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Is Whole Life Insurance a Worthwhile Investment? Exploring Benefits and Timing


A whole life insurance policy provides you with guaranteed returns and might supplement your retirement income.

With even these guaranteed returns, a whole life insurance policy might not suit the financial needs of everyone.

  • A whole life insurance policy can rake cash gradually and also offer coverages.
  • This policy is ideal for parents having lifelong financial dependents or those with a high net worth.
  • It is a permanent life insurance.
  • High premiums are not offset by the low rates of return and depend on your budget.

Whole life insurance comprises a cash value component and is more complex than other life insurance.

These policies provide guaranteed returns and earn interest in a tax-advantaged account. However, they are not everyone’s cup of tea, as these policies are expensive.

Whole Life Insurance Policy as an Investment

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This policy accumulates cash over time and provides permanent coverage to the insured person.

  • An insurer uses your premium, invests it, and returns your policy a cash value.
  • A fixed rate is guaranteed by your insurer, and the cash value grows gradually at that rate.
  • If you store your funds in the policy, you won’t be taxed because the whole life insurance policy is tax-deferred.

After you have collected enough money, you can use it to borrow loans, and you don’t need to repay the loan.

  • The insurer deducts each premium of your loan from this policy, and when you die, he’ll deduce the balance amount of your loan from this payout.
  • However, you must know that your nominee might face sequences and issues if you borrow more than your payout.

If you opt to buy a policy from a company (mutual life insurance) based on the company’s financial performance, you can gain dividends.

  • You can buy additional insurance through these dividends that boosts your life insurance policy’s face value.
  • You can also pay premiums through these dividends.

Using these options might increase your cash value.

There are different scenarios where a whole life insurance policy is ideal investment.

1. Retirement Accounts Maxed Out

If your net worth is high and you have contributed the maximum amount to your individual retirement accounts or 401(k) plan (tax-advantaged accounts), whole life insurance can be used to top up your tax-deferred savings.

  • Over the years, the cash value earns dividends.
  • In the future, when your mortgage is paid off, your children reach the maturity age, or you don’t need life insurance, you can cash out this policy and collect it.

When you surrender your policy, you will be taxed according to the value your investment has gained.

  • When you die your beneficiaries might not receive the death benefit.

2. If You Have a Lifelong Dependent

Any type of insurance gives the insured person a sense of relief and peace of mind when he has financial dependents in his family.

  • If you have a financial dependent such as a person with a disability, a whole life insurance might be the best policy as it usually provides lifelong coverage giving a sense of financial stability to your family.

If your family member has a disability and you must avail government benefits such as Supplemental Security Income, you must not name him as your beneficiary.

3. Help Your Family Pay Estate Taxes

If you are rich and have an estate valued more than $12.92 million, the IRS can levy an estate tax when you die.

It is also true if you own assets worth more than this threshold.

  • Whether you surrender your policy or die, your family can pay your family the money that they require to pay estate taxes without digging into other accounts for payment.

4. Diversify Your Portfolio

One of the greatest benefits of buying a whole life insurance policy is that it diversifies your investment portfolio.

  • Whole life insurance is one investment that does not depend on market trends and offers a return at a set rate.
  • You won’t lose a single penny even if the market is down.

Drawbacks of Whole Life Insurance Policy

Credits: freepik

When you are investing in a whole life insurance policy, there are some drawbacks that you must know.

Expensive Premiums

The drawback of buying a whole life insurance policy is that the premiums are very expensive compared to term life insurance.

  • A $500,000 whole life insurance policy costs approximately $7,028. It is much more expensive than a term life insurance costs $334 (man) and $283 (woman).

Slow-Growing Cash Value

It takes 10-15 years to build enough cash value that you can use to borrow a loan against.

  • It is not for people that don’t have patience and people that prefer investment that offers returns quickly should not invest in this policy.
Low Rate of Return

A whole life insurance policy has a low rate of return and only offers a 1% – 3.5% annual rate of return.

  • It offers guaranteed returns, but other investment options can give you a high rate of return, such as bonds, stock, and real estate.

An expensive investment that offers a guaranteed return is a whole life insurance policy. It can diversify your investment portfolio but is not suitable for everyone financially.

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