How to Use Insurance to Build Wealth

Insurance, it might be the last thing most people think about when it comes to becoming rich. But for those with money, it is another story altogether as insurance is a way to protect their assets and as such, it plays a vital role in building wealth.

An Introduction to Wealth Building

In broad terms, there are two product categories to build wealth – investments and insurance. When it comes to investments, the concept is straightforward, you put your money at risk in the hopes of achieving a return down the road. While the risk tied to an investment differs, no single investment is without risk.

When it comes to insurance you will pay a premium to receive a payment down the road. As opposed to investments, the return on an insurance product is guaranteed – assuming your claim is not denied.

Now, the term ‘insurance’ covers a broad range of policy types, including annuities. This is a product which is used to enhance your savings – that is, build wealth. Keep in mind this is not an endorsement of any annuity.

Just like investments you should always do your due diligence when looking at any insurance product. In this way, you will know the ins and out of the policy and this will make sure you will be able to collect when the time comes.

What are Annuities?

In its simplest terms, it is the opposite of a life insurance policy. The reason for this is that life insurance is set up to provide a safety net for you and your family while annuities offer a mix of deferred and immediate payouts.

In the case of a deferred annuity, payments start after a set number of years; while an immediate annuity will start shortly after the premium payment is made – usually within two to three months.

The importance of these products is that the transform the lump sum payment you would receive via a life insurance policy into a continuous stream of income. As such, annuities are often used by retirees or those living off a trust fund to provide additional income. This is because of annuities payout based on a guaranteed interest rate as well as additional interest when times are good, which means you will avoid any losses.

However, the downside to an annuity is that you will be tying up the principal for an extended period. As such, some financial planners tend to shy away from this product – especially when clients are looking at a more aggressive asset allocation strategy or need to increase liquidity.

In the end, the only way to know if annuities are right for you is to talk to your financial planners and discuss the options and what it will mean for your portfolio strategy.

Another Way Insurance Builds Wealth

This might be a roundabout way to think about it but another way that insurance helps to build wealth is by protecting your assets. This could be through a life insurance policy, a homeowner’s policy, or even car insurance.

One trick that the rich use when it comes to insurance is that they usually take the maximum deductible. While this might sound counterintuitive – after all insurance is meant to protect assets – taking the maximum deductible while reducing premium payments. This trick is especially useful with policies that you hope to never use, like your homeowner’s and car insurance policies. In this way, they are getting full protection without tying up their cash in the policy itself.

For example, the rich often choose cheap auto insurance as they know they will probably never need to make a claim. Remember, this doesn’t mean that they will scrimp on the coverage. Instead, they will look for a carrier with a good reputation and then negotiate the lowest rate possible.

Lastly – Permanent Life Insurance

Why permanent life insurance? The reason is that the cash value of these policies grows over time. As such, the coverage not only protects the beneficiary in the case that something happens to the principal, it also helps both parties to build wealth and all without the risk of investing.

Don’t confuse permanent life insurance with term life or universal life. Sure, these policies also grow over time but whole life is a long-term product while universal life offers more flexibility – these include indexed universal life products, though these policies are not without their risks.
As you can see insurance not only helps to protect your assets, but it can also help to build wealth. However, this doesn’t mean every policy is right for you. As such you should sit with your investment to discuss your options before deciding on the best choice.

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