Posts tagged ‘life insurance nest egg’

Building a Nest Egg with Whole Life Insurance

As our economic hardships cause retirement accounts and riskier Wall Street investments to become less appealing to the American public, many people are looking into life insurance as an alternative investment choice. However, some may find that this is not their best option. 

What is a Whole Life Insurance Policy?

In the past, a whole life insurance policy was the typical policy chosen by most men and women. A whole life insurance policy essentially promises that if you as an individual pay an insurance company a monthly or yearly premium until the day you die, the company will then deliver a previously agreed upon sum to your family after death. Often the sum in question is quite large – $250,000, or $500,000. A whole life insurance policy can be expected to slowly increase in value over the course of a lifetime.

Choosing a Plan

Although many people see whole life insurance policies as an opportunity to invest, the fact of the matter is that they are better suited to some situations than to others. If you are an older person or don’t wish to pay a high premium, it may be best to to choose a term life insurance policy rather than a whole life insurance policy and invest the difference somewhere else. Alternatively, you may choose an equity indexed whole life insurance policy, which is tied to the stock market (but will never be allowed to drop below a minimum rate of return).

Rate of Return

Whole life insurance is considered a “safe” investment in the sense that it is guaranteed at a certain value and will not lose value over the course of the investor’s lifetime. However, as with other low-risk investments, the rate of return on a life insurance policy is also low. This means that while it will build value, it will do so very slowly. Some people choose to take out loans on life insurance policies or to cash the policy in early, but the likelihood is that you will not profit from the investment if you choose this option.

Possible Issues

In addition to low rates of return, whole life insurance policies may incur certain fees if they are cashed in early or used to back loans taken out by the policy owner. However, although the company may reduce the rate of return on policies used to back loans, a loan taken out will most likely be tax deferred, meaning that the borrower will not be required to pay income tax on the amount of the loan until the policy itself comes due. For some, this can be reassuring, while for others it will not provide enough flexibility in changing circumstances.

Alternative Options

For those who wish to pursue investments but don’t feel that a whole life insurance policy will meet their needs, other options are available. Traditional IRA, Roth IRA, and 401k plans can offer more easily liquidated resources, while stock market investments offer a higher rate of return in exchange for higher risks. If none of these options appeal, it may be best simply to open a CD savings account and allow the money you already have to accrue interest slowly over time.

With proper research and an understanding of your options, there’s no reason to be nervous about building a nest egg with a whole life insurance policy!