Life Insurance Strategies

While life insurance is meant to provide after-death, financial protection to your loved ones, it can also be used to achieve strategic financial goals while you are living. This may include saving for education, saving for retirement, optimizing your estate plan and bolstering the continuity of a business.

headshot of Thomas J. Brock, CFA, CPA
  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Edited By
    Lamia Chowdhury
    Lamia Chowdhury

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

    Read More
  • Financially Reviewed By Eric Estevez
  • Updated: August 7, 2023
  • 7 min read time
  • This page features 2 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Brock, T. J. (2023, August 7). Life Insurance Strategies. Annuity.org. Retrieved June 22, 2024, from https://dev.annuity.org/life-insurance/strategies/

MLA Brock, Thomas J. "Life Insurance Strategies." Annuity.org, 7 Aug 2023, https://dev.annuity.org/life-insurance/strategies/.

Chicago Brock, Thomas J. "Life Insurance Strategies." Annuity.org. Last modified August 7, 2023. https://dev.annuity.org/life-insurance/strategies/.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Content created by Annuity.org and sponsored by our affiliates.

Annuity.org has been providing consumers with the tools and knowledge needed to confidently make financial decisions since 2013.

We accept limited advertising on our site to help fund our work, including the use of affiliate links. We may earn a commission when you click on the links at no additional cost to you.

The content and tools created by Annuity.org adhere to strict editorial guidelines to ensure quality and transparency.

Key Takeaways

  • Life insurance is primarily thought of as a risk management tool that provides a death benefit payout, but it can be used to strategically achieve various financial objectives.
  • Permanent life insurance, also known as cash value life insurance, can be used to save for education, save for retirement, optimize your estate plan and support your business endeavors.
  • Cash value life insurance policies are best suited for high-income individuals seeking to protect their loved ones, while growing their wealth in a tax-advantaged manner.
  • Generally, cash value insurance does not make sense for average- to low-income individuals. For them, the optimal approach is to buy term and invest the rest.

The Importance of Strategic Life Insurance

Life insurance is primarily thought of as a risk management tool that provides financial protection to named beneficiaries in the event of the policyholder’s death. However, depending on the type of policy (or policies) you purchase, life insurance can also help you achieve various financial goals, such as saving for education, saving for retirement and optimizing your estate plan — all in a tax-advantaged manner.

Additionally, if you have an interest in a closely held business, life insurance can be used to support your succession plan. It can also be used to mitigate the economic distress that can arise when a key employee dies.

It’s important to understand how these strategies work, so you can be intentional when buying life insurance policies.

“Life Insurance” is a broad concept. Most people do not understand the depth of life insurance and how it can be applied to each of our situations. Whether it is our family or our business, you can be sure there is an option to mitigate risk through some variation of life insurance.

Combining Term and Permanent Policies

At the topmost level, there are two types of life insurance – term and permanent. Term life insurance is in force for a finite period, usually between ten and 30 years. The premium payments go exclusively toward providing financial protection to named beneficiaries in the event of your death.

On the other hand, permanent life insurance — also known as cash value life insurance —is in force for your entire life. The premium payments fund two components — a death benefit and a cash value reserve. The death benefit provides financial protection to named beneficiaries, just like a term policy. But the cash value reserve gives you an equity interest in the policy.

For some people, it is not about choosing between term and permanent life insurance, rather, finding a hybrid solution to be more sensible. This is because term insurance is much cheaper than permanent life insurance, but its finite nature can be inadequate, especially for people who want to invest a portion of their funds in a tax-advantaged and accessible manner.

So, to strike the appropriate balance between cost, coverage and flexibility, many consumers elect for a combination of both — a strategy known as blended insurance. This strategic assortment of coverages can be established in various ways, but it often begins with the establishment of a foundational permanent policy and an add-on term policy.

Read More: How To Use Life Insurance While Alive

Using Cash Value Life Insurance To Invest in Your Future

A key aspect of a term life insurance policy is the payout it provides to its named beneficiaries in the event of the policyholder’s death. The peace of mind provided can be invaluable. However, in some cases, greater financial benefits are achievable through a standalone cash value life policy or a blended approach.

The money allocated to the cash value reserve component can be invested in various ways, and it is allowed to grow on a tax-deferred basis. The accumulated funds can be temporarily or permanently withdrawn and used for spending needs. That said, permanent withdrawals can trigger a taxable event and are likely to reduce the policy’s death benefit.

The most common ways people use cash value life insurance to enhance their finances are described below.

