Is Whole Life Insurance A Good Investment? The Surprising Answer

Updated February 22, 2024

Is whole life insurance a good investment
Disclaimer: The writers here are not financial or investing experts. The following content should only be viewed for educational purposes. Read our full disclaimer for more information.

Whole life insurance is a type of permanent life insurance that has a death benefit that is guaranteed to be paid out when you die. This type of life insurance policy can sometimes be referred to as an investment, but it is not the best way of thinking about it.   

How Whole Life Insurance Works

Whole life insurance is a type of permanent life insurance. As the name implies, permanent life insurance lasts your entire life. This means that whenever you die, the death benefit of your policy will be paid out to your beneficiary(s). This is different that term life insurance which only covers you for a set period of time such as 10, 15 or 20 years.

Your death benefit is the amount of money that your policy will pay out when you die and your beneficiary(s) are the person(s) who will receive this money when you die. For example, let's say that you bought a whole life policy with a death benefit of $250,000 and made your spouse your beneficiary.

When you pass away, your death benefit of $250,000 would be paid out to your spouse. This death benefit would pass tax free to your beneficiary meaning they would not owe taxes on the $250,000. Whole life insurance also has a few other features.

First, whole life insurance has level premiums. This means that your monthly cost (premium) to pay for the policy remains the same if you maintain the policy. If you are young and healthy, you can lock in a reasonable rate on a whole life insurance policy that will remain the same.

Secondly, whole life insurance offers a cash value component. When you pay your monthly premium to your insurance company each month, that money goes into three buckets. The first bucket goes towards covering the cost of your insurance (death benefit).

The second bucket goes towards covering the costs of fees and administrative expenses that the insurance company charges. The third bucket goes into the cash value component of the policy. Your cash value will earn a fixed rate of return from the insurance company and can be used in a variety of ways.  

Is Whole Life Insurance a Good Investment?

There is a problem in the question, "Is whole life insurance a good investment?" The question implies that whole life insurance should be compared to other investments including stocks, bonds, real estate, mutual funds, index funds, and more.  

Whole life insurance should not be compared to other types of investments. It is a complex financial product and does not serve the same purpose as other types of investments. You might be asking yourself how a life insurance policy can even be called an investment in the first place?

Whole life insurance can sometimes be given the title of an "investment" due to its cash value component. When you think through life insurance, you think of the death benefit. A death benefit is the amount of money that will be paid out if or when you die depending upon the type of life insurance.

In addition to a guaranteed death benefit, whole life insurance builds cash value. When you pay your monthly premium into a whole life insurance policy that money goes to three places. First, it goes towards covering the cost of your insurance (death benefit).

Second, it goes towards fees that the insurer charges. Third, it goes towards your cash value. This cash value is a separate account that earns a guaranteed rate of return from your insurer. Insurers take money that you give them and invest it into conservative investments on your behalf which is how your cash value earns interest.

It is important to understand that the cash value portion of a whole life insurance policy takes time to build. In the early years of your policy, more of your premium goes towards covering the costs of your insurance and fees. Over time, more of your premium will go towards cash value.

How cash value can be used for investment purposes

The cash value component of a whole life insurance policy is sort of like an investment in and of itself, but it is not designed to be used in the traditional investment way. For example, let's say that you decided to buy a variety of stock investment funds through a brokerage account and hold onto them for 20 years.

The goal or purpose of this investment is straightforward. You want the stock investment funds to go up in value and compound so that you can start pulling money out of the account in 20 years. The cash value component of a whole life insurance policy is not as straightforward. It can be used in the following ways.

1) Borrow against the cash value - Whole life insurance policies are designed in a way in which you can borrow against the value of your cash value. For example, let's say you have had a whole life insurance policy for the last 10 years and have built up cash value of $100,000.

If it makes sense for you to do so, you can borrow against your $100,000 of cash value. It is important to note that we say that you borrow "against" your cash value as whole life insurance loans are collateral loans. When you take out a loan against your cash value, the money does not leave that account.

Instead, the insurance company lends you their money and uses your death benefit as collateral. What does this mean exactly? Let's assume again that you have $100,000 of cash value in your policy and decide to borrow $20,000.

The $20,000 is not subtracted from your cash value. It is instead given to you by the insurance company. So, the entire $100,000 stays in your cash value account as opposed to $20,000 being taken out of the account which would leave you with an account balance of $80,000.

