Ever since the introduction of variable life insurance in the 1950s the debate over life insurance as an investment has raged on, and, to this day, the issue remains largely unsettled. Life insurance advocates can make a case for its unique properties – tax deferred growth, tax free death benefit, low interest loan provisions, and varied investment options – but then the critics can argue that it can be expensive and that there are better ways to invest your money. The reality is that, while both positions have merit, they also don’t apply equally to all financial situations. Everyone needs t o invest for their future, and nearly everybody should own life insurance. So, the issue comes down to how individuals can best accomplish both. The answer is not so clear cut.

The Savings/Investment Component of Life Insurance

Permanent life insurance policies, such as Whole Life or Variable Life, have unique properties that make them appealing as an accumulation vehicle. First, the cash value is allowed to grow tax free, which makes them popular for people in the higher tax brackets. Secondly, the cash values can be accessed through low cost loans from the policy. In most policies a low interest rate is charged on a loan, but, at the same time, the cash value account is credited with minimum rate of interest on the amount borrowed, so the net cost is negligible. You don’t pay taxes on borrowed money, so there is no tax consequence for the use of your cash value funds. The loans eventually have to be repaid, but that typically occurs upon the death of the insured when the death benefit is reduced by the loan amount. So, it is possible with permanent life insurance to accumulate cash value tax free, and then access it tax free, at least while you’re living.

On the other side of the debate the critics argue that permanent life insurance is too expensive to be used as an accumulation vehicle. Because of the cost of insurance and commissions, it takes several years for the cash value growth to gain momentum, which fuels the argument that it would be better to buy cheaper term insurance and just invest the difference in premium amount in a separate savings or investment account. The one flaw in that argument is that very few people will actually save the difference, whereas the cash value plans are a form of “forced savings.”

When the debate is narrowed to the issue of using life insurance purely as an investment vehicle, the lines are more clearly drawn. Most planners would agree that insurance and investments serve two distinct purposes and that the two should be maintained as separate financial instruments.

Life Insurance is not an Investment Product, however….

Over the last several decades, the life insurance industry has developed a number of insurance products designed to compete with investment products. By wrapping cash accumulation and investment accounts inside of a life insurance policy they could offer attractive investment opportunities that parallel mutual funds and bank CDs, but with the added benefits of tax free growth, access to the account values, and, of course, life insurance protection.

It is these life insurance products which lie at the heart of the insurance and investing debate. Although billions of dollars have flowed into these products over the last few decades, planners and pundits argue that people may be misguided if they are using these life insurance policies as investment vehicles. At the crux of their argument is the fact that investors should instead be maximizing their contributions to their tax qualified retirement plans, especially employer-based plans in which employer matches a portion of the contribution.

It’s not likely that they would receive any argument over that very valid point. Not only do qualified retirement plans offer current tax breaks that should be fully utilized, it is essential that people have a separate investment account earmarked specifically for retirement. To do otherwise can diminish the chances that you will accumulate enough assets to provide for a secure retirement.

Investment-Oriented Life Insurance as a Viable Protection Alternative

Taken in a different context, an equally strong case can be made for investment-oriented life insurance such as variable life or universal life, and to some extent, even whole life. Many people prefer permanent life insurance over term, or temporary life insurance for a number of reasons.

• They recognize that their need for life insurance will continue beyond a term policy’s expiration
• They want to protect their insurability.
• They are using life insurance to protect a business, fund business succession, or maximize the transfer of their estate.
• They recognize permanent life insurance to be a means of accumulating tax favored savings in addition to their qualified plans.
• They recognize that permanent life insurance may provide a more cost-effective means of maintaining life insurance coverage for the long term.

For these people, their objective for their investment-oriented life insurance is not necessarily to get rich, or to replace their qualified retirement plans, rather, it is to provide for permanent life insurance protection that, through the opportunity to earn higher returns, could also create an asset that could provide supplemental income, or, perhaps, could provide the means to pay for their permanent coverage.

Critics will argue that these types of policies are loaded with expenses that can impede the growth of cash values, and therefore, are not good place to put your money to work. Expenses can eat into returns over the long term, but many of the newer products available have cut their expenses significantly and many are available without sales loads. As with any financial vehicle, it is important to shop around and conduct a thorough comparison to find the most efficient investment-oriented life insurance.