Utilizing Life Insurance as an Investment Vehicle

04 Jun 2018

When individuals invest, they consider mutual funds, stocks, bonds, real estate, and other potential options, however they often overlook the possibility of investing in life insurance. Yes, life insurance is an important component of your financial plan from a risk perspective, however, with the ability to grow a cash surrender value within permanent policies, life insurance should also be considered an investment vehicle, especially since the build up of a policy’s cash surrender value may be able to be borrowed on a tax-free basis. Studies have shown that over the long haul, portfolios that include life insurance have outperformed portfolios where life insurance was not considered in the investment mix.

When considering life insurance as an investment vehicle, you need to consider many factors:

  • Age: The younger you are when you start, the less the premiums will go to pay for insurance and the more they will accumulate in the cash surrender portion of the policy.
  • Time horizon: The sales charges and costs are highest in the early years of a policy, so the longer you can accumulate wealth within a life insurance policy, the greater the benefit will be.
  • Investment options: Many different types of permanent insurances exist (e.g. whole, universal, variable), with different underlying investment strategies. You need to choose the right type of policy to meet your investment objectives. Furthermore, many policies have provisions that allow you to change the character of the assets within the plan to be able to control risk, like you would within any other investment vehicle.

With advancements in modern medicine, a retiree at age 65 has a more than 50% chance of living an additional 20 to 25 years. With people living longer, their income needs to live along side them. With defined benefit plans not necessarily a viable option for larger medical practices (could still be very attractive for small practices), what vehicles currently exists to allow physicians to stock-pile retirement funds? Once again here is where life insurance could be a valuable planning tool, and a solid vehicle for investing. Let’s look at some examples:

  • A physician who retired at 60, is thinking of starting to collect her social security when she turns 62 in order to supplement her income. Based upon her income, the social security could be taxable, and the sooner she begins taking her social security benefits, the less the monthly payments are going to be, and the less future cost of living adjustments will be. Instead, she can borrow against her life insurance cash surrender value, potentially on a tax-free basis, and push off the time she starts collecting her social security until age 70.
  • A physician has accumulated a large balance in his 401(k) plan prior to retirement. In his retirement years, due to market conditions, there is a big dip in his 401(k) plan, yet he still needs money to support his lifestyle. The physician can borrow against the cash surrender value of his life insurance policy, potentially on a tax-free basis, to allow his portfolio to recover, thus extending the life of his 401(k) resources.
  • Due to limitations that exist within the amount a physician can place into a defined contribution pension plan (e.g. 401(k)), a physician determines that when he retires, he will not have sufficient resources to live the lifestyle that he is accustomed to in retirement. By building up a large cash surrender value, the physician can utilize the cash surrender value of his life insurance policy to supplement his pension plan. What’s more the accumulation of wealth within the cash surrender value of the policy is generally not subject to taxation.
  • A physician has developed a plan for retirement, worked the plan effectively, and has set aside sufficient assets to meet the retirement goals for her and her husband. Everything looks rosy, until she receives a phone call from her mother’s doctor that her mother has dementia and needs to be cared for. So much for the rosy retirement? No, she can use the cash surrender value of her life insurance policy to provide a potentially tax free distributions to care for her ailing mom.

These are just a few of the ways that life insurance can be an effective vehicle when developing a wholistic approach to investing. What’s more, unlike a qualified pension plan that requires minimum distributions when you reach 70.5, there are no such minimum distribution requirements from life insurance.

Furthermore, in addition to a strong investment vehicle, life insurance still has the added benefit of paying out a death benefit to replenish a portfolio for loved ones when you pass, creating an even larger rate of return from life insurance policies.

With permanent life insurance, you can also purchase various riders to provided added protection, such as a long-term care and chronic illness rider which will allow you to access the value of the policy in a tax efficient way should you become incapacitated by a catastrophic illness.

Finally, provisions exist where you can borrow money to enhance the level of funds you invest in a life insurance policy, utilizing the face value as the policy as collateral. This allows you to leverage your investment, like the way you leverage an investment in real property, to be able to generate faster growth in your cash surrender value.

Life insurance is not for everyone, and like any other investment vehicle requires careful consideration. You need to determine what investing in life insurance can do for you and even if you do invest in life insurance, revisit that investment periodically to determine if it continues to be an appropriate vehicle. If used appropriately, life insurance can be an important component of your investment strategy.


This article was also featured in our newsletter Best Practices Vol. 15