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How to Make Money With Life Insurance?

We often assume life insurance benefits not the insurer but his or her beneficiary because we can claim compensation only after the death of the insurance policyholder. But this is where we are wrong because you may be surprised to hear that life insurance also has money-earning possibilities.

Yes! You hear that right, you can make money with your life insurance policy. don’t know how? Don’t worry, that’s why we are here. In this post, we will explain to you some ways by which you can generate income through your life insurance policy.

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How to make money with life insurance?

  1. Understand the basics of life insurance policy

Before knowing ways to make money from your life insurance policy, it is wise to have a better understanding of some basics of your life insurance policy. Although the insurance companies provide different types of insurance policies, there are three main life insurance policies which are term life insurance, universal and permanent, or whole life insurance.

We have discussed bout these life insurances in several of our other posts. But to tell you in brief, term life insurance can support you for a definite period specified by you. On the other hand, universal, permanent, or whole life insurance provides support for your whole life. Term life insurance doesn’t provide you cash value therefore comes at a cheaper cost.

The latter type of life insurance policy provides a higher amount of cash value but the premium cost can be quite expensive. For a better return on your cash value, you should take out whole or universal life insurance.

Let’s take a look at why permanent or universal life insurance policies are better for you to invest in.

  • Permanent life insurance

Some people invest in a permanent life insurance policy because it is simple to understand and offers fixed premiums. It also provides you with guaranteed death benefit, and over time cash value growth. The cash value increases at a fixed rate set by the insurance company. The investment is not effected by market fluctuations.

  • Universal life insurance

This is a flexible version of permanent life insurance. It is a mix of term and permanent life insurance. It doesn’t guarantee death benefits, premiums, and cash value like in permanent policies. Instead, this policy can increase or decrease your premiums and death benefit within limits if your needs change.

The cash value generally earns interest at money market rates. These rates can fluctuate according to the state of the market, making it a riskier investment than life. However, some insurance companies set a minimum interest rate, such as 2%, to protect the investment against severe losses.

There are also two other life insurances that can generate your income:

  • Variable universal life insurance

This life insurance policy is a subset of universal life. Like universal life insurance, it allows you to adjust your premiums and death benefits but within limits. Additionally, you can choose how to invest the money, giving you significant control over the investment.

The cash value earns interest based on the performance of investment fund options available through the insurance company, such as stocks and bonds. The insurance company may establish minimum interest rates depending on the policy.

  • Variable life insurance

This insurance offers a variety of investment options for cash value, but you can’t adjust your premiums, like with universal life insurance. There are generally greater investment risks with variable life than with other types of permanent coverage.

The cash value earns interest on a variety of investment subaccounts offered by the insurance companies, such as stocks, bonds, and mutual funds. In this policy also, insurance companies can set minimum and maximum rates to help mitigate serious losses.

  1. Build your wealth with permanent or universal life insurance

Permanent life insurance has the potential to grow your money as an investment. Permanent life insurance policies, or universal life insurance policies include an investment component called cash value.

That means a portion of the monthly premium you pay goes toward the cash value and the money grows tax-deferred. If you wish to earn money via your life insurance policy before dying, you can withdraw the investment amount plus interest that you have generated or borrow money with the cash value of your policy.

  • You can take your cash value growth all at once

Insurance companies via permanent life insurance accumulate cash through the premiums that you as a policyholder pay every month or every year. Over time, this cash value grows depending on the interest rates of the policy. This accumulated cash value can generate tax-free income for you in the future.

  • You can withdraw the Dividend paid to you

Some insurance companies provide permanent life insurance policies that pay dividends to their policyholders. They will pay you dividends if you are their lifetime policy holders which can increase the overall value of your investments.

You have many options for using dividends. You can withdraw them in cash, apply them to premium payments, and reinvest them in the policy to build cash value faster. Or, you can put them toward the purchase of additional coverage to leave a larger death benefit for your loved ones.

  • You can take out Policy loans

You can borrow against the cash value of a permanent insurance policy in case, you’re lending money to yourself or make a withdrawal that you’re not obligated to replace. Consider the difference between that and asking for cash or a loan from a bank, You would have to disclose a lot of financial information and qualify for the bank to approve the money. That doesn’t happen when you turn to the cash value of life insurance. They don’t ask a lot of questions and there’s no application to fill out.

However, accessing the cash value of your policy could have some potential negative effects. Any withdrawal or loan balance that is outstanding at the time of your death reduces the amount of benefit your beneficiary receives.

Additionally, if you decide to cancel the policy, you may receive the accumulated cash value, but you may have to pay a fee, known as a surrender charge. However, repaying the loan can increase the cash value of your policy again.

  1. You can receive continuous retirement income

With a life insurance policy, you can plan for your retirement as well. If you purchase a life insurance policy when you are young, then your cash value will increase significantly by the time you retire. And what’s more, you can withdraw this money as a regular payment every month. Or you can take out in a single payment option.

All this could support your daily expenses when you wish to enjoy your retired life with peace of mind. Also remember, this amount is generally tax-free as long as the funds you receive don’t exceed the premiums you’ve paid for the policy. However, not all policies can facilitate you with continuous income like this so ask your insurance provider in detail whether they provide this benefit or not.

