The Best Policies for Building Wealth Through Insurance

Whenever a client asks if insurance is a good investment, we always say no. It’s not because insurance is a bad choice. It’s because insurance isn’t an investment by its very definition.

In the wealth building arena, there are two very broad groups of financial products to choose from: investment class products and insurance class products. With investments, you put in money with the hopes that it will grow. With insurance, you pay a premium for a guaranteed payment later on.

When you’re considering adding an insurance class product to your portfolio, the question is a bit bigger than “annuities or life insurance?” In the insurance world, there’s a large range of policies you can use to gain a future stream of income for yourself or your heirs.

Using Annuities to Supplement Savings

Annuities are sometimes considered the opposite of life insurance because they are insurance policies designed to guard you against outliving your savings. Annuities come in immediate and deferred varieties. With a deferred annuity, there’s an accumulation period before the annuity starts paying out. In an immediate annuity, the payments start soon after you pay your premium. Both of these are methods for turning lump sums into an ongoing stream of payments.

With an annuity, you’re paying an insurer a premium payment upfront. That premium payment is then pooled with other funds to be leveraged in investments to create a fund that can sustain ongoing payments. In a fixed annuity, you’ll get a payment that’s based on the premium you paid as well as a guaranteed interest rate. In a fixed-indexed annuity, the annuity will have a minimum interest rate and an additional interest rate that allows you to take part in the gains on a certain index while avoiding the losses.

There is another kind of annuity, known as the variable annuity. Because these include the risk of loss, we do not offer them and have no interest in obtaining the required securities license to sell them.

Annuities aren’t the only insurance policies you can use to create wealth. In some cases, a life insurance policy can be leveraged as part of your savings portfolio.

Permanent Life Insurance for Wealth Building

Permanent life insurance is a form of life insurance that allows cash value to accumulate on the policy. There are two forms of permanent life insurance that someone might use for building personal wealth during their lifetime: whole life policies and universal life policies.

Whole life and universal life policies both accumulate cash value, but they do it in different ways. Whole life is more focused on the long term, meaning that the individual will have a preset premium schedule and fixed benefits. Universal life policies are a bit more flexible — they allow someone to adjust their premiums, death benefits, and savings methods as needed. Universal life is probably a better choice for creating wealth due to its flexibility. When needed, you can borrow against the cash value or increase death benefits, so you’ll have more control over the terms.

Another option with life insurance policies is indexed universal life insurance. With indexed universal life, you’re permitted to use a portion of the policy’s cash value in an equity index account. This cash value can be used as a means of taking advantage of gains on an index like the S&P 500.

In an indexed policy, its cash value is allocated to an interest-bearing account. Then, this cash value will earn interest based on the overall return of the index it is based on. So if the index sees a 7% gain over the return period, that cash value will see a 7% gain adjusted by a small spread. If the index goes down, no interest will be credited to the account, but nothing will be taken away.

Keep in mind that these policies are not being invested in the stock market. Instead, they’re using the overall index as a benchmark for the amount of interest with which the account will be credited.

What’s Right for Who?

Deciding between an annuity and life insurance as part of your savings portfolio depends on if you’re looking to create a stream of income for yourself or want to leave a bulk amount behind for heirs. With an annuity, you can take a portion of your savings to fund an ongoing payment stipend. This way, you can live on that amount while your heirs get the remainder of your savings.

Or you can hold that annuity in a Roth IRA, which will allow your heirs to create a stream of tax-free income later on. Certain annuities may have required minimum distributions, meaning you can’t allow the annuity to accumulate interest forever.

Life insurance can be an excellent choice for creating a pool of wealth to leave to your heirs, especially in the case of indexed universal life insurance. These policies allow you to leverage cash value within the account to either build up wealth during your lifetime or create an inheritance after you’re gone.

If you’re interested in adding wealth and insurance to your savings portfolio, you’ll have a wide range of options available to you and understanding all these various policies can be quite complex. To get more information about what is right for you, contact a Howard Kaye advisor by calling 800-DIE-RICH.

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