Is Life Insurance the fastest way to build wealth?
By Monica Weissman, CFP, CIM
Life Insurance is something that we love to hate.
All these insurance companies do not do anything else than ripping you off and using your money for their own benefit. You would be better off by just paying with your own savings if and when something unexpected happens – this is how the popular belief goes.
But, is this the truth or is this a myth?
What do the wealthy know about life insurance that makes them carry large amounts of insurance?
When you reached a certain level of financial security, you might consider one of two opposite approach: NO insurance (because I have enough money to mitigate any unexpected adverse event), or LOTS of insurance (because no matter how much money I have, I do not want it wasted by mitigating unexpected adverse events). Life insurance is most often looked upon as a vehicle to protect loved ones, family or business, wellbeing, lifestyle or continuation, but, the question arises – given their wealth, why would rich individuals need life insurance?
Listed below are several reasons which are not exclusive to the wealthy people:
- Life insurance is beneficial for people who will have a substantial amount of deferred income tax to be paid upon death;
- Paying premiums for life insurance that will cover these taxes is almost always less expensive and more efficient than selling assets;
- The heirs will benefit from the cash money provided tax free to replace the wealth amount lost by paying the income tax at death. Some wealthy people often have a strong desire to make a substantial donation to a favorite charity or educational institution, as they wish to create a legacy foundation.
“Life insurance is an efficient way to transfer money to your heirs.” – said Malcom Forbes.
Life insurance is the fastest way to build wealth
In fact, most of the time insurance is faster than any other investments, no matter what investment strategy is used. When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax. Investments are all exposed to taxation, in various degrees, depending on the tax payer’s situation. Paying a fair amount of tax and not more, is as much an art as it is a science, that is why we pay highly for the knowledge of skilled professionals expertise when we file our tax returns.
Life Insurance as an Investment
Maybe our hate relationship with life insurance will change if and when we will look at Life Insurance as an Investment:
- Life insurance is an asset and helps diversifying a portfolio.
- This asset can be used to provide income in retirement.
- The death benefit of life insurance policies is tax free, and this also includes the investment gains made on the cash value portion of the policy. Many have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, a significant wealth increase can be realized, tax free, when compared to tax exposed or tax advantaged investments.
Estate planning and Life Insurance
Reducing the portion of the estate which is lost to the government to pay taxes at death is a major focus in Estate Planning. The advantages of using life insurance for anyone who will have taxes or other liquidity needs at death are easy to understand.
As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.
To grow your wealth – plan for it!
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