Whole Life Insurance as an Investment – Benefits vs Drawbacks

Approaching whole life insurance as an investment comes with its own benefits and drawbacks. The benefits of a whole life insurance investment include early access without penalties, lifelong insurance coverage, and accelerated death riders, but the drawbacks might deter you. When it comes to the benefits vs. the drawbacks of whole life insurance investments, illiquidity and a lack of diversification with your investment are drawbacks you can’t ignore. Read our guide to learn more.

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Chris Tepedino is a feature writer that has written extensively about home, life, and car insurance for numerous websites. He has a college degree in communication from the University of Tennessee and has experience reporting, researching investigative pieces, and crafting detailed, data-driven features. His works have been featured on CB Blog Nation, Flow Words, Healing Law, WIBW Kansas, and C...

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Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance for 10 years. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate...

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Reviewed by Laura Walker
Former Licensed Agent Laura Walker

UPDATED: Jul 16, 2021

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Whole life insurance is a policy that pays a benefit upon the death of the insured, yet it also accumulates cash value. In other words, it is an insurance contract where you pay very high, yet level, premiums that is considered to be an investment and an insurance policy simultaneously. Though it will pay out a stated amount upon the insured’s passing, because of its cash value, it can be withdrawn or borrowed against by the policyholder. But is whole life insurance considered a wise investment? Is it something that you should bother adding to your portfolio? The true answer is, “it depends.”

The Benefits Of Investing In Whole Life Insurance

If you have amassed a great amount of wealth in your lifetime, investing in your whole life insurance can be advantageous to you on many accounts. Here are a few of the reasons that you should consider adopting a policy:

1. Dividends

You may be eligible for dividends if your policy is with a reputable company. Though they are not guaranteed, many carriers are more than willing to share their profits with policyholders. If these payments are properly granted, they will be tax-free.

2. Protection

The cash value of your policy is not subject to the ebbs and flows of the market, while mutual funds and other securities are. Anytime the market takes a dive, it will be no concern of yours.

3. High Starting Cash Value

A correctly-structured life insurance policy will always have high cash value percentages, even as early as its first year. These percentages will increase every year for the life of the policy.

4. Guaranteed Growth

Your money is guaranteed to grow annually. Though the amount of that growth depends strictly on the interest rate at a given time, unlike mutual funds, your money will increase regardless of the fluctuations seen in the market. This means it is a sure bet.

5. Your Own Little Bank

You can borrow against your policy or loan the cash value out to others for purposes of increasing your personal wealth.

6. Access Without Penalties

Unlike IRAs and 401(k)s, whole life insurance policies carry no penalties for accessing cash prior to retirement. They also will not bury you in fees if you borrow funds from them and are unable to pay them back at a particular rate by a certain date. You can take money from your policy at any time you choose to.

7. Lifelong Insurance

Once you open a whole life policy, your coverage is guaranteed until the time of your death, or until you reach the age of 120, whichever comes first. Though many people assume they can purchase a term life insurance plan at any point in their life, it is next to impossible to do so after a certain age and it is especially difficult if the prospective policyholder has been diagnosed with a terminal or chronic illness.

8. Accelerated Death Riders

An “accelerated death rider” is a benefit that can be added to whole life insurance policies for little to no cost. It gives full access to a large portion of your death benefit for use while you are still living if you have already been diagnosed with a terminal illness. This can be put towards medical bills, hospice care or simply to enjoy your remaining time with your family.

9. Benefits Upon Death

The true purpose of this policy is to ensure that once you die, your beneficiaries will remain comfortable by inheriting a tax-free sum of money. Affluent families have transferred their wealthy via death payouts for generations, thus harboring beneficiaries from burdensome taxes reducing their inheritances.

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The Drawbacks of Investing In Whole Life Insurance

On the other hand, many that are opposed to investing in whole life insurance look at it from the point of view of someone who is middle class. Those that make under a certain amount annually may be able to see a greater return on their investment by taking out term life insurance, with its much lower premiums, and investing the difference in diverse ways. Here are some of the other reasons that many average investors are opposed to investing in whole life insurance:

1. Permanency Is Not Necessary For Those That Do Not Have Great Wealth

Term life insurance policies expire at a certain point, usually when the policyholder is nearing age 70. The principal reason that middle-class investors pay insurance premiums is provide their spouses and children with protection if they were to die suddenly, as opposed to transferring great wealth tax-free. Therefore, it is not always necessary to have a policy in effect until your are over 100 years old, since the majority of your heirs will be self-sufficient, or deceased themselves.

2. There Are Easier Ways To Save Tax-free

Savings accounts can also be used to purchase a home or send your children to college. Just like whole life insurance policies, there isn’t any type of taxation on funds within a savings account. There are also no penalties for early withdrawal such as there are with 401(k)s, however, you will not have to pay fees or commissions to an insurance agent.

3. Lack Of Diversification

Diversification is basically spreading your money across many different types of investments with several different companies. This is done strictly to decrease your investment risk, without decreasing your possible return.

Whole life insurance, on the other hand, is not diversified at all. Your large premiums are being invested in one company only and it is completely up to them to give you decent returns. The insurance company invests your money into their own investments and after receiving a return, they will decide what portion they will pass onto you. Unfortunately, if they have a bad year, you will have nothing to fall back on.

4. Illiquidity

Illiquidity is the state of an asset or security that cannot be easily sold without losing substantial value. Whole life insurance is considered illiquid because many policyholders experience negative returns over the first decade that hold the policy. Not only that, but many policies contain a “surrender charge,” which is basically a fee that you must pay if you cancel the policy and withdraw its cash value.

5. Tax-free Is Not Interest-free

Even though it is true that you will have the ability to take tax-free loans out against your policy, you will still have to pay the loan back with high interest. The interest starts accruing on the first day you withdraw the cash and continuously accrues until the loan is paid back in full.

In closing, there are certain situations where a whole life insurance policy may come in handy to a person taking home an average income. For example, a permanent death benefit can be crucial if the policyholder is responsible for a disabled child. However, the vast majority of those in the middle class would probably not receive any special benefit from having whole life insurance that they couldn’t get anywhere else.

For those with a high net-worth, it is a different story. They can use the policy to further build their nest egg, they can afford the high monthly premiums and they can afford to pay back substantial loans with interest prior to their deaths. Therefore, whether or not whole life insurance makes a good investment choice completely depends on your personal wealth and your station in life. Choose wisely and get more information from an experienced life insurance agent.

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