Is Whole Life Insurance a Good Investment?

Is whole life insurance a good investment? This is kind of a trick question, because whole life insurance isn’t actually an investment – at least probably not in the sense you’re thinking. We’ll explain what it is and what it isn’t below to help you decide if it’s the right coverage type for your family.

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Fact Check: Is Whole Life Insurance Even an Investment?

No, whole life insurance is not an investment. By definition, an “investment” is something you put money into in order to make more money: a profit, in other words. But an investment is not guaranteed. It’s possible you could lose money. That’s why it usually takes research, knowledge, skill, and maybe a little luck to make an investment pay off.

Young father looking up whole life insurance on his laptop while holding his baby on his lap

For example, your 401(k) account is an investment vehicle. You put money in, and that money is used to purchase stocks, ETFs, money market funds, and other vehicles that carry both the risk of a loss and the potential for a gain. Although it’s expected that, over time, it will provide you with far more money than you put in, that is not guaranteed.

Whole life insurance is a something different entirely.

Young woman holding a stack of hundred dollar bills and smiling

When you buy a policy, you and the insurance company enter into a contract. That contract stipulates that certain things will happen. If you agree to pay the rate the insurer offers, they will provide a death benefit in the face amount you purchased, plus provide a certain amount of cash value that will grow over time at a low, flat rate of interest.

Think of cash value as a mandatory savings component of your policy. There is zero risk of loss unless the insurance company goes out of business. And your growth is capped by the stated interest rate. Exceptions include policies offered by mutual companies (Mutual of Omaha, MassMutual, etc.) that may offer periodic payment of dividends to policy owners, over and above their guaranteed cash value growth. Adding a dividend to your cash value can help it grow faster, thanks to compound interest.

Okay, so we know whole life isn’t a true investment. But that actually makes it a great part of your overall financial portfolio. Let’s take a closer look at how cash value works, and then see what kind of a role cash value can play in your portfolio.

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What Is Cash Value?

Close-up photo of a hand slipping a coin into a pink piggy bank, symbolizing the savings component of whole life insurance

When you make a payment to your insurer, they use that money for two things: covering the cost of your policy, and funding your cash value account. Money gets added to your cash value account in several ways:

A portion of every payment you make
Interest paid to your account by the insurer
Dividends added to your account by the insurer (if available)

Over time, that cash value account will grow. Whole life features a locked-in, low but guaranteed rate of interest – usually 1-2%. Your insurer will pay interest on your cash value at regular intervals (often yearly). That money grows tax-deferred over time. That means you don’t owe any income tax on it while it’s growing and compounding.

Later, you can use that money for anything you like. We have clients who use it for retirement income, unexpected expenses or repairs, or to enjoy life with a home renovation or family vacation. How much cash value you have depends on your payment amount, your interest rate, and how long you let it compound. It can be thousands, or even tens of thousands of dollars.

There are several ways you can access your policy’s cash value:

Woman holding a fan of cash up to her face, symbolizing the cash value she’s earned in her whole life insurance policy

Loans. You can borrow against your cash value. Your insurer will charge a small amount of interest, usually quite a bit less than a bank or other personal loan. This loan will not show up on your credit report. If you pay it back, great. If not, don’t worry – the insurer will deduct any amount that remains unpaid from the death benefit before it gets paid out to your loved ones.
Withdrawals. You can pull cash to spend from your total available amount, referred to as a “partial surrender.” There will be a fee for this, so make sure you ask about it before pulling out any money.
Use it to pay your premiums. You can ask your insurer to use your cash value to make your policy payments. It’s up to you to make sure there’s enough cash value there to complete the payment and leave enough left over to meet your policy’s minimum funding requirement.
Surrender. This is what it’s called when you cancel your whole life policy. Although we really don’t recommend you do this, canceling through the insurer will end your policy and allow you to claim the remaining cash value. This option comes with a fee, which is part of why we don’t recommend it. If you can no longer afford your policy, let us help you find a cheaper one! That way, your loved ones can still get something if anything happened to you.

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How Does Whole Life Insurance Fit Into Your Financial Portfolio?

Don’t think of whole life insurance as an investment. Instead, think of it as a complement to your other investments. Here’s what it can do for you:

Three toddler girls holding dollar bills, symbolizing the potential to use whole life insurance cash value to pay for college

Provides a 100% income-tax-free death benefit. This is far and away the most important reason to buy whole life insurance. You can’t outlive it, it doesn’t expire, and it provides your loved ones with financial peace of mind.
Acts as a hedge against risk. Have a lot of cash tied up in riskier investments – stocks, real estate, or – gasp – crypto? The guaranteed interest rate on your cash value is a hedge against those risks.
Provides an emergency stash of cash. Many of our clients like knowing there’s a pot of cash in reserve that isn’t in their checking or savings accounts (where they might be tempted to spend it).
Can be a college funding source that doesn’t have to be reported on a FAFSA. If you’re thinking of putting your kids through college, the FAFSA (Free Application for Federal Student Aid) will ask you to declare how much money you have in CDs, stocks, cash, money market funds, mutual funds, bonds, and more. They also ask about any real estate investments you have. Many parents feel this penalizes students for their parents’ planning. The good news? Life insurance cash value does not have to reported on the FAFSA!
Provides living benefits for terminal illness. Most insurers have a terminal illness rider (policy add-on) that lets you access the death benefit if you’re diagnosed with a terminal illness. You can use that money for treatment, to pay for care, or to gather your loved ones near you.
Optional riders protect against costs from chronic/critical illnesses and long-term care. Most insurers offer a range of other riders you can add on for a fee. These let you tap into the death benefit if you’re diagnosed with a chronic or critical illness or need long-term care. This is a fantastic way to avoid depleting your retirement savings if you experience any of these expensive health conditions.

So even though it’s not technically an investment, there’s a lot whole life insurance can do to boost your overall financial portfolio! From providing funds if you need long-term care to the cash value you can use for literally anything, it check so many boxes. And don’t forget the all-cash death benefit – financial peace of mind for the people who depend on you. What’s a better reason to buy than that?

Young couple meeting with a life insurance agent to talk about ‘Is whole life insurance a good investment?’

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