This means that as you borrow $20,000 from the insurance company, your entire $100,000 of cash value stays in your account and continues to earn interest and grow. However, the insurance company will charge you interest on the money they loan you.

They typically charge a slightly higher interest rate on the money you borrow than the interest that you are earning on your cash value. For example, let's say that your $100,000 cash value balance was earning interest at a 3% rate. If you borrow $20,000 you would likely be charged 4% or 5% to borrow that money.

So, what can you use a policy loan for? Anything you want. If you have sufficient funds in your cash value account, your insurance company is obligated to provide you with the funds that you desire. You could use the funds to finance a car, start a business, upgrade your home, etc.

As you have likely gathered, life insurance policy loans are not your typical loan. So, what are the requirements to pay back the loan? Unlike traditional bank loans, whole life insurance policy loans do not have a set schedule to pay the loan back.

For example, let's say that you were going to finance the purchase of a car. If you were to get traditional bank financing, you would be required to repay the loan on a set monthly basis. A life insurance policy loan does not require you to pay back the loan on a set schedule which gives you more flexibility to pay back the loan.

Additionally, whole life insurance policy loans do not necessarily have to be paid back. Remember how we said that life insurance companies issue policy loans and use your death benefit as collateral? This allows your death benefit to cover any outstanding policy loans that you may have.

So, how does this work? Let's say that you bought a whole life insurance policy with a death benefit of $500,000. As you aged, you borrowed from your cash value to supplement your income or finance purchases. When you passed away, you had an outstanding policy loan balance of $200,000 that had accrued from loans and interest.

Your life insurance company would subtract this outstanding loan balance from your death benefit to "pay back" the loan. This means that your $200,000 loan balance would be taken away from your $500,000 death benefit and your beneficiaries would receive a death benefit of $300,000.

Keep in mind that you must be careful with this concept. If your loan balance becomes greater then your death benefit, the policy can blow up and you can face all sorts of consequences. In general, whole life policy loans can be advantageous when used properly.

However, it is extremely important to understand the complexities of a whole life policy loan so that you do not get yourself in financial trouble. Working with an experienced life insurance agent can help you navigate life insurance policy loans.

2) Withdraw from the cash value - If you would rather pull money directly out of your cash value account as opposed to taking a loan, you are able to do so. A cash value account is a deferred tax vehicle which protects the interest you earn from taxes if you keep the money in the account.

However, as you take a withdraw the money inside is leaving your tax deferred savings vehicle which can trigger taxes. Taxes are typically only applied to the interest that you have earned in the account. For example, let's say that you have held onto a whole life insurance policy for 7 years and have built up $50,000 of cash value.

Let's assume that $40,000 of this came from the premiums that you paid into the policy and $10,000 came from interest you earned within the account. Only the $10,000 would be taxable as that is money that you earned. The rest of your account balance came from premium payments which had already been taxed.

It should also be noted that withdrawing money from your cash value account reduces the amount of death benefit coverage you have by the same amount. For example, let's say that you bought a whole life policy with $500,000 of death benefit and had built up your cash value to $100,000. If you were to take a withdrawal of $25,000 from your cash value, your death benefit payout would be reduced to $475,000.

3) Surrender the policy and take the cash value - It is possible to surrender the policy and take the cash value that you have built up. You are deciding to not protect your life anymore and are giving up your death benefit coverage. In exchange, you get to keep your cash value.

If you decide to do this, you might be charged fees or a surrender charge by your insurer depending upon how long you have had the policy for. Additionally, you can owe taxes on any interest that your cash value earned if you surrender the policy.

4) Pay for your insurance costs - If you have sufficient cash value, you can use it to cover the cost of your insurance premiums. For example, let's say that your whole life policy costs you $500 per month. Let's also assume that you have about $20,000 worth of cash value.

If money gets tight from unexpected bills one month, you might be worried about whether you would be able to cover your $500 policy cost. However, since you have enough cash value, you can cover your policy cost from your cash value as you sort out your own personal finances.

The point of a whole life insurance policy

The point of a whole life insurance policy is two-fold. First, whole life insurance death benefits are guaranteed. This means that no matter when you die, your beneficiary(s) are going to receive the amount of death benefit that you purchased from the insurer.

The second point of a whole life insurance company is to have access to safe capital over the course of your life. We will say it again. A whole life insurance policy is designed to give you access to safe capital over the course of your life.

