People discussing life insurance policies
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How to Use Permanent Life Insurance to Build Wealth — All the Details

Anuradha Garg - Author
By

Jun. 27 2022, Published 9:11 a.m. ET

Most people think of life insurance as an accumulation of nest eggs for your loved ones when you pass on. However, there's much more to life insurance than meets the eye. While the death benefit is just one aspect of life insurance, there are many others you can explore to build wealth. Keep reading to learn how to use life insurance to build wealth.

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Life insurance policies can be used as an investment tool. If you want to build wealth with a life insurance policy, go for permanent policies. In fact, a permanent life insurance policy is a good way for people of any age to save money. It allows you to build wealth through something called "cash value."

The cash value part of permanent life insurance policy lets you build wealth.

In a permanent policy, you pay for two parts — the death benefit and cash value. As far as building the wealth goes, the cash value part is the real draw. With this part, you can grow your wealth every month and build savings over the years. What’s even more interesting is that you can tap into this accumulated money by taking withdrawals or loans while you're still alive. You may be able to borrow up to 90 percent of your policy’s cash value. However, it may take several years before you can access a life insurance policy loan.

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life insurance cash value
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Savings can grow at a higher rate under a life insurance policy.

The rate at which your savings grows under a life insurance policy is higher than a typical savings account in a bank. In fact, with an average permanent life insurance policy, your money in a cash value account could grow by 6 percent–8 percent annually, which is significant compared to the standard 0.1 percent in a savings account. A life insurance policy is also a safer bet than other investment types such as stocks and bonds, which can suffer from market volatility.

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There are tax benefits with a life insurance policy.

We haven’t even started talking about the tax benefits of a life insurance policy compared to other investments. One more reason to own permanent life insurance policies by higher net worth people is that they aren't counted as a part of an estate and aren't taxed by the federal government. Retirement plan funds such as IRAs and 401(k)s can be taxed twice for wealthier individuals, as income and estate tax. Life insurance policies don’t get taxed that way. The proceeds of the life insurance are also tax-free to the beneficiary.

How to choose your life insurance policy

There are numerous life insurance policies to choose from. The right one will depend on factors like your current income needs, your tax situation, and other assets that you’re using to fund your financial goals. While term insurance isn't expensive, it just offers the death benefit and is limited for a specified period of time. Permanent life insurance allows you to grow your savings part as well for somewhat more premium. It's an especially good option if you regularly max out your retirement accounts.

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