Whole life insurance investment – is it a good idea?


Although a lot of whole life policies are sold for their investment value, it is rarely a good idea to buy permanent life insurance solely for investment purposes. Remember that, first and foremost, the reason behind buying life insurance should be to provide sufficient coverage for your family.

What Is the Whole Life Insurance Investment Value

Agents might try to talk you into buying whole life insurance for its investment value for several reasons:

  • Apart from the life insurance coverage, permanent life insurance includes an investment account, called "cash value" where part of the premiums accumulates. This cash value belongs to the policyholder and it can be used for a variety of purposes.
  • There are some tax advantages of owning a cash-value whole life insurance: cash value accumulates on a tax-deferred basis which provides some kind of a tax shelter for policy owners.

Reasons against Buying Whole Life Insurance as an Investment

  • Whole life premium rates are usually the highest amongst all the life insurance policy types.
  • Insurers do not disclose the effective rate of return to policyholders, thus making it impossible to keep track of the profits made on the policy.
  • One needs to own a whole life policy for a minimum of 15 years for a reasonable rate of return. The truth is that the majority of policyholders drop their whole life prematurely.
  • The high upfront fees eat up a great amount of the cash value in the early years. Expense loading for sales commissions and management fees, is much higher compared to other investments.
  • Lots of people sacrifice the face amount of their whole life insurance policy just for the sake of owning cash-value insurance. This often results in people remaining underinsured because they can't afford to buy more whole life insurance.  Remember that there are better ways to save money, and only purchase a whole life policy if you can afford it.

When to Purchase Whole Life Insurance as Investment

A new cash-value policy should be purchased as an investment only if:

  • You are planning to hold it for a minimum of 20 years.
  • You are maxing out your annual contributions to your employer's 401(k) plan or to your Roth IRA, which provide favorable income tax treatment at a much lower cost. This will allow you to invest in index funds and all your money will go towards your savings.
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