Whole life insurance and other types of permanent life insurance come with a cash value component, which can be used to invest and grow your wealth over time.
But these types of policies are usually not the best investment option for most people, as they come with expensive premiums and offer low returns. If you’re looking for a way to protect your loved ones financially in the event of your death and also to invest for retirement, you’ll be much better off buying a term life insurance policy and contributing to other standalone investment accounts, like 401(k) or Roth IRA.
Key takeaways
You can invest using whole life and other types of cash value life insurance, but not term life insurance.
Whole life insurance is expensive and offers low returns compared to other tax-free investment options like 401(k) or Roth IRA accounts..
If you need permanent life insurance, your assets exceed the estate tax, or you’ve exhausted other investing options, you may benefit from investing with your life insurance.
For most people, buying standard term life insurance and investing in other tax-free retirement accounts is a better option.
Is investing in life insurance worth it?
Term life insurance
You can’t use term life insurance as an investment option to grow your money because it doesn’t come with a cash value account.
Term life only offers basic protection in the form of the death benefit — a tax-free lump sum your beneficiaries receive if you die.
Term life is a great way to make sure your loved ones will have the funds needed to replace your income in your absence and cover everyday expenses, outstanding debts, or funeral costs.
Term life is affordable and doesn’t have many tax restrictions or regulations. As an investment into the future, the peace of mind that term life offers is worth every penny.
Whole life insurance
The cash value of a whole life insurance policy can be treated as an investment, but for most people, it’s not worth it.
Cash value life insurance policies are much more expensive than term life insurance policies and usually come with associated fees and expensive penalties.
The cash value is a tax-deferred savings account that gains interest and grows over time. While every policy is different in how the cash can grow or shrink, what they all have in common is that they usually offer lower returns than other non-insurance investment options.
Brokerage accounts, education accounts, and retirement savings plans — like IRAs and 401(k)s — offer more value and higher return on investment (ROI) for your money than cash value life insurance.
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Is whole life insurance a good investment?
Whole life insurance costs an average of five to 15 times more than comparable term life policies, which means they’re more expensive to maintain over time than other investments.
As a result, 45% of whole life policies are surrendered within 10 years of being purchased. [1]
Like most investments, most of the growth in your policy’s cash value happens after you’ve held the policy for decades.
As a result, surrendering your policy within the first 10 years makes it unlikely that your cash value will be greater than the total premiums you paid into it.
Cash value policies also come with several hidden costs. These vary from insurer to insurer, but typical fees and penalties for a cash value policy include:
Administrative fees and operating expenses taken out by the insurer
A reduction in the policy’s death benefit when you withdraw (or take a loan) from the cash value
A policy lapse if you spend your entire cash value and miss a premium payment
Significant fees if you withdraw from the cash value during the surrender period
Possible forfeiture of the entire cash value if you cancel your policy during the surrender period
In comparison, term life insurance is more affordable for comparable coverage amounts and doesn’t involve fees or penalties for canceling the policy.
Term life with traditional investing vs. permanent life insurance
To determine which type of life insurance and investment plan is right for you, you’ll need to think through your personal financial protection goals.
Do you need life insurance to provide a financial safety net for your family?
Or, do you want life insurance strictly as an investment vehicle?
Initially, some people want to combine financial protection and investing by buying permanent life insurance, which is where they might run into expensive premiums and difficulty maintaining the cost of the policy.
Below we compare the cost of traditional investing combined with a term life policy versus using permanent life insurance for retirement, also known as a life insurance retirement plan (LIRP).
You’ll notice that term life insurance combined with traditional investments offersmuch more flexibility in terms of how much you have to pay.
Cost comparison: term life & traditional investing vs. LIRP
Term & 401(k) | Term & Roth IRA | LIRP (permanent life insurance) | |
|---|---|---|---|
Monthly premiums | $20.85 | $20.85 | $481.00 |
Cost of retirement account | No minimum investment required | No minimum investment required, some brokers set a minimum initial investment | Cost of policy premiums |
Maximum investment per year | $22,500 (+$7,500 if older than 50) | $6,500 (below age 50); $7,500 (age 50 & up) | N/A |
Methodology: Sample monthly rates are based on premiums for a 35-year-old female non-smoker in a Preferred Plus health class, obtaining a $500,000, 20-year term life insurance policy based on a composite of policies offered through Policygenius from Brighthouse Financial, Corebridge Financial, Foresters Financial, Haven Life, Legal & General America, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, Symetra, and Transamerica. Sample whole life rates are based on a $500,000 whole life insurance policy offered through Policygenius from MassMutual. Ratesmay vary by insurer, term, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 01/01/2024.
49% of the sandwich generation don’t have life insurance
A recent Policygenius survey found that 49% of the sandwich generation(people with a parent age 65 or older who also are raising children or supporting adult children)doesn’t have life insurance to help financially support their loved ones after they die. If that’s your case, a term life insurance policy is an easy and affordable way to provide your family with a financial safety net in your absence.
Read more about term life insurance
When is whole life insurance a smart investment?
Though a term life policy is the right choice for the majority of life insurance shoppers, there are a few specific instances in which using a cash value life insurance policy as an investment might make sense.
When your assets will be subject to an estate tax
If you have ahigh net worth, you can benefit from whole life insurance. If your heirs will have to pay an estate tax on your assets when you die, a permanent life insurance policy can help offset some of those costs.
