The most alluring aspect of whole life insurance besides its death benefit is its investment value. The insurance company will take a portion of your premiums and invest it. As that portion grows in value so will the cash value of your insurance policy. Many policy holders who reach a stage where they no longer have dependants can greatly benefit from the rise of the cash value of their policies. Legislation allows policy holders to withdraw the cash value of their policies and enjoy those proceeds tax free. The way that it works is that the policy holder is actually borrowing the money from the policy. The insurance company will then cover the loan from the proceeds of the death benefit, which are usually greater than the cash value of the policy. So if Mr. Z reaches the age of 65 and no longer had dependants he might decide to withdraw the cash value of his policy. Lets say that the cash value of his $1,000,000 policy is $200,000. He could withdraw the $200,000, use it tax free, and then let the insurance company recover the money from his policy when he passes away. The difference would go towards his designated beneficiaries. In effect he is giving his insurance company money that they are investing for him, a portion of which can become a tax free windfall years later. But another school of thought says buy term and invest the rest. In other words, buy term life insurance because it is substantially cheaper than whole life insurance. You would then use the money that you saved and invest it yourself. The theory behind this strategy is that the individual investor can obtain much better returns than an insurance company can, and he will save the investment fees that the insurance company charges its policy holders. Or an alternate approach would be for the term policy holder to use his savings and invest it in the purchase of a house, his own business, or place it in a mutual fund. |
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