Life Insurance as Investment Strategy (LIRS)

There are many types of life insurance products and LIRS can only be fulfilled with “permanent” life insurance – products that build cash values over time, such as whole life (WL), universal life (UL), variable life (VUL) and indexed universal life insurance (IUL), and generally, will continue death benefit coverage so long as premiums are paid.

LIRS are most stable because of the strength of premium and cash value guarantees, the overall lifetime cost of ownership, and the high growth potential. This product is intended to maximize both cash values and death benefits, and may also pay dividends that can be used to increase the death benefit and cash values.

LIRS takes advantage of the favorable tax treatment afforded to permanent life insurance by law. The three most important features are (1) income tax-free death benefits; (2) the growth of the cash values inside a permanent policy is deferred from taxation while the funds remain in the policy; and (3) policy cash values can be accessed on a tax-favored basis by withdrawals or through policy loans or a combination of the two.

It is through these last two features that make LIRS stand out as an effective supplement to retirement savings and income. Withdrawals from a life insurance policy are generally treated on a First-In First-Out Basis meaning that withdrawals to the extent of cost basis are considered a tax-free return of cost basis. During the insured’s life, loans taken against a whole life policy will generally not trigger a taxable event, even though the policy may have a large gain in excess of premiums paid. Cash values can be accessed on a demand basis through a policy loan at any time and for any reason, without the application and approval process that is required for consumer or business loans. Once a policy loan has been taken, any annual dividend paid can be used to help pay back a policy loan. If the loan is not repaid, the loan balance will merely reduce the death benefit and cash values.