Using Life Insurance as an Investment Vehicle for High Earners

Richard Schechter |
Categories
Estate Planning
Investments
Insurance

High-earning individuals often seek additional investment avenues after maximizing contributions to traditional retirement plans. One such option is utilizing permanent life insurance as an investment vehicle, offering both a death benefit and potential cash value accumulation. Additionally, the cash value of certain life insurance policies can serve as an asset protection tool, shielding funds from potential creditors depending on the jurisdiction.

Current Retirement Plan Contribution Limits for 2025

Before exploring life insurance as an investment, it’s essential to understand the contribution limits of standard retirement accounts:

  • 401(k) Plans: The employee contribution limit is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and above, totaling $31,000.
  • Individual Retirement Accounts (IRAs): The contribution limit remains at $7,000, with a $1,000 catch-up contribution for individuals aged 50 and above, totaling $8,000.
  • Defined Contribution Plans (e.g., 401(a)): The total contribution limit, including both employer and employee contributions, is $70,000.

Using Permanent Life Insurance as an Investment Vehicle

Once these limits are reached, permanent life insurance policies—such as whole life or universal life insurance—can serve as alternative investment vehicles. These policies not only provide a death benefit but also accumulate cash value over time, which grows on a tax-deferred basis.

Benefits of Cash Value Life Insurance

  • Tax-Deferred Growth: The cash value grows without immediate tax implications, allowing for compounded growth over time.
  • Access to Funds: Policyholders can access the cash value through withdrawals or loans, providing liquidity for emergencies, retirement supplementation, or significant purchases.
  • Asset Protection: In many states, the cash value of life insurance enjoys protection from creditors and legal claims, offering an added layer of financial security for high-net-worth individuals.
  • Supplemental Retirement Income: The accumulated cash value can serve as an additional income stream during retirement, especially beneficial for those who have maxed out other retirement accounts.

Considerations

  • Cost: Permanent life insurance premiums are generally higher than term life insurance. It's crucial to assess whether the benefits align with the costs.
  • Policy Structure: Understanding the specifics of the policy—including fees, surrender charges, and the performance of underlying investments (in the case of variable policies)—is vital.
  • Long-Term Commitment: These policies are designed for long-term use. Early withdrawals or policy surrenders can result in penalties and potential tax liabilities.

Conclusion

For high-earning individuals who have maximized traditional retirement contributions, permanent life insurance offers a viable investment alternative. It combines the benefits of a death benefit with tax-deferred cash value growth, while also providing asset protection in many cases. This strategy offers financial flexibility, liquidity options, and an additional retirement income source. However, it’s essential to consult with a financial advisor to ensure this approach aligns with individual financial goals, estate planning needs, and asset protection strategies.