While life insurance is primarily designed for insurance protection, it can also be used as an investment account. Permanent policies grow cash value, which is money you can take out while you are alive. Some policies offer a fixed, guaranteed rate of return on your cash while others let you invest your savings in the stock market. In both cases, life insurance offers several significant investment advantages.
Tax Free Growth
If you manage your cash value properly, all your investment gains will be tax-free. The only other account in the United States that offers tax-free growth is the Roth IRA, so this is a significant advantage. To get this benefit, you need to take your money out as a loan, not as a withdrawal. The IRS doesn't tax life insurance policy loans. Once you've borrowed money, you never need to pay it back -- but when you die, the loan gets paid out of your death benefit. Since death benefits are also tax-free, your heirs won't owe any income tax either.
No Investment Limit
The IRS limits the amount you can contribute per year to retirement accounts so you don't get too much of a tax advantage. In addition, if your income is too high, you get disqualified from many retirement plans. There are no limits on your life insurance contributions. All you need to do is buy more life insurance and you can invest more money per year. This makes it a good extra option for investors that have maxed out their other plans.
When you invest in life insurance, you're also getting insurance protection. This is a useful extra feature even if you can't use it yourself. If you die during the first year of investing in life insurance, your heirs receive a sizable death benefit. This is especially helpful if your spouse was depending on your income to build a retirement fund. If instead you had put that investment in a regular brokerage account, your heirs would only receive that small investment back.
No Withdrawal Restrictions
Life insurance also doesn't have any restrictions on your withdrawals. When you put money in a retirement account, you aren't supposed to take your money out until you turn 59 1/2. If you do, you get hit with extra taxes and penalties. With life insurance, you can take out your money whenever you want. There are also no deadlines for when you need to take your money out. With retirement plans, you need to start making withdrawals by the time you turn 70 1/2. With life insurance, you can postpone taking withdrawals as long as you want.
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