When you think of insurance, you likely imagine safeguarding something, such as your home or vehicle.

But certain types of life insurance plans are actually designed to do much more than just protect you and the people you value. In addition, they can serve as powerful financial tools that may help you build wealth during your lifetime, especially if you select coverage with the help of a certified insurance professional. Here’s a closer look at some common options and how they could work for you.

The power of permanent life insurance

The key to an insurance policy’s dual role as both protection and an investment lies in its “cash value” component. Unlike term life insurance, which is temporary and has no cash value, a portion of the premiums paid for a permanent policy goes into an account that grows over time. This cash value is a living asset that you can potentially use while you are still alive.

There are several types of permanent life insurance, each with a different approach to building cash value:

Whole life insurance
This is the most traditional form of permanent coverage. It offers a guaranteed death benefit and a cash value that grows at a definite, fixed rate. This predictable growth could provide a stable and secure component to your investment portfolio that is insulated from market volatility. Further, the cash value can be borrowed against for any purpose—be it a down payment on a home, a business opportunity, or to supplement retirement income—without impacting your credit. While the growth rate may be modest, its solid, relatively reliable growth could make it a good asset. However, you may find similar benefits with alternatives like a high-interest savings account.

Universal life insurance

Alternatively, this type of policy may offer greater flexibility. It also builds cash value, but it allows you to adjust your premium payments and death benefit within certain limits. This flexibility can be particularly useful as your financial situation changes over time. Within the universal life category, two types stand out for their investment potential:

• Indexed universal life (IUL): The cash value grows based on the performance of a market index, such as the S&P 500. This gives you the potential for higher returns when the market performs well, while also offering a “floor,” or minimum interest rate, to protect your cash value from market downturns. This unique feature can be less risky than other investments, such as the stock market.
• Variable universal life (VUL): A VUL policy offers the most direct investment control. With this type of plan, you can choose to invest your cash value in a variety of sub-accounts, such as stocks and mutual funds, allowing you to build your own portfolio. This can lead to potential significant growth, but it also carries the risk of losing value if your chosen investments perform poorly. Because of this, a VUL policy is often considered a more aggressive investment tool.

Key advantages

One of the most attractive features of permanent life insurance is its tax-deferred growth. The money in your cash value account grows without being taxed each year—and when you need to access it, you can take out loans against the cash value, which are generally tax-free, unlike withdrawals from a 401(k) or IRA before retirement age.

However, it’s important to remember that these policies are long-term commitments, and the fees can be higher than other investment options. Also, they are not necessarily replacements for traditional retirement accounts but could be powerful supplements for anyone seeking to diversify their assets and leverage tax-advantaged growth.

In the end, while the primary purpose of any insurance is protection, certain permanent life insurance policies can be prudent to include in your comprehensive financial plan. They may offer a blend of security, flexibility, and wealth-building potential, but for more guidance in pursuing these options, consider speaking with an experienced life insurance professional. Such an expert can offer investment recommendations based on your current fiscal health and long-term goals.