The other important point you have to keep in mind is that these payments that you receive come from the death benefit. For example, let’s say you have a whole life insurance policy worth say NPR 500,000, and your son is your only beneficiary.

Then you request the insurance company to pay you NPR 1,000 per month. If you continue receiving NPR 1,000 per month for 10 years before you die, that means you have reduced the cash value by NPR 120,000 and your son would receive NPR 380,000 as a death benefit after you die.

  1. You can get tax benefit

The cash value of a permanent life policy grows on a tax-deferred basis, and in most cases, you can access that money tax-free. The money you withdraw as a loan from your life insurance is not taxed as long as the policy remains in force.

The money you withdraw from the policy, whether in a single distribution or as a monthly stream of income, is also tax-free. However, the amount you withdrew should be less than the total premiums you have paid for the policy. Additionally, beneficiaries do not pay income tax on the insurance money they receive when they die.

The dividends you withdraw from a whole-life policy are also tax-free, as long as they do not exceed the premium payments you have made. It is because according to law, these withdrawals are not income but an overpayment of premiums returned to policyholders. However, if you draw dividends that exceed the total premium payments, the excess amount is subject to tax.

  1. You can pay for your long-term care needs

Several insurance companies provide life insurance policies with the clause known as expedited care benefit. This type of clause allows you to use a portion of your life insurance policy money to pay for your health care. In any event you suffer from chronic illness and need long-term care, you can use this portion to pay your bills.

You can keep the remaining portion as a benefit for your beneficiary after your demise. This is another way you can take benefit of your life insurance policy when you are still alive. The premium fee and benefits of this type of policy however depend on your age, health, and your lifestyle.

For example, say X has permanent life insurance of NPR 2,50,000 with an access to benefit clause. He pays an annual premium of NPR 2600. let’s say he has a chronic illness for which he takes medication costing him NPR 5000 per month or NPR 340 per day.

If he required home care, it cost him NPR 5000 per month for 2 years. He then died, which means he used NPR 120,000 of his insurance benefits. The insurance company will then pay the remaining NPR 1,30,000 to his beneficiary.

  1. Use your Life insurance as an investment tool

You can use your life insurance policy as an investment tool and in return, you will get the benefits of tax exemption, estate planning, and risk management. We have already explained to you how your death benefits amount is tax-free and your beneficiary can receive the claim without having to worry about paying any taxes.

Likewise, estate planning provides financial flexibility as it effectively reduces estate taxes and various other expenses. Therefore, you can pass on your assets and properties to your beneficiary without necessitating for their sale.

Similarly, for business, you can use your life insurance policy for risk management. With the help of key person insurance and buy-sell agreements, businesses can protect themselves from any potential financial liability in case of the death of a key person or executive of the business.

  1. Premium Financing

In case you own a large business and wish to generate more profit from your life insurance, you can use your life insurance for premium financing. This way, you can optimize your life insurance coverage without any investment of your own money.

For this, you can borrow a loan from any financial institution and use the loan to pay your premiums. By doing so, you can purchase any coverage you desire, and enjoy its benefits. Such as you can have asset protection coverage, estate planning, and so on without necessitating to use of your assets.

With premium financing, you can use the borrowed money to increase your insurance policy returns. You can also save on your money which you can use on other investments such as stocks or real estate and yield more benefits.

  1. Consider risks before making life insurance

Now you know how you can make money with your life insurance policy. However, before using your policy for income generation, you also need to have a few considerations. Such as policy performance, insurance cost, and policy surrender charges.

  • Policy performance

We have already explained to you how your cash value in permanent life insurance increases with time. However, it may take decades for your cash value to grow and this cash value growth depends on several other factors. Such as the interest rates provided to you by the insurance company.

If the company offers high-interest rates, your cash value will also increase faster and vice versa. The interest rate from one insurance company to another differs. It is because the insurance companies also invest the premium money they have generated from you and other policyholders in stocks or other investments. If they generate profit, they will give you a higher interest rate.

Therefore, you should consider checking the investment performance of your insurance company. You can monitor their quarterly financial statements if necessary.

  • Life insurance cost

Although permanent life insurance yields numerous benefits to you you mustn’t forget that permanent life insurance also costs you higher, the monthly or annual premiums that you for this type of insurance are higher than term life insurance.

It is because permanent life insurance supports you for your entire life and it has expanded coverage with higher cash value return. Therefore, before investing in purchasing permanent life insurance, you need to assess your current financial status. Calculate the premium fee you need to pay and check whether you can pay the burden of paying that fee.

  • Policy surrender charges

Before buying a permanent life insurance policy, you should be familiar with the term surrender charges. The surrender charges are those imposed on you by your insurance company in case you terminate your policy before its maturation or expiration.

The surrender charge protects the insurance company from any financial loss if the policyholder decides to cancel their policy after buying it. So review the terms and conditions mentioned in the policy carefully and know what the surrender charges value. Generally, these charges are a percent of your life insurance cash value but it can differ between companies.

Conclusion

Life insurance is traditionally believed to be beneficial only after the death of the insurance holder. But now you know how you can take advantage and earn money from your life insurance policy when you are still alive. However, before applying these methods to make money with your life insurance policy, always consult your financial advisor.

Review the terms and conditions mentioned in the policy and estimate your financial status carefully. By doing so, you can be safe and can make money at the same time.

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