Is Whole Life Insurance a Good Investment?

There are many different options, however, I am going to categorize our options into 3 different categories: the market (stocks, mutual funds, etc.), government sponsored plans (ira’s, 401k’s, etc.), and savings accounts (the corner bank, putting money in your mattress).

Let’s start by taking a look at how whole life insurance works, and then make our comparisons.

Whole life insurance is a vehicle meant to provide a sum of money to your heirs, tax free, upon the death of an individual. However, these vehicles have evolved over time to attach what we call a cash account, meaning a sum of money that is required by law to be liquid in the event you decide to liquidate your policy and walk away.

Now, the life insurance companies themselves are divided into 2 different types, stock and mutual. A stock company is owned by shareholders, and dividends are paid out to shareholders as owners. Now, for our purpose, using life insurance as an investment, a stock company does not meet all of our needs. However, a mutual company has no stock holders, the policy holders themselves are owners in company profits, therefore dividends are paid to policy holders.

We want to grow cash in our accounts as quickly as possible, therefore mutual companies are our best choice.

When we look at insurance at first, we may not realize how many positive attributes are found innately in a life insurance policy. However, when we look closely at whole life insurance, we find that there are some very appealing attributes. Here are a few…

Guaranteed returns every year – you will never lose money, the insurance companies guarantee you a floor, or growth on cash value. So, there is no risk associated with these accounts, because you can never lose money.

Dividends and history – although dividends are not guaranteed, many of the top mutual companies have paid dividends through the great depression and multiple recessions, so in years where most people were losing 10-20 percent of their money in the market, those with cash value in life insurance were experiencing growth.

Tax deferred growth – the growth inside of a life insurance policy is tax deferred, and if structured and treated properly you will never pay taxes on any of the growth. This makes life insurance unique like a 401k, however, because the money put into a life insurance account has already been taxes, you don’t owe any taxes on the money used to build the policy. Taxes can have a significant impact on your growth, remember a 9 percent stock market return, taxed at 30 percent, is the equivalent of a 6 percent growth without tax.

No fund fees – with mutual funds, 401k’s, and financial planners in general, you will be paying fees, whether hidden or upfront. Either way, in winning years you lose part of your earnings, and in losing years you still have to pay fees.

Liquidity – this is one of the most appealing pieces of a life insurance policy, you have the ability to collateralize against your cash value. In this way, you never actually take money out of your policy, it continues to benefit from the power of compound interest (watch a quick video about the powerful effect of collateralization here). Not only can you collateralize against the cash value but you can, at any time, withdraw the cash value for any reason. Therefore, you always have access to your money. Many people don’t realize they are paying more money in interest than they are experiences in growth from their retirement plans. If they had access to their money to pay off debt now, they would be saving more money in the long run.

Certainty – because life insurance experiences no market losses, you are certain how much money you will have when planning for your retirement. You don’t have to worry about losing half the value of your government sponsored plan the year before you retire. You are certain of your financial standing.

This is what makes life insurance such a good place to save your money. I’ve done most of the comparisons in the above paragraphs, but quickly, let’s touch on how life insurance compares to our other investments.

The Market: Life insurance will not have the growth potential that the market has, however you do not have the risk. If you have money you can afford to lose, put it in the market. However, most people don’t have the time to study the market and make smart investments, and they lose money. This is why life insurance is a much better investment, the last ten years have been hard on many people, and with baby boomers pulling more and more money out, it is likely the trend will continue.

Government Sponsored Plans: 401k’s, IRA’s, etc are not liquid, and many people do not realize they are paying more in interest and debt than they are making in their government sponsored plans. Also, postponing taxes for the future may turn out to be a bad decision, taxes are, historically, very low, and the only direction I see taxes going in the future is up. A government sponsored plan puts you in a position to pay taxes in the future, be aware of the gamble you are making.

Savings Accounts – a savings account isn’t going to produce near the return a life insurance policy will, and at the same time your savings account will be taxed. Life insurance provides a safe place for money, like a savings account, yet it will have tax advantages and growth potential.