Life Insurance as an Investment

posted 9/28/2015 in Investment Services

September is a great month – football season starts, the kids are back in school, and the season is changing. It’s also National Life Insurance Awareness Month, an important reminder that it’s time to review your life insurance coverage and your long-term financial planning.

Many people only think of life insurance in terms of income replacement and paying for final expenses but, for certain investors, life insurance as an asset class can be an important part of their overall financial strategy. For instance, it can help families protect their wealth in several ways, from providing funds to pay estate taxes to the realization of tax deferred (and even sometimes tax-free) gains.

What is life insurance as an asset class?
In the financial world, an asset is something you pay for today with a reasonable expectation there will be some cash flow in the future. Term life insurance generally isn’t considered an asset class because it does not have any cash value. However, other types of life insurance do match this description including:
  • Whole life insurance - a permanent policy that is life-long and combines a death benefit with a savings or investment account in the form of cash value.

  • Universal life insurance - a type of permanent life insurance that can be adjusted, offering a little more liquidity.

  • Annuity - a form of life insurance that offers the option to receive income payments after you make an initial investment (often called an immediate annuity or deferred annuity), with a fixed interest or variable return. This is often used to provide stable income for retirement as well as principal protection.
Life insurance as part of a long-term investment strategy creates several financial planning advantages. Here are just a few of the advantages of adding life insurance to a diversified portfolio:

Estate Planning
Life insurance is a great way to pass on money, tax-free to the next generation. The tax-deferred earnings in life insurance makes the rate of return higher than the equivalent amount if the money was not tax deferred, and the entire investment can also be withdrawn tax free. With a tax-free, inter-generational transfer of wealth, heirs have access to a source of ready cash to pay estate taxes on illiquid assets, such as property or businesses, or to allow wealth to pass to heirs outside the estate.


Families can also choose to give back to charitable organizations using the proceeds of a life insurance policy. Since the death benefits paid to charities are not subject to any tax, donors can rest assured that all the proceeds of the policy are paid in full to their chosen organization. As an added incentive, donors can deduct premium payments from their annual taxes as an itemized deduction under certain circumstances.

Tax Advantaged Retirement Income

Although the death benefit proceeds are the primary reason for purchasing life insurance, the cash value of that life insurance also offers the option to accumulate wealth within the policy that can later be converted to income. Because the cash value of life insurance grows tax-deferred, and perhaps even tax-free, making premium payments with excess funds can be the ideal solution for someone who is in a high tax bracket but has maxed out retirement plan contributions.

Financial Planning Expertise is Key to Success

It’s important to note that life insurance as an asset class is a long term strategy and it’s not right for everyone. These products function as both a death benefit and as an investment asset, but there are many rules and regulations to consider to use them effectively. We strongly believe in tailoring every financial decision to the individual’s unique circumstances as well as consulting a legal and/or tax advisor before investing.

How do you decide if permanent life insurance is a good investment for your portfolio? You will need to take a close look at your finances and consider your long-term plans and goals to determine the best course of action. If you would like more information, contact the investment professionals at Lincoln Savings Bank to discuss life insurance and other financial planning options.

Not FDIC Insured |No Bank Guarantee | May Lose Value | Not a Deposit | Not Insured by any Federal Government Agency
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