down to better understand why it’s a worthwhile investment.
What age should you begin to purchase life insurance?
Life in your twenties moves fast, but when is the right time to purchase life insurance? With a significant number of millennials interested in finding new ways to invest their money, life insurance is not only a great way to kill two birds with one stone, but it should always be part of the conversation, especially as your assets begin to grow.
The earlier you purchase life insurance, the more you can save on your premiums and are able to lock in a low rate for life. The most common thing I hear from retirees is, “I wish I bought my life insurance sooner.”
What does it mean to “invest” in life insurance?
When you hear your financial advisor or a life insurance agent recommend life insurance as an investment, they are usually referring to the “cash component” of your permanent life insurance policy – this includes whole life insurance and universal life insurance policies. They will also advise on the different ways you can invest and borrow this money.
It’s much easier to get an affordable whole life or universal life insurance policy in your twenties. The benefits of these types of insurance is that they grow and compound for life. This means that the money you contribute to your life insurance can be used in retirement as an investment. Think of it like car insurance, but on steroids. If you don’t get into a car accident, you won’t get your money back at the end of the year. But, with whole life insurance, if you do not pass away before retirement, you get all of your money back PLUS a rate of return.
So, what are the benefits of investing in life insurance?
Tax-deferred growth
When you invest the cash component of your life insurance policy, what this means is that until you withdraw the proceeds, you don’t have to pay taxes on any interest, dividends and capital gains of your investment. This is like investing in an RRSP. For those who max out their RRSP contributions, it’s a good idea to use a whole life or universal life insurance policy to protect your family in case of an early death, BUT ALSO to get tax-deferred growth on your money. This essentially means that you are able to invest your money and let that money compound and make more money without having to pay taxes on that growth at the end of every year.
Forced investment
If saving isn’t your forte, investing in life insurance does the job for you. Dually beneficial, by paying your monthly premiums, not only do you have access to the death benefit of your policy but you’re able to save money that earns interest at the same time. Most people make the mistake of withdrawing their money at the wrong time or for the wrong things. Everyone knows that one person who liquidated their TFSA to travel the world, or heard of the dad who turned 60 and bought a Ferrari to satisfy his mid-life crisis. With an insurance investment, you don’t get the option to withdraw until later in life, forcing you to save and leave your money to compound and grow.
Professional Management
When you invest in life insurance, not only are you getting the benefits of the policy itself, but the insurance company professionally manages the funds for you with lower management fees. Life insurance investment pools are VERY large, which means that they are managed much like a pension fund. For those of you who do not work for a company with a good pension plan, this is a great alternative. It offers everyday investors access to institutional-level investment management, which is typically exclusive to the ultra-wealthy or high-end benefit jobs, such as teacher pension plans and OMERS.
Creditor Proof
Your cash is protected when you invest in a life insurance policy. In the event that you file for bankruptcy, the invested cash portion of your insurance policy is completely safeguarded and cannot be touched by creditors. This is beneficial especially for business owners.
Alternative Avenue to Borrow Money
The cash component of your life insurance policy acts like a savings account that earns interest and can be used during your life time. The cash investment of a life insurance policy is structured so that you can borrow against this cash value to make a down payment on a house or for any other reason. It serves as another avenue to get cash, as opposed to borrowing from the bank, and the money accessed from teh cash surrender value of the policy can be taken out on a tax-free basis.