Insurance Meets Investing

Friday, June 20 2025 | 10 h 38 min | News

By Dr. Roxanne Arnal, CFP®

Life insurance at its core is meant to provide financial security for loved ones after one’s passing. For multi-owner businesses, it is also a powerful tool to provide liquidity for buy/sell funding.

Did you know these basic uses can be enhanced through an understanding of the investment opportunities that permanent life insurance can provide?

Cash Value Accumulation

Permanent life insurance policies offer a cash value component. The cash value portion of the policy can accumulate over time through additional deposits beyond those required to cover the pure cost of insurance, all within a tax-deferred environment. There are tax limits that must be followed, but understanding your goal from the outset can help ensure that the product you purchase permits the deposits you are looking to contribute.

Tax Advantages

The death benefit of life insurance policies is paid to the beneficiaries tax free. For a business owned policy, the majority of the benefit will fall into the notional Capital Dividend Account permitting the distribution of a tax-free capital dividend to the shareholders.

As the cash value of the permanent policy grows on a tax-deferred basis, policyholders can access this cash value through loans or withdrawals without immediate tax consequences, provided the policy is structured correctly. This can be particularly advantageous for individuals in higher tax brackets looking to minimize their tax liabilities while enhancing their income stream.

Policy Loans

Borrowing cash value from your policy can come with lower interest rates compared to traditional loans and do not require credit approval.

Alternatively, the cash value of a life insurance policy can be pledged as collateral for a traditional loan with some lenders covering up to 90% of the growing cash value of the policy.

The borrowed funds can then be used for various purposes, such as funding a child’s education, purchasing a home, or even supplementing retirement income. It’s important to note that if the loan is not repaid, it will reduce the death benefit paid to beneficiaries.

Withdrawals

Contractual provisions typically offer partial or full withdrawals of the cash value. Unlike loans, such withdrawals would be subject to tax on the gain as they are typically deemed to be a permanent partial or total surrender of the policy. Any surrender would reduce the total death benefit.

Investment Options

Policyholders can allocate the cash value into various investment options, including money market and mutual funds with a Universal Life insurance policy. This provides an opportunity for potentially higher returns compared to the annual fixed dividend rates offered by Participating Whole Life policy insurers. Keep in mind that Participating Whole Life insurance offers various dividend options, including enhanced death benefit, premium offset, or deposit accumulation.

Retirement Supplement

The cash value accumulated in a permanent life insurance policy can be accessed during retirement to provide an additional income stream or safety net should your needs change.

Estate Planning

Life insurance plays a crucial role in estate planning as the death benefit can be used to pay estate taxes or make charitable donation to ensure that heirs receive the full value of the estate. Additionally, life insurance can provide liquidity to an estate, allowing for the smooth transfer of assets without the need to sell off real property or other investments.

Conclusion

While life insurance is designed to provide financial protection for loved ones, it can also serve as a versatile investment vehicle. By leveraging the cash value component, taking advantage of tax benefits, and utilizing policy loans and withdrawals, individuals can enhance their financial planning and achieve various financial goals. It’s essential to work with a qualified professional to ensure your life insurance policy is set up to meet both your current and potential future requirements.

Roxanne Arnal is a Certified Financial Planner®, former Optometrist, Professional Corporation President, and practice owner. She is dedicated to empowering individuals and their wealth by helping them make smart financial decisions that bring more joy to their lives.

This article is for information purposes only and is not a replacement for personalized financial planning. Errors and Omissions exempt.

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