Term Life vs. Whole Life Insurance as an Investment

Years ago, life insurance was meant to provide for surviving family
members upon one's death and the stock market was used for
investments. With changes in the market, the economy and the laws,
many people put money in the stock market as a way to make a living
and life insurance as a potentially-liquid asset. If you are
considering investing in a life insurance policy, it's a good idea to
understand how – and when – you can make a withdrawal.

Term Life as an Investment
Term life insurance is a policy that expires after a specified number
of years. This is called the "term" of the policy. Premiums are much
lower for term compared to whole life because the chances of a claim
are lower (what are the chances you'll die in the next 10 years,
compared to 100 years?) Your money doesn't usually accrue interest or
dividends on investments – you simply own a policy that pays if you
die before the term is complete.

That's not to say term life can't be a worthwhile investment. Many
policies offer a renewal upon expiration of the term. The renewal
usually converts the term policy to a whole life policy. Young,
healthy people often benefit from a term life policy because they pay
very little during the first 10 to 30 years then begin to accrue
dividends once the policy converts to whole life.

Whole Life as an Investment
Whole life policies are what most people consider "traditional" life
insurance. You purchase a policy and it pays out when you die, whether
that's one year or 90 after activating the policy. The premiums are a
bit higher than term life but the policy is yours forever.

Whole life policies often include dividends earnings, used to buy
paid-up additions (PUAs). PUAs can be cashed in for money to use now
or reinvested in the policy. Dividends are earned because the
insurance company invests your policy premiums into one of their many
ventures and they return a portion of the profits to you. The longer
you've paid premiums, the more money you have and the more investing
the insurer does. In turn, you receive more profits.

You aren't taxed on the dividends or PUAs unless and until you make a
withdrawal. Withdrawing these dividends or PUAs is usually done in a
lump sum with a once per year restriction. This makes your accounting
much simpler, since the income received from your dividends won't need
to be calculated just entered onto your tax form.

Different Strokes for Different Folks
Toward the beginning of your life, say the first 50 years, your best
bet for insurance is a term life policy with a renewal period at the
end of your term IF you don't expect to pull out any money. It is an
investment in your survivor's future with very little chance of
providing you any return until you are of retirement age. You'll save
money by not paying on a policy you aren't likely to need for many,
many years.

By mid-life, you should be enrolled or considering enrollment in a
whole life policy. This will give you the option of withdrawal during
your years of retirement as well as a death benefit to your children
or kin.
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