Most people will agree that insurance is an excellent form of risk management to protect your assets either by covering the costs of damage or replacement, or by covering you for any liability as a result of unforeseen events. However, what most people don’t realize is that insurance can be used to not only preserve, but build wealth and help fund your retirement.

Most people think of life insurance as a way to preserve their family’s lifestyle should they pass away earlier than expected. And most of the limited knowledge they have about insurance was passed down from their parents or other family members who value life insurance. They are totally oblivious to the fact that when they buy life insurance, they are protecting their greatest asset — themselves.

More than 80% of North American homeowners believe that either their home, or the money they have in the bank or in other forms of investments is their greatest asset. They don’t view themselves being in good health as their greatest asset.

[You] are your greatest asset. And if you have great health…then the greater an asset you’ll more likely be.  

If you don’t agree that [you] are your greatest asset, just imagine that tomorrow you become disabled or critically ill, and unable to work for the rest of your life. For how long will you be able to do the following without some assistance?

  • Pay your rent/mortgage
  • Pay your property taxes
  • Pay your home/renters insurance
  • Pay your utility bills
  • Pay for your groceries
  • Pay for personal care stuff
  • Pay your children’s tuition
  • Send money back home to your family members
  • Take the yearly vacation
  • Pay for your weekly entertainment 

Historically, people view insurance as just peace of mind or a safety net in the event of unexpected life events, such as a motor vehicle accident, damage to a home, or the death of a loved one. But there is way more to insurance than how most people consider it traditionally. And while there are many different types of insurance that people will buy for different purposes, the key insurance that is used for wealth building purposes is life insurance.  

There are 3 types of life insurance:

  • Term Life
  • Whole Life
  • Universal life 

And while all 3 types can be used to pass on wealth to family members should the life insured die, only Whole Life and Universal Life insurances are geared towards building and preserving wealth.  

Term Life insurance is like leasing a home. While your lease agreement is in effect, you have the full use of the properties and all its amenities. However, once the lease is terminated, you have no use of the property and you have no claim on the equity in the home.  

For instance, let’s say you bought a 20-year Term Life insurance with a death benefit of $2 million on your life. God forbid you die within 20 years, your loved ones will receive a death benefit of $2 million. But suppose you die one day after the 20-year period, your family will receive zero dollars. 

How can I Use Whole Life and Universal Life Insurance to Increase My Wealth?  

Whole Life Insurance  

Whole Life insurance is a permanent life insurance that will cover the insured until he dies. A whole life policy has a death benefit portion that is paid out to the beneficiary when the life insured dies, and it has an accumulated cash value that the policy holder will receive should he decide to surrender the policy. However, if the policy owner wants access to some of the cash value, but doesn’t wish to surrender the policy, he may borrow against the cash value, and repay the loan at a later time.  

Many entrepreneurs borrow funds against their whole life policies to fund or grow their businesses. For instance, when Walt Disney needed funds to make Magic Kingdom the magical place it is today, he used funds from his whole life policy to bankroll his venture so that his dreams could come true. Decades later, Magic Kingdom is the most visited theme park in the world, attracting more than 20 million visitors each year.  

Some whole life policies also offer annual dividends. The policyholder may take these dividends in cash to increase his cash flow, or he may leave the dividend with the insurer to increase his cash value. This causes the cash value to grow at a faster rate, thus giving the policy owner access to more funds to borrow.  

The great news about borrowing from your insurance policy is that it doesn’t go on your credit history. It is viewed as a collateral loan, where the death benefit is the collateral. And your policy will continue to grow like normal, despite the outstanding loan against it. 

This is the reason why you can use your Whole Life insurance policy to fund your retirement. You can borrow up to 90% of the cash value of your policy, and buy an annuity with the proceeds. Or you can use the funds to invest in an asset that provides the monthly cash flow that you may need to supplement your retirement income. 

Universal Life Insurance 

Universal Life (UL) insurance is a special kind of permanent insurance. It has an insurance component, and an investment savings component. This gives people the option to have insurance for peace of mind as well as some savings to tap into when unexpected life events occur. Like the whole life policy, the insurance component has a death benefit that goes to the beneficiary when the life insured dies, while the investment savings portion accumulates a cash value.  

The investment earns interest as regular investments, and is the portion that can help you to increase your wealth. When you pay your premiums, the insurance company deducts an amount to cover the insurance portion— depending on your death benefit—then the balance goes into an investment fund that attracts administration fees.  

You can borrow or withdraw from the investment portion as required. However, like most investments, there are no guarantees, so there is a possibility for growth as well as decline in the investment component of a UL policy.  

So, while a Whole Life insurance policy has a guaranteed cash value, the cash value in the UL policy is not guaranteed. For this reason, it is a good idea to do your research to make sound investment choices.  

Also, since the investment portion grows tax-free—you pay taxes on the growth upon withdrawal. Moreover, the taxman regulates these policies to prevent people from having too much money growing tax-free. Hence, there’s a limit as to how much money you can put in the investment component. The rationale is that it is mainly an insurance instrument, so it should not be used predominantly for investment purposes.  

Regardless, UL insurance is still a great instrument that can be used to increase wealth or to borrow money to grow that business you have been thinking about, or pay for your children’s education to avoid the heavy weight of student loan debt around their necks when they finish college or university. 

Now that you know how the right type of life insurance can be used as, one stone to kill two birds (the cash value and the death benefit), so to speak, you can capitalize on this strategy to grow your wealth or bank roll that business you’re thinking about starting in the future after accumulating some savings.