September 6, 2012

Permanent Life Insurance: A Smarter Investment Product?

In today’s volatile investment arena, secure investments providing competitive returns are few and far between. For those clients who have grown weary of the fluctuating market for stocks and bonds, the steady returns offered by so-called “permanent” life insurance policies may be the solution.

In an environment where traditionally “safe” investments, such as bonds and CDs, are earning returns in the low single-digits, permanent life insurance has emerged as a competitive product where returns steadily rival and exceed more traditional investment vehicles. Considering the premium placed on stability in recent years, investing in a permanent life policy might be the best bargain on the market.

Why Permanent Life?

As the name suggests, a permanent life insurance policy remains in effect for the client’s entire life. While these policies are more expensive than term life insurance, which insures the client for only a specific term, they are guaranteed to provide a death benefit as long as the policy is maintained.

In addition to the guaranteed death benefit, permanent life insurance policies allow the policyholder to accumulate cash in the policy that can be withdrawn tax-free in the future. Much like a Roth IRA, the growth realized on the cash value of the policy is not subject to tax, making these policies a powerful savings vehicle for clients who have already maxed out their contributions to traditional retirement accounts.

Further, many of these policies are issued by insurers called “mutuals,” which means that they are owned by the policyholders themselves, so profits are not split with public stockholders. This has contributed to their ability to provide steady rates of return even throughout the recent recession. In fact, many policyholders would have to earn between 5% and 6% after taxes each year in order to beat the insurance policy’s rate of return—making the insurance policy a better investment than many bonds.

Potential Traps

Purchasing a permanent life insurance policy can be complicated because there are so many options on the market, so it is critical that your clients understand the differences between policies. Perhaps most important is that you advise them of the period of time that must elapse before they begin to see cash value accumulate within the policy. This period will vary based on the policy’s fees and premiums.

It is also important that your clients understand that these policies are often much more expensive than a term life insurance policy. Many advisors advocate combining the purchase of term life insurance with an independent bond-investing strategy as a better method for realizing the same level of returns even in a down market.

Older clients must realize that their lower life expectancies will leave them with less time to accumulate cash value in the policy. While the death benefit is guaranteed, some policies take several years before substantial cash value is accumulated. The longer this cash value is permitted to grow, the greater the tax-deferral benefits become.

Conclusion

Like any other investment strategy, whether permanent life insurance will provide the best investment vehicle for your clients depends on their financial position and goals. Despite this, one thing remains certain—for those clients looking for competitive, yet stable, returns, permanent life insurance deserves a closer look.

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