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Is life insurance an investment?

Jul 6, 2023 4 Minute Read

The primary purpose of life insurance is to protect your loved ones from sudden financial loss because of your passing. However, certain permanent life insurance policies have a cash value component that some people use to save money and can sometimes be referred to as an investment.

However, there are big differences between life insurance and investments. In this article, we’ll cover the ways investments and life insurance differ and why they should be managed separately for most people.

Understanding life insurance as an investment

When most people think about investments, they think about investing in the stock market or setting aside money in a retirement account, like a 401(k). The cash value of some permanent life insurance policies is similar to an investment in that it can earn interest over time.

However, there are differences between more traditional investment options and life insurance as outlined in the table below.


Investments Life Insurance
How to remove money Policy loans or withdrawals. Policy loans, withdrawals, or surrender (cash out), but cash value can take years to accrue.
Death benefit Typically none The policy’s face value
Tax advantages Saving money in pre-tax accounts can reduce taxable income. Death benefit payments are tax-free. Cash value accrues tax-deferred.
Interest accumulation Generally at market rate or interest rate of individual investments, no guaranteed returns. Based on policy type and insurer. Whole life policies offer guaranteed returns.
Dividend payments Paid depending on investment type. Paid at insurer’s discretion for participating whole life policies.

Which life insurance policies include investment options?

The following permanent life insurance policies include cash value accounts which some people use as an investment.

Whole life insurance

Whole life insurance is the simplest type of permanent life coverage. With fixed premium payments and a consistent death benefit payout, whole life is easy to understand. There are several types of whole life insurance policies, including final expense, simplified issue, and guaranteed issue.

The cash value account for whole life insurance grows at a guaranteed rate that varies depending on the insurer. It’s important to discuss cash value returns with a licensed insurance agent before you apply for a policy to ensure you understand how much cash value you may accumulate over time.

Universal life insurance

Universal life insurance is a type of permanent life insurance that differs from whole life primarily in its flexibility. Universal life enables you to choose to pay higher or lower premiums based on your current financial situation. This can be ideal for people going through significant life changes like having children or starting a new career.

While whole life has a guaranteed interest rate set from when the policy begins, universal life has an interest rate that can fluctuate with a minimum guaranteed rate. That means you could have years where your cash value account accrues more interest and others where it’s less, but you’ll never make below the minimum rate.

When does investing in life insurance make sense?

You may choose to invest in life insurance for a few reasons, including:

Investing in your peace of mind

The primary purpose of life insurance is to provide financial protection for loved ones so they can cover income replacement, funeral expenses, or debt repayment if the unexpected happens to you. Once you have the right life insurance policy in place, you’ll no longer have the mental burden of worrying whether your loved ones will be okay financially without you.

Investing in life insurance for estate planning

Life insurance is an important part of legacy planning for many people. You can opt to use the life insurance death benefit as the inheritance, or if you prefer, direct loved ones to use the life insurance death benefit to cover estate taxes and other fees associated with passing on your assets.

Investing in life insurance for retirement planning

Some higher net-worth individuals may use life insurance for retirement planning. Yet the average person should save for retirement using more traditional savings options first. If you haven’t yet maxed out tax-advantaged retirement accounts like a 401(k) or IRA, it may be the wrong time to use life insurance for retirement planning. It’s best to consult a retirement planner or other financial professional before applying for life insurance to use in retirement.

Find the right life insurance policy through eFinancial

Life insurance is an important part of financial planning, but not everyone needs permanent life insurance with the ability to accrue cash value. For most everyday families, term life insurance is an affordable alternative. A licensed insurance agent can explain the life insurance options you’re eligible for and give you a quote so you can ensure the policy fits your budget before you apply. Contact eFinancial today.