While it is technically not an investment per se, cash value life insurance can provide a long list of financial benefits – and it can do so in a tax-advantaged manner. For instance, because the money inside of a permanent life insurance policy is allowed to grow tax-deferred, it can build exponentially over time.
In some cases, such as with variable life insurance, there is the risk of loss due to poor market performance. In other cases, like with whole life or universal life insurance, there is no risk to the cash – regardless of what happens in the stock market. Because there is no loss to make up for, the cash can continue to build up over time.
The cash in a permanent life insurance policy can be surrendered, withdrawn, and borrowed by the policyholder. If the policy is surrendered, tax will be owed on the gain. However, you can access money from the policy tax-free via a policy loan and withdrawal. This can provide an excellent way to secure tax-free retirement income.
One perceived “drawback” of this type of policy is that the cost is higher than that of comparable term life insurance coverage. But, while this is typically the case at the time of application (especially if the insured is young and in good health), term insurance can actually become much costlier down the road. That’s because, once the coverage expires, the insured may need to re-qualify, based on his or her then-current age and health condition.
Pros and Cons: