Types

• There are two types of life insurance. First, term life insurance provides basic life insurance protection. These types of policies are not suitable for investment since they do not offer any kind of equity value during your lifetime. Cash value life insurance, also called permanent life insurance, provides a cash reserve that builds up against the value of the death benefit. This cash reserve functions as a savings that is invested by you or the insurance company.
  
  

Process

• When investing in a life insurance policy, it's not enough to choose a cash value life insurance policy, you must locate policies that focus on building high cash value amounts. These policies have cash values and premium payments that are high, relative to the death benefit you purchase. In other words, the total amount of death benefit is much lower than what you would find with most types of permanent life insurance. The reason you aren't buying much death benefit relative to the premiums you are paying is to allow much of the premium to be put toward the cash value account instead of supporting a large death benefit. Sometimes this process is referred to as "overfunding" a life insurance policy. With some types of permanent life insurance, like universal life insurance, the process is called "minimizing death benefits, maximizing cash value."
  
  

Benefits

• The benefit of investing in life insurance is that the cash value in the policy is tax-free. Additionally, you can withdraw money from a life insurance policy up to the basis (your total premiums paid to the policy) without incurring any tax liability. You may also borrow against the value of the policy using tax-free policy loans.
  
  

Disadvantages

• The disadvantage of investing in a life insurance policy are that high, sustained policy premiums are normally required for 10 or more years. If you cannot make these payments, your policy may lapse and you may lose a substantial amount of money. This is because it normally takes at least 10 years for the cash value in your policy to equal your total premiums paid. Another disadvantage is that investment earnings may be low compared to other investments.
  
  

Considerations

• When considering a life insurance policy as an investment, make sure you understand how the investment works. For example, whole life insurance generally pays a fixed interest rate to the cash value of the policy. Variable life insurance, however, pays a variable rate of return to the policy. This variable rate of return is based on mutual funds inside of the policy. With a variable policy, you must manage investments. If you're not confident enough to do this, a fixed interest policy may be more suitable for you.