Is Permanent Life Insurance a Good Investment?
June 30, 2022
While looking for life insurance policies for you and your loved ones, you may have come across something called a permanent life insurance policy. Maybe you found it while browsing the web, or your financial advisor may have mentioned it to you. And while doing your research, you may have come across its pros and cons which might have you a bit confused, wondering whether it’s the right policy or not for you. Well, that ends today as in this article we discuss what permanent or whole life insurance is, how it works, and whether it would meet your insurance needs. Read on to find out all about it.
Permanent life insurance - Explained
Once you purchase permanent life insurance, you will get financial coverage for the entirety of your life, provided that the premiums are paid on time. It’s widely popular amongst Canadians not only because of the coverage it provides but also the additional benefits that come with it. The face value of the policy, alternatively known as death benefits can be exempted from taxes if the policyholder (that means you) falls below state and federal estate exemption levels. You will have the flexibility to pay the premium monthly, bi-annually as well as yearly. Additionally, there is a cash component which grows over time and you can use this fund as extra income. Otherwise, you can choose to pay your premiums, purchase additional coverage, or provide a tax-free loan by utilizing the funds.
Permanent life insurance as an investment
When you pay your premium towards the policy, the insurance company invests a part to give your policy a cash value. This investment grows over time at a fixed-rate interest and is guaranteed by your insurer. Not to mention, this increase in cash value is also tax-deferred. Meaning, that any interest you earn isn’t taxed, as long as you don't withdraw.
Once you’ve created enough cash value, you can start taking out loans against your policy. You will not need to pay back these loans as it’s your money, your insurer will subtract any outstanding loan amount from the payout when you pass away.
If you plan to buy a policy from a mutual life insurance company where the insurer is owned by its policyholders, you may receive dividends based on the company’s financial performance.
Do you need permanent life insurance?
This one is a bit tricky to answer, but ideally, it would depend on your insurance needs. It’s perfect for any private individual who wants to build cash value and in contrast, it’s better than the term life insurance policy as your beneficiaries will definitely get the payout if or when you pass away.
Some factors that lead people to purchase permanent life insurance are:
Need for life-long insurance protection because you have people who are financially dependent on you.
You want to fund a trust for heirs.
You have the desire to leave a financial legacy to heirs.
You want to capitalize on the cash value component.
Ensuring that your loved ones get the payout to manage financial expenses.
If you have a high income but have maxed out other investment vehicles and you are in need of life insurance.
Parents of children with special needs.
If you are a senior who don’t have enough savings to cover your end-of-life expenses such as medical care and funeral costs.
Cash out your permanent life insurance
Yes, you are allowed to cash-out permanent life insurance. You can do it by withdrawing money in your cash value or by borrowing against your policy, or you can surrender the policy. If you do the latter, you might have to pay the fees and taxes on your withdrawal.
In the end, it would depend on your insurance requirements to understand whether this policy would be ideal for you or not. We hope this blog can help you decide and if you need help, you can always hire a professional insurance broker. If you want to read more interesting topics like this, bookmark this blog.