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Life insurance is not normally thought of as an investment in the sense that stocks or bonds are. Rather, life insurance is purchased mainly to provide protection against dying too soon while accumulating cash value that can be used as a living benefit. Life insurance must not be sold strictly as an investment without regard to its death benefit component, and life insurance is suitable only if the insured has a need for the death benefit.
While certain features of life insurance resemble other types of investments, it also has major differences:
Death benefits—Life insurance provides guaranteed death benefits, generally free of income taxation, that are not available in other types of investments.
Liquidity—Life insurance has liquidity features that may not be available in other plans, such as the ability to take policy loans and withdrawals. However, that liquidity may be reduced by the presence of surrender charges, if applicable.
The permanent life insurance policy’s cash value offsets some of the risk to the insurance company and is part of the policy’s face amount paid as a death benefit.
As a permanent life insurance policy’s cash value increases with the payment of premiums and the accumulation of interest, the risk to the insurance company, referred to as the net amount at risk, is reduced. At age 120 in a whole life insurance policy issued on or after 2009, the cash value equals the policy’s face amount, and the policy endows for its face amount.
A traditional whole life insurance policy’s face amount is its initial death benefit. In a whole life insurance policy, the guaranteed cash value is exactly equal to the face amount once the insured’s age is 120, at which time the face amount is paid in cash to the policy owner. A life insurance policy is said to endow when the cash value (equal to the policy’s face amount) is paid to the policy owner.
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