With Higher Interest Rates, Why Whole Life Insurance Still Makes Sense

Jason Handal is vice president of Risk Products at Northwestern Mutual.

Dividends are a critical part of whole life insurance. They’re key to a policy’s growth over time—and to the long-term value a whole life insurance policy provides to you and your family. 

With the recent increases in interest rates, we’ve been getting a lot of questions about life insurance dividends and the dividend interest rate (DIR). People naturally focus on the rate, thinking it’s an easy way to compare the expected performance of an insurance policy with short-term vehicles like CDs or bonds. The question people ask: “If I could get 5 percent on a CD or bond today, why wouldn’t I just buy that safer asset and get some term life insurance?” 

I understand why people make the comparison. But I’d like to show you that keeping a broader view of your financial planning can help you see how the long-term value of whole life insurance outweighs the short-term draw of current rates on CDs and bonds. 

Here are three common questions we’ve been hearing lately, and how we’ve been responding. 

Common questions about whole life insurance as interest rates rise 

1. Can’t I get the same result with bonds and term life insurance as I would with a whole life insurance policy? 

Trying to compare whole life insurance to a bond or CD is sort of like trying to compare a car to an airplane. Both are similar in the sense that they’re modes of transportation that will get you from one place to another, but they work in very different ways and are used for very different purposes.  

Much as you’d want a car for a short trip to the store, CDs and bonds are a safer way to set aside money for a short-term need you anticipate—like a down payment on a new home in the next year or two. Whole life insurance is a long-term product that offers immediate benefits while helping you build long-term value and flexibility. When you’re going on a longer journey (the kind of journey that might lend itself to an airplane), whole life insurance may be a more efficient way to get there. And, importantly, whole life insurance provides you with lifelong death benefit protection, which is not only the primary reason for including it in your plan but also something that CDs, bonds, and other short-term investment options don’t offer. 

But it’s not an either/or decision. Just as you might use a car and an airplane for different parts of the same journey, a short-term investment and long-term product can work together to reach your goals in an efficient way. I’d encourage you to think about using whole life insurance along with other financial products—like investments.  

2. Why isn’t your dividend interest rate rising as quickly as other product rates? 

One of the benefits of whole life insurance is that it’s an incredibly stable asset (that’s a key role it plays in your broader plan). CDs and bonds—while generally safe and stable—can be subject to fluctuations. (Anyone who owned bonds over the past couple years is likely aware of this.) As interest rates have moved higher, rates for CDs and bonds have changed just as quickly. The same will be true if rates come down in the future—which is likely. 

Whole life insurance, on the other hand, is generally less volatile. And over longer periods of time, the dividend interest rate on whole life insurance tends to be similar to other options¹.  

3. Can’t I just wait until your dividend interest rate goes up? 

If you believe that whole life insurance should play a role in your financial plan, trying to maximize your short-term return is a bit like trying to time when you invest in the stock market. Sure, you might end up with a few extra dollars in the short term if you get your timing just right. But you also risk missing out on the benefits that come with your investment—especially if your timing is a little off.  

With whole life insurance, you get the immediate peace of mind that comes with lifelong death benefit protection. And your policy builds cash value. Over time you’re likely to come out ahead. 

Whole life insurance leads to better financial outcomes over the long term 

Independent research shows that over longer periods of time, a financial plan that includes whole life insurance alongside investments (and, eventually, an annuity) can lead to better financial outcomes.  

The analysis, conducted by EY, found that a 35-year-old who allocated 30 percent of annual savings to permanent life insurance and then, at age 55, used 30 percent of assets to add a participating deferred income annuity produced a 3.5 percent higher retirement income and 16.3 percent more legacy at age 95 than using an investment-only strategy. The key reason for these results is that whole life insurance and deferred income annuities tend to outperform fixed income and provide better stability when markets are fluctuating. 

By getting to know you and what’s important to you, your Northwestern Mutual advisor can work with you to design a plan that helps you accomplish your objectives through the benefits of whole life insurance, investments and other financial tools. When these elements of your plan work together, you’ll be in a better position to grow the wealth you need to reach your goals and protect your money if life doesn’t go according to plan. 

¹ Dividends are not guaranteed. The dividend interest rate for a particular policy is the interest rate used for crediting interest on policy values after deducting mortality and expense charges. It reflects investment performance of both managed assets and policy loans. The dividend scale is reviewed annually by the Company’s Board of Trustees and is subject to change.