David Lerner Associates: Life Insurance as an Asset
A Different Way to Look at Life Insurance
Many people buy different types of insurance throughout their lives, including health, automobile, homeowner’s and life insurance. But one of these types of insurance — life insurance — is very different from the others. These differences are important to take into consideration as you assess your overall insurance coverage needs.
Only life insurance covers losses against an event that is guaranteed to occur at some time: the policyholder's death. You might or might not get sick and need health insurance, you might or might not get in a car accident and need car insurance, and your home might or might not become damaged, triggering the need for homeowner’s insurance. But it is 100 percent certain that one day, you will eventually die.
This distinction is important to understand, notes Dan Gardella, vice president of Insurance Services for David Lerner and Associates. “That’s because, when viewed through this lens, life insurance isn’t an expense — it’s an asset that will eventually provide a return on your investment. As long as you pay the premiums and maintain the policy, your beneficiaries will eventually receive the death benefit.”
Term Insurance and the No Lapse Guarantee
There are two main types of life insurance: term and permanent. “With term insurance the payment of the death benefit is guaranteed by the insurance company as long as the policy remains in force,” Gardella explains.
It’s possible to determine the rate of return on a term life insurance policy, assuming the policyholder’s death in a given year. For example, suppose that Bob, a healthy 52 year-old man, buys a $1 million term policy at an annual cost of $9,098. If he were to die in 10 years at age 62, the pre-tax equivalent internal rate of return on the policy would be 58.5 percent. The longer Bob lives, the lower the rate of return. If he were to die at age 72, the return would be 20.1 percent, and if he were to die at age 82, the return would be 10.3 percent.
Permanent Insurance and Cash Value
A permanent insurance policy, also sometimes referred to as whole life insurance, is designed to build internal cash value that can be accessed before the insured dies via policy loans.
“Policyholders can tap into the cash value that builds up inside a permanent insurance policy to meet a wide range of financial needs, including providing income for retirement or paying for children’s college educations,” says Gardella.
Every individual’s and family’s insurance situation is unique, so you should consult with an insurance professional for guidance on the best type of life insurance for you and your family.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
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