As seen on moneygeek.com – Life Insurance As An Investment
Experts’ Insights on Using Life Insurance as an Investment
Rick Valenzi, CFP
Founder and Certified Financial Planner at Financial ZenBACK TO ALL EXPERTS
Could you explain how one can leverage their life insurance policy for investment purposes?
With certain types of life insurance — variable universal life — you can invest the policy’s cash value in subaccounts (basically just mutual funds) and then take a tax-free loan against that cash value in retirement.
Are there any notable risks when using life insurance as an investment?
Using a VUL for passive income is only appropriate for the ultra-wealthy in very high tax brackets. VULs are very expensive; most of them charge annual fees of 4–5% per year for investment fees, insurance fees and admin fees. The reason the ultra-wealthy don’t mind those high fees is because the taxes they save from the loan outweigh the fees.
There’s also the underlying risk of the insurance company not being able to meet its obligations.
How should one balance the risks and benefits of a life insurance policy as an investment?
To be honest, unless you need to generate over $500k per year in passive income to support your living expenses in retirement, insurance is a terrible investment. 98% of Americans will be better off maxing out all the tax-advantaged retirement accounts — Roth IRAs, 401ks, etc. — and then saving the rest in a brokerage account invested in low-cost ETFs.
