Is Whole Life Insurance a Good Investment?

Using whole life insurance or another type of permanent life insurance as an investment vehicle can be a great way to manage the risk of an unexpected death while also building a cash account that can be used to fund a mortgage, pay for a child’s education, or even start a business. However, whole life insurance investment may not be the best decision for everyone. To decide if a whole life insurance policy makes sense for your financial situation, it's important to first weigh the pros, cons, and alternatives.

An independent insurance agent can help you determine if a whole life insurance investment is a good option for you. They'll help you evaluate your personal goals and coverage options. But first, you can use our guide to determine if whole life insurance can double as an investment for you.

Key Takeaways - Is Whole Life Insurance a Good Investment?

Whole life insurance can be used as an investment option because these policies build a cash value over time.
Whole life insurance investments also come with tax benefits that are attractive to many people.
People with large estates, high incomes, and business partners often choose whole life insurance as an investment.
You might also be attracted to whole life insurance investments if you don't want to take on the risk involved in other investment options.
Working with an independent insurance agent is highly recommended, as they can help you evaluate your whole life insurance investment options and tailor coverage to your unique needs.

Whole Life Insurance Investment Explained

Whole life insurance falls into the permanent life insurance class, and like other products in this category, it is just what the name indicates. It provides coverage for your whole life, as long as you pay the premiums. This is a major difference from term life insurance coverage, which is only in force during a specified term, typically 10, 20, or 30 years. After the term expires, the policy terminates.

In addition to providing lifelong protection, a whole life insurance policy accumulates cash value over its life. The cash value is tax-deferred, and you can borrow against it, making it a great low-interest loan source.

Three of the most common permanent life insurance policies are:

Whole life insurance: A whole life insurance investment is a predictable and stable product that offers a guaranteed death benefit, guaranteed rate of return, and a level premium over the life of the policy. Your cash value account is credited with a predetermined amount every premium period. The cash value can be borrowed against. This type of policy is excellent for a person who enjoys stability and low risk.
Variable life insurance: This kind of permanent life policy lets you decide where to allocate your premium dollars. A variety of options are available, including stocks, bonds, or a combination of both. It's also possible to invest in a fixed account that guarantees your return. While this policy offers a more dramatic rate of return if the underlying investments do well, it can also tank, taking your cash value with it. These policies are suited to people who are willing to accept some risk in the pursuit of bigger returns.
Universal life insurance: If you are interested in a flexible premium, universal life may be the ticket. Unlike whole and variable life, which have a level premium, universal life allows flexible premium payments (subject to minimums and maximums) so you can make higher payments when you have the money and skip payments when cash is tight. The death benefit is also adjustable with this type of policy. In most cases, the cash value component provides a guaranteed rate of return.

An independent insurance agent can help you evaluate your lifetime coverage options to find the best type of permanent or whole life insurance for you.

Whole Life Insurance Cash Value Component

One of the major benefits of whole life insurance investment is the cash value that accrues over the life of the policy. The cash value of whole life and other permanent life insurance policies accumulates on a tax-deferred basis, just like a 401(k) or other retirement savings account. As the cash value grows, you can borrow against it for whatever you need, including retirement income.

The cash value of a whole life insurance investment policy can be accessed without having to jump through the hoops that are necessary for a bank loan, including a credit check and a mess of paperwork. Also, unlike a 401(k), IRA, or many other retirement savings vehicles, there's no penalty for taking out your cash value. The penalty for an early withdrawal from an IRA can run up to 10%.

Keep in mind that when you borrow against the cash value of your policy, interest will be charged on the loan, but in most cases, the interest rate is very low. The loan must be repaid, or the loan amount and interest will be deducted from the death benefit, which could affect your beneficiaries.

The cash value can also be used to cover your policy's premiums if, for some reason, you're no longer able to pay them. The cash value can be used to keep the policy in force for as long as the cash amount covers the premium rate. In some cases, this may be for the life of the policy.

If you wish to surrender the policy, you keep whatever guaranteed policy values are outlined in its terms. In the early years of the policy, the cash or surrender value will be quite low, or non-existent.

Is Whole Life Insurance a Good Investment Option?

