Life insurance can certainly be looked at from an investment perspective. All one needs to do is to compare premiums paid to benefits received, incorporating the time value of money into the equation.
Indeed, often times it makes a lot of sense to compare what life insurance can do versus simply investing the premiums elsewhere; it gives you a reference point to see exactly what life insurance can and cannot do, when compared to other investment options.
The truth is in many circumstances life insurance can provide superior investment results to other investment alternatives due to its tax advantages. This can be true whether you are looking at returns on cash values available during life or on proceeds payable at death.
If properly structured, life insurance provides the following tax advantages:
• Cash values grow tax deferred
• Death benefits are received income tax free
• Withdrawals from cash value are tax-free until the cumulative investment in the contract is recovered
• Policy loans are not taxed as income
• Loan balances outstanding at death are paid off income tax free out of the death benefit. Moreover, if a policy is owned by an Irrevocable Trust for more than three (3) years from the date of transfer to the Trust, the death proceeds can even be estate tax free.
Many individuals, corporations and trusts are using life insurance to fund a variety of liabilities specifically because upon close and critical examination, it provides the best after-tax returns compared to alternative investments.
Naturally, there is a cost for providing the life insurance death benefit. However, in many cases this benefit is the most valuable feature. It provides for the immediate creation of a capital sum at death and cannot be duplicated by any investment.
In other situations, the life insurance benefit is not as important and can be minimized; here the emphasis is on the tax-advantaged cash value accumulation of the contract. Today’s life insurance programs can be customized by a qualified agent to
strike the right balance in terms of costs and benefits for what you are trying to accomplish.
It is very important to make sure comparisons are fair as well. For instance, it is not really appropriate to compare traditional whole life insurance to a common stock mutual fund because the risk profiles are completely different. Traditional whole life is more appropriately compared to bonds due to the conservative nature of the underlying investments and the emphasis on guaranteed values. Mutual fund investments or variable annuities should be more appropriately compared to variable life insurance. When doing this kind of comparison all costs (including tax effects) should be fully analyzed on a year-by-year basis – not only for the insurance but for the alternative investment.
Invariably, for life insurance to make sense, it is a long-term proposition. In order for the tax benefits to overcome the commissions and other start-up expenses, time is needed. This is especially true when buying cash value life insurance where the goal is to utilize the living benefits (cash values) of the contract. Obviously, nothing can beat the immediate leverage provided by the life insurance death benefit when compared to the initial premium paid.