The point of all traditional investments is to make you money. A whole life insurance policy does make you money through cash value, but it is there to give you access to money. This is why we previously noted that whole life insurance policies should not be compared to other types of investments.

Some financial experts advise against whole life insurance policies as you can make more money in other investments. For example, let's say that you bought a whole life insurance policy that would cost you $500 per month. Let's assume that your cash value earned 3% interest.

Instead of buying a whole life policy, you could take that same $500 per month and invest it in the stock market which would give you a return of around 10% over time. When you put it this way, a whole life insurance policy does not make sense.

However, as emphasized thus far, a whole life insurance policy is not a traditional investment. We keep saying that whole life insurance gives you access to capital. What does that even mean? We are going to walk through an illustration below to show how whole life insurance can be used.  

An illustration of a whole life policy in use

For sake of example, we are going to use married couple John and Amy to illustrate how a whole life insurance policy could be used. John and Amy both work and both make an after-tax income of $75,000 per year which gives them household income of $150,000 per year.

John and Amy are financially savvy and are in the position to invest 20% of their income per year which would be $30,000. John and Amy are primarily concerned about saving for their retirement and plan on investing part of the $30,000 into a variety of retirement accounts.

Both John and Amy's employer offer a 401k retirement plan. For sake of example, let's assume that John and Amy would both need to contribute $5,000 to their respective 401k accounts in order to get their employer's maximum match on their contributions.

They decide to do this. This would leave them with the remaining $20,000 of their initial $30,000 to invest. John and Amy decide that they do not want to rely solely on their 401k plans for their investments and open Roth IRAs.  

Having a Roth IRA will give John and Amy more control over their investments and the account itself when compared to their 401(k)s as it is held outside of work. They will both contribute $5,000 to each of their respective Roth IRAs.

Up until this point, John and Amy have a solid financial plan. They have a strong household income and are planning for their future. However, they still have $10,000 left to invest. This is where things can start to get interesting.

John and Amy already have solid investments so the question becomes what should they do with the final $10,000? They could do a variety of things with it. Maybe they continue to fund their 401(k)s. Maybe they just put the money away in a savings account or they could put the remainder into a whole life insurance policy.

Now, why in the world would they do this? The answer is two-fold. First, they might want a guaranteed way to leave money to their children if they have any. Since the death benefit of a whole life insurance policy is guaranteed to pay out when you die, John and Amy could set one up to ensure the leave their children money.

This would also allow them to spend all the funds within their 401(k)s and Roth IRAs as they would not be worried about leaving their children money from these accounts as it has already been taken care of. The second reason that John and Amy might use a whole life insurance policy to have access to capital throughout their life.

The 401(k)s and Roth IRAs that John and Amy have offer a variety of benefits, but they do have a drawback. Due to the rules of both of the accounts, John and Amy will not be able to touch the money in the accounts until they are 59 and a half years old in most scenarios.

If they do try to touch the money in these accounts, they can incur penalties and income taxes on the funds they withdraw. A whole life insurance policy can solve these problems. You can access the cash value component of a whole life insurance policy at any time for whatever purpose if you have funds available. John and Amy might use a whole life insurance policy in the following ways.

1) To fund major capital purchases - A major capital purchase is any purchase that cannot be covered with your monthly cash flow such as the money you earn from your job. If John and Amy decide to use a whole life insurance policy, they will be able to fund major capital purchases when it makes since to do so.

For example, let's say that Amy needs a better car and can spend around $20,000. During this time, it makes the most since for John and Amy to finance the purchase of a better vehicle. John and Amy start shopping around for auto loans online.

Let's say that after they shop around, the best rate they can get to finance Amy's new car is 7%. If traditional financing were their only option, they would have to go with a 7% rate. However, let's assume that Amy also has a whole life insurance policy and has built up a cash value of $50,000 over the past 10 years.

Let's assume that Amy could borrow against her cash value at a rate of 3.5% interest. Amy and John plan to finance the cost of the vehicle over 5 years. If Amy were to use traditional financing at 7% interest, she would end up paying $3,761.44.

If Amy were to finance the purchase of the vehicle by borrowing against the value of her cash value, she would only pay $1,830.09 in interest. This is a difference of $1,931.35. John and Amy could take this money they saved over 5 years and invest it.

Besides a potentially lower interest rate, borrowing against the cash value would provide John and Amy a few other benefits. First, John and Amy would have more flexibility to pay back the loan. Cash value loans are not required to be paid back on a set schedule.

