insurance

How do I: Use insurance as an investment?

Topic: CDS AND INVESTMENTS
Who is affected: CONSUMERS AT EVERY STAGE OF LIFE
DEGREE OF DIFFICULTY: MODERATE
What you'll need: YEARLY INCOME FIGURES; DEPENDENT INFORMATION

What you need to know

Permanent insurance is different from its more common cousin, term-life insurance. The premiums you pay for permanent life insurance are much higher than for term life, but the payoff is that your policy accumulates cash value over time.

This cash value then earns interest and/or investment income that builds up tax-free. As long as you pay the premiums and the insurer stays in business, the policy sticks around until you die.

There are three basic types:

  • Whole life. A policy with a fixed premium, a guaranteed death benefit and a guaranteed return on cash value. This insurance offers safety, but don't expect soaring returns.
  • Universal life. Similar to whole life, but your fixed premium is split up into a payment for your death benefit and a portion for investment. The latter portion is put into a mix of fixed-income investments chosen by the insurance company. Your heirs benefit if the investments do well. But even if investments lag, heirs receive a minimum benefit.
  • Variable life. Your fixed premium is invested in a basket of stock, bond and money market funds chosen by you. The benefit and value of the policy fluctuates with the performance of the funds.

 

Step-by-step
Figure out how much life insurance coverage you need using Bankrate's handy calculator.
While most people opt for term life insurance and then cancel it once their kids move out, permanent life insurance can be a good alternative for those who have disabled dependents who'll need long-term care. However, if your goal is retirement saving, a 401(k) or IRA is usually a better choice.

 

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