Permanent life insurance isn’t used by as many people as it should be. This type of insurance includes whole life, universal life, and variable universal life, and it comes with many different features that make it incredibly powerful for building wealth. While these features can make permanent life insurance seem complicated, the information in this article makes it easy to understand what the advantages are to building wealth through life insurance, and how you can maximize your use of permanent life insurance to achieve your financial goals.
1) Save On Taxes
A common misconception about life insurance is that it’s designed only for people who have young children or a spouse. Permanent life insurance is a great option for anyone looking to save on taxes, including people without kids or spouses. In fact, one of its benefits is that premiums are tax-deductible as long as they fit within your annual adjusted gross income. This can provide you with immediate tax savings, which adds up over time. For example, if you earn $150,000 per year and decide to invest $1,000 per month in permanent life insurance, you could save roughly $32,200 in taxes by deducting your premiums on your federal return (and another $4,700 at the state level). That’s a pretty big saving!
2) Leverage Gains and Interest
One way to build your wealth with permanent life insurance is by using it as an investment vehicle. Permanent life insurance provides a great shelter for investment gains and interest, protecting that money from being taxed upon withdrawal. The more time you have before withdrawing, typically, the better — but if you’ve done well in a given year, it’s not a bad idea to put some of those gains into permanent life insurance as well. This way, you not only save on taxes now (and later), but you’ll also begin building long-term wealth for yourself with no risk of losing principal or interest income along the way.
3) Create an Investment Pool
If you’re building wealth for retirement, one of your best opportunities is through permanent life insurance. Even if you’re young, it makes sense to start a long-term savings plan that will fund both your immediate needs and some sort of long-term investment pool. It takes a little bit of work, but taking advantage of permanent life insurance policies can be a valuable asset in building wealth over time. The key is to make sure that you’re investing those funds wisely and not just spending them on items you don’t need. After all, there are few investments with guaranteed returns like those that come from smartly invested permanent life insurance policies.
4) Set Up A Self-Funded Account
The great thing about life insurance is that you can use it to accumulate wealth tax-free. That’s right—all you have to do is get a policy, pay your premiums and leave it alone. Most people start with a term life insurance policy, which provides coverage for a specific period of time, say 10 or 20 years. The premium stays level (though it will rise along with inflation) for that entire period and then disappears completely.
5) Fund Education Expenses
Consider long-term disability or life insurance. If you have dependents, permanent life insurance is a great way to ensure that your family will be taken care of in case of your death, while also generating cash flow. You can even invest any additional premiums into income-generating assets such as stocks and bonds so that you create a second source of income at little or no cost. If your premiums are low, permanent life insurance can still build wealth for you without spending an extra dime.
6) Pay Off Debts Quickly
Once you’ve socked away cash, one of your next moves should be paying off credit card debt as quickly as possible. But unlike interest on a home loan or student loan, credit card interest is not tax-deductible. So while it might seem like a good idea to put extra money toward your mortgage, in reality, it may make more sense—especially if you’re carrying high-interest credit card debt—to invest those funds instead of letting them languish in savings earning next to nothing. Sure, paying off high-interest debt may eat into your income a bit.
7) Use as Collateral
If you already have a plan in place or are just looking for a quick boost, you can use your permanent life insurance policy as collateral for a loan. Of course, interest rates on a loan against your policy will be much higher than those offered by banks, but some people prefer them anyway because they offer more flexible repayment schedules and shorter repayment periods. This means that instead of making monthly payments over 20 years (the standard term), you may only have to make them over 10 years or so. Depending on how much money you want and need, these loans might be an excellent way to get them without taking any unnecessary risks.
8) Use to Lower Mortgage Payments
Most permanent life insurance policies have a rider attached that allows you to borrow money from your policy. This is known as a paid-up benefit, because it provides you with an instant paid-up insurance policy that has no remaining premium obligation, allowing you to take out cash for any purpose. There are restrictions on how much you can borrow and what interest rate you can get—meaning there is some risk involved in these policies—but if used correctly, these benefits can be a great way to cut down on monthly bills. If your premiums are going toward something like an adjustable-rate mortgage (ARM), which may be due for a reset in three or five years, taking out a loan against your life insurance policy may make sense.
9) Put Money Away For Rainy Days
It might seem like a bad idea to place cash in something that guarantees you nothing, but putting money into permanent life insurance is actually a smart way to save for retirement. In addition to generating interest on your savings, many permanent life insurance policies also offer dividends based on how well the underlying assets perform. These dividend payments are often tax-free and can be put towards other investment vehicles, helping grow your wealth over time. The average American household has about $7,000 saved for retirement—if you’re not adding any money, chances are you won’t have much when it comes time to call it quits.
10) Immediate Cash Value
When you buy permanent life insurance, part of your premium goes toward a cash value account that builds up over time. If you have a whole life policy and make payments for 20 years, for example, you could get up to $400,000 in cash when you redeem your policy. Some policies will allow early withdrawals (before age 59 1/2) but come with fees and penalties. Still, even if you only withdraw from it once or twice during retirement—or never at all—having that money available is valuable in many ways. On average, we spend $250 per month on medical costs as we age; paying off that debt with permanent life insurance could give us extra peace of mind now and save us thousands in interest payments over time.
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