Secondly, cash value loans are collateral loans. This simply means that if Amy were to borrow $20,000 against the $50,000 of cash value she has built up, $20,000 does not come out of the cash value account. It is loaned to her by the insurance company. This means that her entire $50,000 cash value balance stays in her account and continues to earn interest.

2) To fund other investment opportunities when they arise - John and Amy could also use a whole life insurance policy to fund other investment opportunities when they arise. Let's say that John has a whole life insurance policy and has built up a cash value of $100,000.

We know that John and Amy already have 40k(k)s and Roth IRAs, but John in particular likes to invest in stocks and is always on the lookout for good investment opportunities. Let's say that one year the stock market has a major crash and goes down by 50% in value across the board.

John realizes this could be a good time to buy strong stocks at a steeply discounted price. Other investors would recognize the opportunity as well, but the reality is that some would not have access to funds that would allow them to purchase stocks at a discount.

John does not have this problem as he can leverage his cash value in his policy. Let's say that John decides to borrow $75,000 against his policy at a 3.5% rate. He then uses the $75,000 to buy a variety of stock investment funds at a steep discount through a brokerage account.

For sake of example, let's assume that the stock market took 4 years to recover from the 50% crash and then went up an additional 10% in year 5. This means that John would have earned a 60% return on the $75,000 he invested over the course of 5 years.

This would leave John with $120,000 worth of stocks. Keep in mind that John was being charged 3.5% by his insurer per year on $75,000 over the course of 5 years. This would leave him with an outstanding loan balance of $88,125.

John could sell $88,125 worth of stock to pay back his policy loan and be left with a profit of $31,875. He could leave this money invested and let it continue to compound. Keep in mind that John may owe capital gains tax on his earnings since he bought these investments through a brokerage account.

Important note - It is important to understand that the examples above are only that and should not be taken as financial advice. Whole life insurance policies are very complex, and you should not use one at the drop of a hat.

With that being said, a whole life insurance policy may be a valuable addition to your financial plan depending upon your needs and goals. Make sure to work with a competent financial advisor or insurance agent to see if a whole life policy is right for you.

How to Integrate Whole Life Insurance Into Your Financial Plan

The illustration above was meant to show how a whole life insurance policy could fit into a financial plan. It is important to understand that a whole life insurance policy is not the end all be all of financial products. It should be used in tandem with other financial accounts and investments if it will meet your needs.

Before you decide whether or not to use a whole life insurance policy, it is a good idea to evaluate your complete financial picture to see if a whole life insurance policy makes sense for you. First, it is important to make sure you have financial safeguards in place to prevent you from going backwards.

This might include having a well funded emergency fund and making sure you have proper insurance coverage for your car(s) and home. From there, you can look to see if you have anything in place to build wealth for your future. This might include contributing to your employer's 401k plan, setting up a Roth IRA, opening a brokerage account and more.

Once you have ticked these boxes you could look into a whole life insurance policy. There are two reasons a whole life insurance policy makes sense for some individuals. First, the death benefits of whole life insurance policies are guaranteed to be paid out when you die.

If you want a guarantee that your loved ones will receive money from you when you die, a whole life insurance policy can be a good option. It will also allow you to spend the rest of your money knowing that you already have money in place to leave your loved ones.

Secondly, the cash value component of a whole life insurance policy will give you access to capital when you need it throughout the course of your life. Cash value grows at a guaranteed rate by your insurer and never goes down in value. It can be used in a variety of ways for whatever purpose you would like.

With that being said, it is important to work with a competent financial advisor or insurance agent before buying a whole life insurance policy. Whole life insurance is among the most complex financial products. It is important that you have someone in your corner to explain the complexities that can help you use the policy in the way that is designed to be used.  

The Bottom Line

The bottom line is whole life insurance is a type of permanent life insurance that has a guaranteed death benefit that will be paid out to your beneficiary(s) when you die. The cash value component of a whole life insurance policy leads some to calling whole life insurance an "investment".

However, it is not a good idea to compare a whole life insurance policy to more traditional investments as that is not the point of the policy. A whole life insurance policy is designed to give you access to capital throughout the course of your life and should be used in tandem with other financial accounts or investments.

Whole life insurance is a complex financial product but can be part of a well rounded financial plan when understood and used properly. It is important to work with a competent insurance agent or financial advisor if you decide to buy and use a whole life insurance policy.

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