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You likely think of life insurance as money you leave behind for your loved ones, but what if you could use it as a wealth-building tool?

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Life insurance is an excellent way to protect your loved ones from unexpected death, but if you use it as a tool to build wealth along the way, you may be able to leave your loved ones with even more money than you thought.

Reasons to Use Whole Life Insurance to Build Wealth

You probably think of the stock market or other risky investments to build wealth. But what happens when they crash?

You lose everything, right?

It’s hard to build wealth when you’re riding the roller coaster the stock market creates. You get ahead, and then you fall back. If this keeps happening, it’s impossible to reach your financial goals. Plus, you have to take significant risks to see any type of return.

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That doesn’t happen with whole life insurance. Here’s what you should know.

You Won’t Lose your Principal

Unlike investments in the stock market, you won’t lose the amount you invested if you invest in whole life insurance. Your principal is protected, which means you don’t have to worry about not only not earning money but also losing the initial amount you invested.

When you invest in stocks, there’s never a guarantee on your initial investment. You could invest $1 million in stock, and if it crashes, you lose everything.

There’s a Guaranteed Rate of Return

You aren’t at the mercy of how the market responds like you are with the stock market. You have a guaranteed rate of return, and the earnings compound, so your money is constantly growing without the risk of a total loss.

is the return guaranteed?

The returns might not be as high as some very successful stocks, but that’s few and far between. The stock market ebbs and flows, creating major wins and losses, eventually increasing to an average 9% – 10% return. Life insurance cash value doesn’t do that. You have a guaranteed rate of return no matter what happens with the market.

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You Might Earn Dividends

If you invest in the right company, you might earn dividends. Most insurance companies that have been around for 100+ years pay dividends.

There’s never a guaranteed life insurance companies will pay dividends, but if they do, it’s tax-free earnings that further compound your investments.

You Can Borrow Funds Tax-Free

Once you build a cash value (it can take a few years), you can borrow against it. This means you borrow from yourself, but here’s the best part – you don’t pay taxes on the funds you borrow. This means you could borrow from your earnings and still not pay taxes as long as you pay it back.

Essentially you get to use your funds how you want, and as long as you repay yourself, you pay no taxes on your earnings yet could accomplish your life’s goals while earning interest too!

You Still Earn Interest on Borrowed Money

This is where the wealth building tools really come into play.

Let’s say you have a cash value of $200,000. You decide to buy a house, and you want to use some of your cash value for the down payment. Essentially, you’re using the same money for two investments – some call it double-dipping and an ideal strategy.

You borrow $100,000, leaving your ‘true cash value’ at $100,000, but you earn interest on the full $200,000. Now you have money leveraged in a home that will likely appreciate at normal rates, plus you’re earning tax-free interest on your life insurance cash value.

Premiums Remain Steady

Whole life insurance premiums are indeed higher than most other policies, especially term life insurance, but they stay the same for your entire life.

If you have a steady income and choose a premium you can afford now, that premium will never change. However, what will change is your cash value and overall net worth because you decided to build wealth with life insurance.

How to Use Life Insurance as an Investment

To use life insurance as an investment, you should choose whole life insurance. You’ll get a guaranteed rate of return and won’t have to worry about losses.

It can take a few years to build up a substantial amount depending on the terms of your insurance. Use the first few years as your ‘build-up period’ so you have plenty of money to earn interest.

Investment growth

If you plan to use this money as a supplement for retirement, the earlier you set up your whole life insurance policy, the better.

Once you have a substantial amount built up, you can borrow from the funds, using it to build wealth in other areas of your life. You still earn the interest on the total amount, and you pay yourself back versus paying interest to a bank and losing money.

What Happens to your Death Benefits?

Of course, the main focus of life insurance is the death benefits. You want to leave something behind for your loved ones if you die.

The death benefits remain in place for life (or as long as you pay the premiums). Any remaining cash value goes toward your death benefit when you die.

You can use your cash value up to a certain point. Talk to your life insurance provider before using too much of your cash value, so you don’t risk lapsing your death benefits. However, you can always surrender the policy and take the full cash value amount should you no longer need the death benefit.

This is another great way to build wealth. You can take the amount earned and invest it somewhere safe or use it as you see fit, supplementing your retirement income or investing elsewhere.

Just be careful of the tax liabilities it might incur. Any amount earned over your contributions might be subject to tax.

Final Thoughts

Can you make money with life insurance?

You can when it’s done right. Whole life insurance is the safest option to use life insurance as an investment. You get guaranteed returns, can use the money how you want, and have a death benefit as long as your cash value remains at a predetermined amount.

You can use the funds to supplement your retirement, invest elsewhere, or cover unexpected expenses. The choice is yours all the while you’re building wealth and protecting your loved ones at the same time.