Ideally, you’ll live to be a ripe old age, enjoying your golden years and leaving plenty of money behind for your survivors. But no matter what age you are now, life insurance can give you the peace of mind of knowing that your loved ones will be financially secure. There are advantages of investing in life insurance, including having access to cash you can borrow as you need it, and a cash-out option that terminates the policy while giving you cash you can use.
Life Insurance Pros and Cons
With term life insurance, you're required to pay premiums to cover you or your loved ones for a set term. At the end of the term, you can either renew the policy or let it expire. Also known as living benefits life insurance or permanent life insurance, whole life insurance has an actual cash value that you retain when the policy expires. There are pros and cons of investing in life insurance, whether you choose a term or whole life policy.
For term life insurance, the advantages include having financial protection for your loved ones, while the disadvantages include having nothing to show for the premiums you’ve paid. The pros and cons of living benefits life insurance include the biggest advantage, which is having cash you can borrow at any time. The biggest disadvantage is that the high premiums you’ll pay over time will typically exceed the cash value when you cash it out.
Term Versus Permanent Life Insurance
Typically, when investors talk about making money off life insurance, they’re referring to permanent life insurance, which has a cash-value component. Although permanent life insurance is usually more expensive, it’s set up to cover you for your entire life. The biggest benefit, though, is its cash value, which allows you to borrow money against it or surrender it to get the current value in cash.
Term life, on the other hand, covers you for a set timeframe. It has no cash value and once it ends, you have to decide whether or not to renew it. If you die with a term life policy in place, the value goes to the person or persons you designated as beneficiaries.
Advantages of Life Insurance Investing
One of the biggest advantages of investing in life insurance is that you don’t pay taxes on the money until you take it out. If you keep paying premiums, you can keep the money in the account, accruing interest, until you die. You also have the option of cashing it out while you’re still alive and using the money, although this will leave nothing in the plan for your survivors.
Unlike 401(k) plans, you can also borrow from the plan to pay for expenses without penalty. Using 401(k) funds for anything other than retirement will incur a 10 percent penalty. You will need to pay income taxes on any money you withdraw on either plan, though.
Disadvantages of Life Insurance Investing
Before weighing the pros and cons of investing in life insurance, it’s important to note that one of the advantages, being able to borrow the funds, comes at a price. You’ll have to repay the money, and interest will accrue on the money until you replace it. If you die before you repay it, that means your beneficiaries will see a lower death benefit than they would have if you’d left the money in place. In some cases, depending on the terms of your policy, an unpaid balance due could cause your policy to lapse.
But the biggest disadvantage of whole life insurance is the high premiums you’ll pay. If you’ve priced term life insurance, you may not realize just how much more expensive it is to pay for living benefits life insurance. Often those who take the cash value of the plan after some time has passed realize that they paid more in premiums than they received in the end, which means they would have been better off putting the money into a term life policy and investing the extra elsewhere.
Advantages of Term Life Policies
The advantages of investing in life insurance are different when you’re purchasing term life instead of whole life. Term life is an investment, but it goes toward security for your loved ones in the event of your untimely death. If you purchase a 20-year policy when your children are young, for instance, you’ll know they’ll be taken care of at least until they reach adulthood, giving you the peace of mind you need.
Perhaps the biggest draw for those shopping term versus whole life insurance policies, though, is its simplicity. Unlike whole life, your options for term life are fairly straightforward. Simply choose the “term,” which is the length of time you want the policy to last, then decide how much coverage you want for your loved ones.
Disadvantages of Term Life Policies
There are pros and cons of investing in life insurance for beneficiaries, and the cons are worth considering. One issue with term life is that your age can limit your term options. You’ll also pay much more for a term-life policy as you get older.
But the biggest disadvantage of term life is at the end of the term, you’ll be left with nothing to show for it. Many people outlive the end of their life insurance policies. Sure, you can renew, but your rates will be based on your current age, not the age at which you initially took out the policy. You may find yourself paying much more for premiums the second time around.
Converting Term to Whole Life
The good news is, if you’re weighing the pros and cons of living benefits life insurance after you already have a term life policy in place, you aren’t stuck. Most term life policies are convertible policies, which means you can convert them to whole life, although there may be a deadline in place to do so. This allows you to begin to put money toward your savings.
It’s important to note that your premiums will increase when you make the switch. Before contacting your insurer to begin the conversion process, price whole life policies with other insurers. Then, when you’re given a quote by your existing insurer, you’ll be able to make the comparison and decide whether you want to convert or purchase a whole life policy when your term life expires.
Alternatives to Whole Life Insurance
Experts weighing the pros and cons of living benefits life insurance point out that although it’s a great investment strategy, there may be better alternatives. It can be a great option if you’ve already maxed out your 401(k) and individual retirement arrangement options. It’s also valuable if you need life insurance, although many find it’s more beneficial to choose a term life insurance and put the premiums they save into another investment vehicle.
A 401(k) or an IRA is typically a better way to meet your investment goals. Instead of paying more in premiums than the amount you’d get if you cashed the policy out down the road, you’ll be putting your money into an account that will grow in value over time, ensuring you’ll get more than you’re putting in. The only downside is that you’ll need to keep the money in there until you reach retirement age to avoid paying that 10 percent penalty.
- Nerdwallet: The Differences Between Term and Whole Life Insurance
- Gateway Financial: Advantages & Disadvantages of Life Insurance
- Nerdwallet: 4 Advantages of Term Life Insurance
- Effortless Insurance: Pros and Cons of Term Life Insurance
- Nerdwallet: What to Do When Your Term Life Insurance Expires
- Nerdwallet: Reasons to Convert Term to Whole Life Insurance
- Nerdwallet: When Is Whole Life Insurance a Good Investment Strategy?