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Denelle Waynick, a corporate attorney for Schering Plough Corp. in Kenilworth, New Jersey, used to think life insurance was simply a means to cover burial expenses. That all changed when her son, now 13, was born. Waynick began to see life insurance, combined with other investments and savings, as a way to provide financially for her son in the event of her death. In 2001 she bought a $750,000 variable universal life insurance policy, which doubles as an investment vehicle.
“The concept was relatively new to me,” says Waynick, 39. “I was fixed on the traditional notion of life insurance to pay for my burial.”
Life insurance products, which like regular life insurance provide tax-free money for beneficiaries upon a policyholder’s death, are increasingly included in investors’ financial portfolios. They also provide other options for leaving money to beneficiaries. According to Dwight Raiford, a financial planner with MetLife Financial Services in New York, an insurance policy should be the bedrock of most financial or investment plans. Investors should also include a 401(k), IRA, and Social Security and pension plans in their portfolios.
“It’s almost like a chess game. Move pieces around and, at the end, create more wealth,” says David Roy Eaton, chairman and chief executive officer of the Eaton Group, a financial services firm with offices in New York and Boca Raton, Florida. “It’s not about putting every dollar in life insurance — it’s about a balance.”
Certain life insurance policies can help build wealth by serving as tax-deferred vehicles in which investment returns grow, building up cash value. Policyholders can borrow against the cash value for retirement income or to pay college tuition or mortgages, leaving other savings and investments intact. And the cash value doesn’t score against a child who’s applying for financial aid for college, as it would with other investments, says James Hunt IV, wealth management adviser for Northwestern Mutual Financial Network in Summit, New Jersey.
Although insurers offer several options, financial experts recommend two products: variable universal life insurance, which combines life insurance with a policyholder-driven investment component; and traditional whole life insurance, which offers guaranteed returns and fixed premium payments. Before choosing a policy, weigh the risks against the potential wealth that can be accumulated for retirement, Hunt advises.
Variable life insurance
Variable life insurance is suitable for younger, risk-tolerant investors because it includes a more volatile mix of mutual funds, bonds, and stock investments and does not offer a guaranteed return. It is also less expensive and offers flexibility with premium payments. The policies are popular among 30- to 45-year-olds. Policyholders, not the insurer, decide where to direct investments within a tax-protected life insurance policy. Some term life insurance policies can be converted to variable life insurance.
“The client is taking some involved risk, but over time, there is potential for greater wealth building,” says Raiford, “especially for younger people who have more time before retirement. The equity component over the long run has consistently outperformed inflation.” Because of the risk involved and the time needed to mitigate that risk,