The answer to that question will vary depending on your needs. While whole life insurance can be a good risk management tool, and is ideal for some as an investment, in many situations, it will not produce the results you might achieve using other investment instruments.

Pros of using whole life insurance as an investment

If the ups and downs of the stock market concern you, or if you find saving money difficult, a whole life or other permanent insurance policy can be a good investment. Whole life policies allow you to build a cash account without much effort on your part.

A major benefit of whole life insurance investment is that the return is guaranteed. There are also tax advantages to whole life insurance. The cash value can be used for any purpose you see fit, and the loans are free of tax and penalties, giving them an advantage over a more traditional retirement savings account, such as an IRA or 401(k).

Another benefit of whole life insurance is the death benefit that can be paid out to your selected beneficiary if you pass away. Other investment options don't offer a death benefit payout to the person, people, or organization of your choice. Further, whole life insurance as an investment offers stability during market volatility, in contrast to other investment options like stocks. Whole life insurance can also have advantages when it comes to estate planning.

Cons of using whole life insurance as an investment

There can be some potential drawbacks to using whole life insurance as an investment for many people to consider. Whole and permanent life insurance policies come with much higher premium rates than term life insurance, which can make this type of coverage inaccessible for some. Whole life insurance can also provide lower returns compared to some other traditional investment options.

Some people may find permanent life insurance policies too complex to use as an investment. This coverage can also provide limited liquidity and take a long time to break even on your initial investment.

While the pros seem to outweigh the cons, fees and expenses can be a huge drawback with whole life and other permanent policies. High fees can have a major impact on your return, especially over decades. An independent insurance agent can help you run the numbers to make sure a whole life policy makes financial sense as an investment option.

Who Should Consider Whole Life Insurance as an Investment?

High-net-worth individuals and business owners are among the top candidates to use whole life insurance as an investment. People who are interested in estate planning and tax benefits may also be drawn to whole life insurance investments. Some of the people who should buy whole life insurance to use as an investment include the following:

Large estate owners: If you have a large estate and are concerned about estate taxes forcing your heirs to sell assets to cover the estate taxes, a whole life insurance policy can be ideal. Your policy can be set up so the death benefit covers the estate taxes.
High-income earners: If you have a high income and have maxed out other tax-deferred investment vehicles, a whole life or other permanent life insurance policy can be a great way to accumulate tax-deferred retirement funds.
Buy/sell agreement holders: If you have a buy/sell agreement in place with a business partner, a whole life policy can ensure that you have the funds available to buy out your partner upon their death.

Even though whole life and other permanent life insurance policies can be used as investment vehicles, their true purpose is more closely aligned with risk management tools. The death benefit and cash value can help your beneficiaries maintain their lifestyle in the event of your untimely death.

Adding a permanent life insurance policy to your investment portfolio can be a good option to help mitigate the risk of early death, as well as build cash value that can be used for a variety of purposes, including retirement income. However, it should never be used as your only method of investment planning. Other tax-deferred products usually offer a better return on your money over time.

How to Choose the Right Whole Life Insurance Policy

A whole life insurance policy can be a great investment if you have trouble saving money, are not savvy when it comes to the stock market, or are a cautious investor who doesn’t want to deal with the ups and downs of equities. The various types of permanent life insurance offer somewhat different benefits, but the cash value component is standard across the board.

You can find the right whole life policy by shopping and comparing policies and rates from multiple insurers, and an independent insurance agent can help do this for you. These agents have access to all the best whole life insurance policies, and they can provide you with several whole life quotes that represent affordable coverage that doesn't sacrifice quality. Your agent knows which whole life insurance companies have great reputations and financial strength ratings, and they can also help you evaluate your coverage options to make an informed choice.

Here's How an Independent Insurance Agent Can Help

When considering whether to get whole life insurance as an investment, no one's better equipped to help than a local independent insurance agent. These agents can help you weigh your whole life insurance investment options to find the right policy. Your agent also has access to multiple insurance companies, so they're free to shop and compare coverage options and premium rates for you to find the best deal. And down the road, your agent will still be there to help file life insurance claims or update your coverage when necessary.

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