Most people think of life insurance as something that benefits others after you die. However, savvy investors know it’s also a financial planning tool.
“In addition to protecting your loved ones when you pass away, life insurance can provide living benefits you can use as an investment strategy,” explains Allendale-based insurance agent Kathleen Sposato of New York Life. “Think of it like a savings account: you can use it to pay for college, put a downpayment on a home, or make ends meet in retirement.”
However, not all policies are the same, and insurance needs vary during your lifetime. Knowing what’s right for you and your family can be complicated. Here’s what you need to know to make the best investment for you.
Different Types of Life Insurance
Life insurance policies fall into four main categories: Term Life, Whole Life, Universal Life, and Variable Universal. Of these, term life insurance is the only one not used for investing.
Term life is a traditional life insurance policy that replaces lost income when the policyholder dies. You can purchase a policy for a set time frame, such as five, 10, or 20 years.
“Term life insurance is like a rental policy,” notes Sposato. “It expires at the end of the term.”
Whole, universal, and variable universal life insurance policies are financial assets. These have two main components: A death benefit paid to your beneficiaries when you pass away and a tax-free cash value you can access while alive.
“These policies are often used as part of a retirement planning strategy along with a 401K, IRA, and other investments,” Sposato says. “The cash value is a separate pool of money that can work hand-in-hand with other investments.”
Life Insurance is also a relatively stable investment that provides tax advantages.
“The government wants people to have life insurance so their dependents are cared for and won’t need to rely on welfare,” she explains. “To encourage more people to maintain life insurance policies, they offer tax incentives. Both the cash value and death benefits are not taxed.”
Whole Life Insurance as an Investment
The most popular type of investment policy is whole life insurance. A form of permanent life insurance, whole life is considered a safe, guaranteed part of your portfolio.
“It’s not tied to the stock market, so you don’t have to worry about market fluctuations,” notes Sposato, who has been with New York Life for more than 20 years.
Whole-life policies pay dividends that increase the cash value over time. Premiums are generally lower the younger you are when you buy the policy. As long as you stay current with your payments, they won’t increase as you age. You can also customize a whole-life policy to limit premium payments to a set number of years and the death benefit is guaranteed.
“Most people go for whole life because it is safe. It offers the peace of mind of knowing what you have down the line for retirement,” she adds. “They can afford to take more risks in other investments because they have the security of whole life.”
Universal Life and Variable Universal Benefits
Universal life insurance policies are adjustable plans that offer more flexibility but less stability than whole life insurance. You can change the total coverage and adjust premium costs with these policies, which are based on fluctuating interest rates.
“Universal life is popular with business owners,” Sposato explains. “It’s a middle ground between term life and whole life. Unlike term life, universal life allows you to build cash value, but it doesn’t offer the same guarantees as whole life.”
Variable universal life insurance, by comparison, is invested in the stock market. It offers the same flexibility as universal life, but the funds are invested in financial markets, potentially increasing the cash value if the markets are favorable. You can choose from different investment options based on your goals, risk tolerance, and timeline.
“Variable universal is more popular with people who are savvy with the market,” she adds. “It’s a higher risk and there are no guarantees, but some people do very well with it.”
Finding the Right Plan for You
Life insurance is helpful for anyone at any age, but it’s essential for people with financial obligations.
However, there isn’t a cookie-cutter formula for how much insurance you need. The right strategy for you will depend on several factors including your age, financial goals, and budget. That’s why it can be helpful to work with an insurance agent.
“When working with clients, I always start with a fact-finding interview to gather general information: where they work, if they have any kids, the size of their mortgage, and other reasons they would need life insurance,” explains Sposato. “From there, I customize a plan to meet their individual needs.”
For young couples with growing families and big mortgages, Sposato usually recommends a combination of whole-life and term-life policies. A universal life policy is a better option for people who wait to buy insurance until later in life.
“If you are too close to retirement age, you may not have enough time for a whole life policy to build up enough cash value to use in retirement,” she adds.
Working With an Agent
The best way to figure out the right strategy for you and your family is to work with an experienced agent.
“Helping clients understand their options and achieve their goals makes my job so rewarding,” says Sposato. “Every client is unique, so together, we can develop a personalized approach that meets today's needs and tomorrow's as well.”
Technology also makes working with an agent more convenient than ever. Virtual meetings mean you don’t need to tidy up before an appointment.
“COVID changed the nature of this work. We used to travel to people’s homes to fill out paperwork and get hand signatures,” she explains. “Now I meet with clients on Zoom or over the phone, and documents are signed electronically. “As a full-time mom and a full-time worker, this gives me the flexibility to stay home with my toddler and take care of my family while also working smarter for my clients,” Sposato adds.
If you’re in the market for life insurance, you can contact Sposato by phone at 551.264.9321, email at kdelaney@ft.newyorklife.com, or online at newyorklife.com/agent/kdelaney.
“In addition to protecting your loved ones when you pass away, life insurance can provide living benefits you can use as an investment strategy.”
“Helping clients understand their options and achieve their goals makes my job so rewarding. Every client is unique, so together, we can develop a personalized approach that meets today's needs and tomorrow's as well.”
