Investment Grade Life Insurance
- Investment-grade life insurance is not a particular type of policy. Rather, it is a way of using certain kinds of life insurance contracts. The policy is funded with significant premiums so it generates cash values that are enough to supplement your retirement or provide money for other uses during your lifetime. These policies must always be permanent cash value life insurance policies. The cash value policy builds a cash reserve, called the cash value, which functions as savings. This savings is what you use during your life.
- When you use life insurance, you typically purchase a death benefit and figure out how much it will cost for that benefit. With investment-grade life insurance, the policy is structured using a money-purchase arrangement. You define how much money you are willing to spend on a policy, and the death benefit is determined based on how much premium you put toward the policy. The death benefit is scheduled so it is lower than what would ordinarily be purchased given the premium you are putting toward the policy. In other words, you are "overpaying" for the death benefit. Premiums are paid in excess of what is normally required for the death benefit of the policy. Sometimes, this is called "over-funding" a life insurance policy. For whole life policies, this means paying the base premium (the regular premium amount) and using a paid-up additions rider (a modification to the original contract) to pay more premium than what is normally required under the contract. For a universal life insurance policy, the insurer must be instructed to schedule the policy as "minimum death benefit/maximum cash value." Universal life insurance works by specifying a "target premium." This target premium is the amount of premium that is required to keep the policy in force. An "over-funded" universal life policy pays premiums in excess of the target premium.
- The benefit of investment-grade life insurance is that the excess premium amount allows the cash value to build up more rapidly than it otherwise would. Premiums in excess of the base premium (whole life) or target premium (universal life) are paid directly into the cash value and start earning interest right away. This accelerates the growth in the policy and increases the amount of money you'll have available to you over time. It also increases the net rate of return on the policy, since the excess premium is normally not subject to the fees and expenses associated with the base or target premium.
- Look for an investment-grade life insurance policy that is designed for significant cash value growth. These policies are not automatically set up to maximum cash values through over-funding, but the cost structure will be such that they will have more potential for growth than policies designed for significant death benefits. In particular, limited pay, dividend paying, whole life insurance and fixed-interest universal life, variable universal life and equity indexed universal life may all be used as investment-grade life insurance.