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Understanding Life Insurance as an Investment: Ultimate Guide

When discussing life insurance, the focus is often on how it’s a financial product you can use to protect your loved ones when you die. However, you can also use life insurance as an investment to save money and grow your wealth.

This post will cover the different types of life insurance products that double as investments and everything you need to know about them. You’ll also learn when such policies make sense as investment options and when choosing other investment vehicles is best.

The Types of Life Insurance Products That Work As Investment Vehicles

The life insurance products that double as investments vehicles are whole life and universal life insurance.

Whole Life Insurance

Also known as participating permanent life insurance, these products feature lifetime insurance coverage in exchange for fixed monthly premiums. The premiums will remain the same even as you age, change occupations, or make other lifestyle changes.

The insurance company invests the cash value of the premiums, allowing it to compound over time and grow tax-free. If the investments grow well over time, you may receive dividends that you can reinvest.

You can also decide to withdraw money from the policy or use it as collateral for a third-party loan. However, such withdrawals can lead to tax liabilities.

Whole life insurance is a good choice if you want permanent coverage and favour passive investing. The policy will pay out death benefits if you die at any point, but you still have an investment that delivers tax-advantaged, stable growth.

Universal Life Insurance

Universal life insurance is very similar to whole life insurance. It’s permanent insurance, so you get lifetime coverage and tax-free growth.

You can also take loans against the cash value or withdraw money from the policy. The major difference is that you have more influence over how you can grow the policy’s cash value.

It’s a perfect choice for people who prefer a more hands-on approach to investing. You can choose how to invest the policy’s cash component depending on your objectives and risk tolerance. However, the growth of the policy’s cash value hinges on the performance of the investments you choose.

With universal life insurance, there’s some flexibility with the premiums. You can pay a fixed premium or vary the payments as you see fit. However, you must cover the insurance provider’s regular deductions.

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Universal vs. Whole Life Insurance

To give you an in-depth look at both options, we’ll answer common questions about them in this section.

Which is Cheaper Between Universal and Whole Life Insurance?

Universal life insurance is cheaper than whole life insurance for various reasons. In whole life insurance, you’ll pay higher premiums for a guaranteed death benefit, cash value, and monthly premium.

With universal life insurance, you can reduce the premium payments and the policy’s death benefits depending on your situation. Universal life insurance is also less expensive because you’ll agree to take on more risk to generate cash value as the policyholder instead of enjoying stable growth.

How Much Do Whole and Universal Life Insurance Cost?

The cost of your life insurance depends on factors such as age, gender, health status, and lifestyle. However, you can expect to pay 25-30% more on premiums if you choose a whole life insurance policy ahead of a universal life option worth the same amount.

Remember, you can reduce the premiums on your universal life policy even further if there is a change in your situation.

Which Life Insurance Policy is More Flexible Between Whole and Universal Life?

Whole life insurance is a popular option because of its consistency. The death benefits, premium rates, and cash value remain stable over the policy’s life.

However, if you favour flexibility, it’s best to choose universal life insurance.  

The policy allows you to choose how much money you can invest into the policy’s cash value component. You also have control over the investments, and you can choose the level of risk you’re willing to take to maximize your gains. You can also increase or reduce the death benefits as your needs change.

Which Life Insurance Policy Has the More Potential for Growth As An Investment Vehicle?

Whole life insurance policies grow at a predictable rate due to the fixed interest rate. You’ll enjoy guaranteed growth, but there is no potential for generating outsized market returns in a bullish market.

In a strong market, universal life insurance will deliver a higher rate of return over a time period—assuming you made good choices with your investment. Conversely, your returns can falter or even slip below the returns on a whole-life policy if the market enters a bearish period.

So, you must weigh the impact of poor market performance on your investment before looking at potential growth.  

Which Policy Will Build Cash Value Quicker?

Whole life cash value grows quickly in the early days of the policy before slowing down, because the portion of the premium that impacts the cash value tapers off over time. Universal life insurance will grow cash value faster if you pay standard premiums and pick good investment vehicles.

Which Policy Is Better Between Universal and Whole Life Insurance?

No policy is better than the other. The right policy depends on your needs. Whole life insurance is the better choice if you want stability with your investments. You should choose universal life insurance if you want more flexibility and greater control over your investment.

Is It Possible to Switch Insurance Type Midway Into the Policy’s Lifespan?

You can’t convert your whole life insurance policy to universal life insurance. Therefore, it’s important to weigh your options carefully before agreeing to sign up for a policy.

Why Life Insurance Is a Good Investment Vehicle

Some of the benefits of choosing life insurance (especially the products above) as an investment vehicle include the following:

You Get Permanent Life Insurance Coverage

If you have dependents, a universal or whole life insurance policy can give you the peace of mind that comes with knowing they will receive a payout whether you die at 70 or 95. Term life options have a maximum 30-year window.

It’s a Tax-Free Investment

Whole or universal life insurance policies are good alternatives to tax-free investment vehicles such as Registered Retirement Savings Plans and Tax-Free Savings Accounts. The policy’s cash value will grow tax-free, and your beneficiaries will receive death benefits without deductions. Do keep in mind, while they are a tax-free investment, life insurance premiums are not tax-deductible.

It’s Great for Estate Planning

Since these policies are tax-free products, they are a fantastic choice for estate planning. If you have many fixed or long-term assets, your beneficiaries can use the death benefit funds to pay any accrued estate taxes. There will be no need to sell off some of your assets to offset the tax bill.

You Can Withdraw Cash From the Policy At Any Point

Since you can withdraw funds or take a loan against the policy, your whole or universal life insurance can act as a source of emergency capital. You can dip into it if a sizable emergency expenditure arises.

When Should You Avoid Using Life Insurance as an Investment Vehicle?

Life insurance is not a good investment in the following scenarios:

You Have Substantial Savings, Little to No Debt, and No Dependents

If you no longer have dependents and don’t have sizable debts to pay off, life insurance may not be a great investment choice. The attractiveness of a life insurance policy — including those used as investments — lies in the death benefits. If you don’t have anyone that can benefit from the payout and don’t intend to donate to a charity, the policies lose their attractiveness.

You Prefer Managing Your Money Independently

Universal life insurance policies allow you to choose from different investment options, but independent investing is far more flexible. Exploring independent investments will give you more control over your portfolio. Also, since you won’t lose money to the insurance company’s deductions, independent investments often generate better returns overall.

You Haven’t Maxed Out Other Tax-Free Savings Accounts

Why pay premiums to an insurance provider when you can take advantage of Registered Retirement Savings Plans and Tax-Free Savings Accounts? These investment vehicles also allow you to grow your funds tax-free (to a level), and you can get them from almost any Canadian bank. Since you don’t need to pay premiums, your TFSA investment will yield better returns in the same market environment.

What’s the Difference Between Mortgage Insurance or Life Insurance?

This article explains it all.

Make the Right Choice 

Designing your financial future requires meticulous planning. Before settling for a life insurance product as an investment vehicle, you must thoroughly explore your options and evaluate your situation.  

Should you focus on growing your retirement plans? Should you choose other insurance products without investment components?

At Alliance Income Services Corp. (AIS), our highly experienced advisors can offer guidance about the right type of insurance policy to use as an investment. When it’s time to buy your universal or whole-life policy, we can help you find excellent policies. We shop the Canadian market to secure the life insurance policy that makes sense for you.

Fill out the contact form today to discuss life insurance as an investment further or request a life insurance quote.


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