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.
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.
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 offers much 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, 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. Rates may 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.
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 a high 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 $13.61 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.
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.
