Is Whole Life Insurance a Good Investment?

Is whole life insurance a “good” investment? That’s a tricky question because a “good” investment is relative to each person’s situation.

Is whole life insurance worth it?

In the most literal sense, whole life insurance is not an investment—it’s life insurance, and its primary role is to provide a death benefit for your family someday. But it also accumulates cash value that’s tax-advantaged and guaranteed to grow. Just as you might “invest” in a home renovation to add value to your home, a whole life insurance policy will accumulate value that you can access throughout your life. Ultimately, you invest in assets that help you achieve financial goals, and whole life insurance can become an asset that adds significant value throughout your life.

Life insurance and your financial plan

A financial plan can mean different things to different people. At its core, a financial plan is a roadmap that shows you where you are today, where you want to go and how you’ll get there. That means a plan can include a range of financial options, including investments for growth, insurance for protection and guaranteed growth and even annuities for guaranteed income in retirement. In addition, planning will look at things like your debt, emergency savings, cash flow, estate planning and other financial considerations.

The different financial options are paths (and sometimes detours) that you can use to get to your financial goals. Now let’s take a closer look at how whole life insurance can help you reach your financial goals.

Life insurance can help you reach financial goals

Goal: financial protection for your family

Let’s start with the basics. Unlike term insurance, which only provides a death benefit if you die within a predetermined coverage window, a whole life insurance policy will provide a death benefit to your family no matter when you pass away. 

The added value: In addition to the peace of mind you get when you’re young, your death benefit can give you more freedom with other financial assets during retirement. For instance, people who want to leave a legacy are sometimes hesitant to spend down their assets in retirement for fear there will be nothing left for their heirs. Knowing that you’ll always have the death benefit of a whole life insurance policy can free you to spend down other savings, so you can conquer that bucket list and still leave a financial legacy.

Combining life insurance with investments

Goal: tax-advantaged growth 

In addition to locked-in premiums and a lifetime death benefit, whole life insurance policies also accumulate cash value over time (term policies do not). Your premium covers the cost of insuring you, the insurance company’s overhead and another portion goes toward the policy’s cash value. That cash value portion grows in a tax-advantaged way and is guaranteed to grow. While the rate of growth may be higher or lower from one year to the next, your cash value will keep growing.

While you may be able to generate more growth over time through investments in a tax-advantaged retirement account, the value of those assets will rise and fall—unpredictably and, perhaps, dramatically—from one year to the next. When combined with investments in a financial plan, the stability of whole life insurance cash value may free you to take more risk with your investments than you could through an invest-only approach.

In addition to cash value growth, many insurance companies also pay annual dividends to their policyholders. You can take the dividend from your policy as cash, or you can plow it right back into your policy to help your cash value grow and compound even faster. Though dividends aren’t guaranteed, Northwestern Mutual has paid one on its policies every year since 1872. You can earn dividends through stocks (no guarantees here, either), but, again, those assets are exposed to the volatile nature of the markets as well as taxes.

The added value: A tax favored asset that’s guaranteed to grow over time is self-explanatory. But here’s the kicker: You can use cash value for anything you want, whenever you want. You could take a loan against your policy or withdraw some for anything you need (although that will reduce your death benefit).

Goal: setting aside funds for emergencies

As we mentioned, accumulated cash value in a whole life policy can be used for whatever you want. That means cash value can serve as a tax-advantaged portion of emergency funds. According to the Federal Reserve’s 2017 Report on the Economic Well-Being of U.S. Households, 40 percent of Americans would struggle to cover an unexpected $400 expense. Whatever that surprise may be, you could tap into your accumulated cash value to help cover the cost. 

The added value: We recommend setting aside enough money in an emergency fund to cover 6 months of household expenses to avoid borrowing money to cover costs. Typically, you’ll put that money in an ultra-safe place, such as a savings account. However, the interest earned in a savings account may not even keep pace with inflation, which means it technically loses value over time. Cash value, on the other hand, will typically grow at a higher rate and is very safe. As you accumulate cash value, you may be able to put a portion of the money that you saved for an emergency (say three months' worth of expenses) to work as investments, knowing that you could tap your cash value if you need it.

Goal: reliable, tax-efficient income in retirement 

As you can see there are a lot of benefits from cash value within a whole life policy, but its impact extends to your entire portfolio of assets. If you’re retired and relying on selling stocks and bonds to generate income, a recession could put a real kink in your financial plan. You either need to reduce your income or sell more assets at lower prices to generate the same amount. Not so with a whole life insurance policy. Rather than selling any stocks or bonds, you could dip into your cash value for income and wait for the markets to recover. 

Cash value can help in a bull market, too. Because you have stable cash value as a financial backstop, it might be easier to be more aggressive with your investments and capture more growth potential—even in retirement. And, you can also use the cash value of whole life insurance to help avoid crossing into a higher tax bracket in a given year. That’s because you can generally withdraw the basis you paid into your policy tax free. You can also take a loan against your policy without owing tax—so long as you repay the loan and keep your policy intact.

The added value: Long-term investing is all about balancing risk and potential rewards: the more risk, the higher the reward. The stable cash value of whole life insurance can help you take a little more investment risk without being riskier in your overall plan. 

So, when is whole life insurance worth it?

If you’re simply looking to grow your money quickly, investments alone may seem like the best option now. But 10, 20 or 30 years from now, your priorities may be a little different. When you get to the point where you need your savings, protecting it and making it last will become more important. Unfortunately, if you haven’t positioned your financial tools prior to that time, it could be too late.

That’s why the best financial planning includes a range of financial options that reinforce each other. Whole life insurance isn’t an investment, rather it works with your investments to put you in a financial position to grow your wealth, while also helping to protect it from some of the known risks that come with market-based investments. That’s the value it adds to your financial plan.

Cash value accumulates slowly in the early years of the policy; it typically takes several years for cash value to become a useful source of funds. There are different ways to use your policy’s cash value. These different methods have advantages and disadvantages. Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.