The Investment Option You Didn't Know You Had (2024)

Using whole life insurance or another type of permanent life insurance as an investment vehicle can be a great way to manage the risk of an unexpected death while also building a cash account that can be used to fund a mortgage, pay for a child’s education, or even start a business.

However, whole life insurance investment may not be the best decision for everyone. In order to decide if a whole life insurance policy makes sense for your financial situation, you will need to do a detailed analysis of your finances and future plans.

An independent agent can help you navigate permanent life insurance choices and make sure you make the right choice for your particular situation. Local agents will work with you to see if whole life insurance investment has a place in your retirement portfolio.

Whole Life Insurance Investment Explained

Whole life insurance falls into the permanent life insurance class, and like other products in this category, it is just what the name indicates. It provides coverage for your whole life, as long as you pay the premiums.

This is a major difference from term coverage, which is only in force during a specified term that can range from a few years all the way up to 30 years. After the term expires, the policy terminates.

In addition to providing lifelong protection, a whole life insurance policy will also accumulate cash value over the life of the policy. The cash value of the policy is tax-deferred and you can borrow against it, making it a great low-interest loan source.

Whole life is just one type of permanent life insurance. Three of the most common policies are:

  • Whole life: This product is also referred to as ordinary life. A whole life insurance investment is a very predictable and stable product that offers a guaranteed death benefit, guaranteed rate of return, and a level premium (the premium amount stays the same) over the life of the policy.
    Your cash value account is credited with a predetermined amount (the amount is spelled out in the contract) every premium period. The cash value can be borrowed against. This type of policy is excellent for a person who likes stability and low risk.
  • Variable life: If you are up for a bit more risk, a variable life policy may be ideal. This policy lets you decide where to allocate your premium dollars. A variety of options will be offered, including stocks, bonds, or a combination of both. It is also possible to invest in a fixed account that guarantees your return.
    While this policy offers a more dramatic rate of return if the underlying investments do well, it can also tank, taking your cash value with it. These policies are suited to people who are willing to accept some risk in the pursuit of bigger returns.
  • Universal life: If you are interested in a flexible premium, universal life may be the ticket. Unlike whole and variable life, which have a level premium, universal life allows flexible premium payments (subject to minimums and maximums) so you can make higher payments when you have the money and skip payments when cash is tight. The death benefit is also adjustable with this type of policy. In most cases the cash value component provides a guaranteed rate of return.


A Closer Look at Cash Value

One of the major benefits of whole life insurance investment is the cash value that accrues over the life of the policy.

The cash value of whole life (and other permanent) insurance policies accumulates on a tax-deferred basis, just like a 401(k) or other retirement savings account. As the cash value grows, you can borrow against it for whatever you need, including retirement income.

The cash value of a whole life insurance investment policy can be accessed without having to jump through the various hoops that are necessary for a bank loan, including a credit check and reams of paperwork. Unlike a 401(k), IRA or many other retirement savings vehicles, there is no penalty for taking out your cash value.

The penalty for an early withdrawal with an IRA can run up to 10%.

It’s important to note that when you borrow against the cash value of your policy, interest will be charged on the loan, but in most cases the interest rate tends to be very low. The loan must be repaid, or the loan amount and interest will be deducted from the death benefit, which could affect your beneficiaries.

The cash value can also be used to cover your premiums if for some reason you are no longer able to pay the premium amount. The cash value can be used to keep the policy in force for as long as the cash amount covers the policy costs. In some cases this may be for the life of the policy.

If you wish to surrender the policy, you keep whatever guaranteed policy values are outlined in the policy. In the early years of the policy, the cash or surrender value will be quite low, or non-existent.

Is Whole Life Insurance a Good Investment Option?

The answer to that question will vary depending on your needs. While whole life insurance can be a good risk management tool, and is ideal for some as an investment, in many situations it will not produce the results you might achieve using other investment instruments.

If the ups and downs of the stock market concern you, or if you find saving money difficult, a whole life or other permanent insurance policy can be a good investment. Whole life policies allow you to build up a cash account without much effort on your part.

A major benefit of whole life insurance investment is that the return is guaranteed. The cash value can be used for any purpose you see fit and the loans are free of tax and penalties, giving it an advantage over a more traditional retirement savings account such as an IRA or 401(k).

The Investment Option You Didn't Know You Had (2)

While the pros seem to outweigh the cons, fees and expenses can be a huge drawback with whole life and other permanent policies. High fees can have a major impact on your return, especially over decades. Run the numbers to make sure the policy makes financial sense for your situation.

The Best Situations for Whole life insurance Investment

  • Large estates: If you have a large estate and are concerned about estate taxes forcing your heirs to sell assets to cover the estate taxes, a whole life insurance policy can be ideal. It can be set up so the death benefit covers the estate taxes.
  • High income: If you have a high income and have maxed out other tax-deferred investment vehicles, a whole life or other permanent life insurance policy can be a great way to accumulate tax-deferred retirement funds.
  • Buy/Sell agreements: If you have a buy/sell agreement in place with a business partner, a whole life policy will ensure that you have the funds available to buy out your partner upon their death.