Saving for Education

Purchasing a cash value life policy can make a lot of sense when saving for a child’s education. In this scenario, your investing horizon may not be long enough to endure the downside risks associated with investing in volatile stocks and interest-rate sensitive bonds, but it is long enough to strive to earn a higher rate of return than offered by certificates of deposit and high-yield savings accounts.

A cash value policy enables you to save in a safe, tax-deferred manner. This ensures you will have sufficient money to spend on your child’s education when it’s time to foot the bill. The source of the funds will come from either the policy’s death benefit (in the event of your death) or the cash value reserve (in the event you live a long, healthy life).

Pro Tip

Another advantage of using cash value life insurance to pay for your child’s education is that this asset is not factored into the determination of your child’s eligibility for federal financial aid.

Saving for Retirement

Purchasing a cash value life policy can also be good way to save for retirement. This move is most sensible for high-income individuals that have maxed out contributions to other tax-advantaged vehicles, such as 401(k) plans and individual retirement accounts (IRAs).

The expected return on some cash value policies is relatively low, but so is the risk. Assuming you have taken an appropriate level of risk in other aspects of your investment holdings, a cash value policy can be a prudent way to deploy excess funds. Doing so will provide your beneficiaries financial protection and enhance your long-term growth potential.

If you live a long life, the death benefit will go unexercised, and you will accumulate a meaningful cash value reserve. Then, in retirement, you can temporarily or permanently withdraw funds to meet your spending needs. However, it is important to note that any permanent withdrawals will reduce the death benefit component of your policy, leaving less money for your beneficiaries when you die.

Estate Planning

A third area where cash value life insurance can improve your financial position is estate planning. Incorporating life insurance policies into your framework can help ensure the financial security of your heirs and enhance your philanthropic endeavors, oftentimes, while minimizing tax drag.

That said, estate planning is a highly personal undertaking, which can involve a myriad of complex issues. As a result, you should seek expert legal, accounting and investment management advice to optimize the effectiveness of your plan and ensure it meets your tolerance for risk, whether or not it includes a life insurance component.

Supporting Your Business Endeavors

The practicality of cash value life insurance extends beyond personal finance. If you have an equity interest in a partnership or closely held company, cash value life insurance can be used to improve the continuity and resiliency of your business. The two most common ways these benefits are achieved are described below.

Buy-Sell Agreements

For many closely held businesses, cash value life insurance is a key aspect of their succession plans. It provides the financial means to execute a pre-arranged buyout transaction in the event of a business owner’s death.

For example, imagine a simple partnership with five equal-share business owners. A cash value life policy is purchased on the life of each partner based on the current value of their share of the business, and the other four partners are specified as beneficiaries. If a partner dies, the others will use the death benefit to buyout their position and continue to operate the partnership with the new, consolidated ownership structure.

Moreover, as the partnership grows and appreciates in value, the cash value reserves of the insurance policies also grow. This allows the business owners to align the value of the business to their life insurance policies and reinforce the succession plan.

The correlation is unlikely to be perfect, which could result in a valuation gap over time. But fortunately, additional life insurance investments can be made to manage the situation.

Insuring Key Employees

Beyond financing a succession plan, cash value life insurance is a prudent way to bolster the financial wherewithal of your firm if a key employee dies. The death benefit of a cash value life insurance policy may not fully offset the tangible and intangible costs of losing a key employee, but it can help mitigate the economic impairment.

Buying Term Life Insurance and Investing the Difference

While many find cash value life insurance to be beneficial, it is important to note that this type of life insurance product is not right for everyone. Generally, using life insurance as an investment is best suited for relatively high-income individuals seeking to protect their loved ones while sheltering their income from high tax rates.

Low- to average-income investors face too much opportunity cost by investing in these relatively low-yielding life insurance products. They can achieve much better after-tax, risk-adjusted returns by investing directly in traditional investments, such as publicly traded stocks, bonds and annuities.

This statement echoes the well-known adage to “buy term and invest the rest.” Essentially, it reflects the belief that lower income households should utilize life insurance strictly for financial protection, not wealth accumulation.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 7, 2023

2 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. National Association of Insurance Commissioners (2022, June 23). Life Insurance. Retrieved from https://content.naic.org/cipr-topics/life-insurance
  2. U.S. Securities and Exchange Commission. (n.d.). Assessing Your Risk Tolerance. Retrieved from https://www.investor.gov/introduction-investing/getting-started/assessing-your-risk-tolerance