In 2023, any assets above $12.92 million are subject to an estate tax. [2] However, the death benefit of a life insurance policy is tax-free, as long as it pays out to a beneficiary, rather than your estate.
So, for example, if your estate is worth $13 million and $940,000 of that is subject to an estate tax, you might take out a permanent life insurance policy worth $1 million so that money goes directly to your heirs — tax-free — when you die.
A whole life insurance policy might also benefit your heirs if your estate consists largely of fixed or long-term assets, such as real estate.
Your heirs will need to pay federal taxes on your estate within nine months of your death, which could be difficult if your assets aren’t liquid.
A life insurance policy with a death benefit large enough to cover the taxes your family will owe can ease that financial burden.
When you’ve already maxed out your retirement funds
For the same reasons that cash value life insurance isn’t a great investment, relying on the cash value to supplement retirement income isn’t recommended for most people.
But high-income earners who have already maximized contributions to their other retirement accounts might want an additional vehicle for tax-deferred savings.
In these cases, a cash value policy could make sense if you also need life insurance coverage and can afford the high premiums of a cash value policy.
Consult with a financial advisor who can walk you through the specifics of how to use life insurance in your retirement planning.
When you need permanent life insurance coverage
People with lifelong dependents, such as children with disabilities, may need permanent life insurance coverage. This would ensure their dependents always have a financial safety net.
A parent with a lifelong dependent can set up a supplemental needs trust, which is specifically designed for life insurance and estate beneficiaries who are unable to handle their own finances and care.
Designating the trust as the beneficiary of a permanent life insurance policy ensures financial protection for their dependents.
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Is life insurance a good retirement investment?
Most seniors don’t need life insurance when they retire because they no longer have financial obligations — such as a mortgage or minor children.
Using a permanent policy or annuity to supplement retirement income can make sense for people with more complex financial needs (as mentioned above) or people who know they’ll need life insurance coverage for the rest of their lives.
Generally speaking, cash value policies come with limited investment options and relatively low rates of return.
Buying term life insurance at a lower cost and using dedicated investment vehicles — such as a mutual fund, 401(k), or IRA — will likely provide better returns than investing the cash value of a whole life policy.
If you’re not certain buying a permanent policy is right for your investment strategy, speaking with a financial advisor can help.
Frequently asked questions
Is life insurance a good investment?
Life insurance isn’t the smartest investment for most people. Cash value life insurance is more expensive than term life insurance and typically provides less return on your investment than a standalone investment account.
Can I invest in term life insurance?
Term life insurance doesn’t come with a cash value and therefore you cannot invest in a term policy. You can only invest in permanent life insurance with a cash value amount.
Who should invest in life insurance?
If you regularly contribute the maximum amount to your retirement accounts, your estate will be taxed, or if you have a lifelong dependent who would benefit from your permanent policy, then you might benefit from investing in life insurance.
As an enthusiast with a deep understanding of insurance and investment, I can confidently address the concepts mentioned in the article. My expertise is grounded in practical knowledge and a comprehensive understanding of the insurance and investment landscape.
The article discusses various types of life insurance, focusing on whole life insurance and term life insurance, and their suitability as investment options. Here's a breakdown of the key concepts mentioned:
1. Cash Value Component:
- Whole life insurance and other permanent life insurance policies come with a cash value component.
- This cash value can be used to invest and grow wealth over time.
2. Investment Considerations:
- Whole life insurance and similar policies are generally not considered the best investment options for most people.
- Reasons include expensive premiums and comparatively low returns.
3. Recommended Strategy:
- For those seeking financial protection and retirement investment, the article recommends buying term life insurance and contributing to standalone investment accounts like 401(k) or Roth IRA.
4. Term Life Insurance:
- Term life insurance is presented as a cost-effective option for basic protection.
- It does not have a cash value account and focuses on providing a tax-free death benefit to beneficiaries.
5. Whole Life Insurance Challenges:
- Whole life insurance is highlighted as more expensive with lower returns compared to alternative investment options.
- Surrender rates within the first 10 years are mentioned, emphasizing the long-term nature of these policies.
6. Hidden Costs of Cash Value Policies:
- Administrative fees, operating expenses, reduction in death benefit upon withdrawal, policy lapse risks, surrender period fees, and possible forfeiture are cited as hidden costs of cash value life insurance.
7. Cost Comparison:
- A cost comparison is provided, contrasting the premiums and costs of term life insurance combined with traditional investments versus a Life Insurance Retirement Plan (LIRP).
8. Instances When Whole Life Insurance Makes Sense:
- Whole life insurance may be beneficial for high-net-worth individuals subject to estate taxes or those with fixed or long-term assets.
- It could also be considered when other retirement accounts are maxed out, and additional tax-deferred savings are needed.
9. Life Insurance in Retirement:
- The article suggests that, in retirement, most seniors may not need life insurance unless they have complex financial needs or require coverage for life.
- Cash value policies are noted for their limited investment options and relatively low rates of return in retirement scenarios.
10. Seeking Financial Advice:
- Financial advisors are recommended for personalized guidance on whether a permanent life insurance policy aligns with one's investment strategy.
11. Frequently Asked Questions:
- The FAQs address the suitability of life insurance as an investment, the inability to invest in term life insurance, and circ*mstances where investing in life insurance may be beneficial.
In summary, the article advocates for a thoughtful approach to life insurance and investment, emphasizing that, for most people, term life insurance combined with dedicated investment accounts is a more practical and cost-effective strategy.