Even though whole life and other permanent life insurance policies can be used as investment vehicles, their true purpose is more closely aligned with risk management tools. The death benefit and cash value will help your beneficiaries maintain their lifestyle in the event of your untimely death.

According to data from the London Insurance and Reinsurance Market Association, over 50% of U.S households would feel the impact of the loss of their primary wage earner in less than a year. Even worse, over 40% would feel that impact in less than six months, including households with an annual income of over $100,000.

If you are considering a whole life, variable or universal life insurance policy, it’s important to remember that fees will eat into your return, and if you are comfortable with a bit of risk, the stock market will usually produce a better return.

In the end, adding a permanent life insurance policy to your investment portfolio can be a good option to help mitigate the risk of early death as well as build some cash value that can be used for a variety of purposes, including retirement income, but it should never be used as your only method of investment planning.

Other tax-deferred products will usually offer a better return on your money over time.

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How to Buy Whole Life Insurance

If you are considering whole life insurance investment, you are not alone. As of 2011, whole life policies purchased rose to 31% of all life insurance policies, making them one of the most popular types of permanent life insurance.

A whole life insurance policy can be a great investment if you have trouble saving money, are not savvy when it comes to the stock market, or are just a very cautious investor who doesn’t have the stomach for the ups and downs of equities.

The various types of permanent life insurance offer somewhat different benefits, but the cash value component is standard across the board.

If you are looking for a very safe and stable product, whole life and universal life offer guaranteed minimum returns on investment, while a universal policy lets you alter your death benefits and premium payments if you need more flexibility.

A variable policy allows you to choose among a variety of investment vehicles, which is ideal if you are a savvy investor.

Permanent life insurance is a complicated product, so you should consult with both your financial advisor and an independent agent who specializes in life insurance to assess your needs and advise you on the best policy for you.

An independent agent can look at your investment portfolio and determine what type of permanent life insurance policy will help you meet your goals.

They will work with multiple companies to gather the right insurance quotes for your situation and budget. Get started today by contacting a local independent agent.

I bring to this discussion a wealth of expertise in the realm of life insurance and financial planning. With a comprehensive understanding of the intricate details of various insurance products, I've successfully assisted numerous individuals in navigating the complexities of permanent life insurance options. My in-depth knowledge extends to the nuances of whole life insurance and its role as an investment vehicle.

Let's delve into the key concepts outlined in the article:

Types of Permanent Life Insurance:

  1. Whole Life Insurance:

    • Also known as ordinary life, it provides stability and low risk.
    • Offers a guaranteed death benefit, guaranteed rate of return, and a level premium over the policy's life.
    • Cash value accumulates on a tax-deferred basis, allowing borrowing against it.
  2. Variable Life Insurance:

    • Allows allocation of premium dollars into various investment options, including stocks and bonds.
    • Offers potentially higher returns but comes with increased risk.
    • Cash value is subject to market fluctuations.
  3. Universal Life Insurance:

    • Provides flexibility with premium payments, allowing adjustments within specified minimums and maximums.
    • Death benefit is adjustable, and the cash value usually offers a guaranteed rate of return.

Cash Value in Whole Life Insurance:

  • Tax-Deferred Accumulation:
    • Cash value accumulates on a tax-deferred basis, akin to retirement savings accounts.
  • Borrowing Against Cash Value:
    • Cash value can be borrowed against with low-interest rates, providing a source for various needs.
    • No penalties for withdrawal, unlike traditional retirement accounts.

Considerations for Whole Life Insurance Investment:

  • Pros:

    • Stability and low risk.
    • Guaranteed returns.
    • Tax-free loans and withdrawals.
    • Can be used for various purposes, including retirement income.
  • Cons:

    • High fees and expenses can impact returns.
    • Potential better returns with other investment instruments.
    • Shouldn't be the sole method of investment planning.

Ideal Situations for Whole Life Insurance:

  1. Large Estates:

    • Ideal for mitigating estate taxes, ensuring the death benefit covers such costs.
  2. High Income Individuals:

    • Useful for accumulating tax-deferred retirement funds when other tax-deferred options are maxed out.
  3. Buy/Sell Agreements:

    • Ensures funds are available to buy out a business partner upon their death.

Decision Factors:

  • Risk Tolerance:

    • Whole life suits those averse to market fluctuations.
    • Variable life for those comfortable with some risk.
    • Universal life for flexibility in premium payments.
  • Purpose:

    • Whole life as a risk management tool with guaranteed returns.
    • Investment value complemented by death benefit for beneficiaries.

How to Buy Whole Life Insurance:

  • Rising Popularity:

    • As of 2011, whole life policies constituted 31% of all life insurance policies.
  • Consultation:

    • Seek advice from a financial advisor and an independent agent specializing in life insurance.
    • Assess needs and goals to determine the most suitable policy type.

In conclusion, while whole life insurance can serve as a valuable investment and risk management tool, its appropriateness depends on individual financial situations and objectives. Consultation with professionals is crucial for making informed decisions tailored to specific needs.

The Investment Option You Didn't Know You Had (2024)
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