This is generally a financial safety net. It is to safeguard the families in the event of the insured’s death. Over the years, however, this has given way to a new discussion, investing using whole life insurance. Whole life policies combine death benefits with a cash value component; therefore, it is not like term life insurance. Term life insurance covers a definite period, while whole life insures an entire life.
So How Does It Work?
The section of the premium that whole life insurance pays for the death benefit form is similar to that portion allocated to the policy’s cash value. That cash value grows, mostly at a guaranteed rate over the years. On a tax-deferred basis, it would mean, eventually, accessing this cash value either by loans or withdrawals for the liquidity of the policyholder. But it does not come cheap.
The Cash Value: The Investment Aspect of Whole Life Insurance
Cash value is the even heart of investment potential in whole life insurance. This part has some capital-like characteristics, such as growth potential. The cash value grows over the years at a guaranteed interest rate, assuring that it will grow over time, regardless of market-related fluctuations. Most include the option for dividends, usually either cash value growth or payment of part of or even the entire premium towards paid-up additions.
The cash value does grow, but you’re unlikely to see any meaningful returns until after several years. With a whole life insurance policy, the first years of your premium payments go more towards administrative costs and insurance coverage than toward growing the cash value.
Advantages and Disadvantages of Whole Life Insurance as an Investment
To find whether whole life insurance is an efficient investment tool or not, all the advantages and disadvantages must be discussed.
Pros of Whole Life Insurance as an Investment Tool:
- Growth that is assured: The cash value in a whole life policy grows at an assured rate. No other place other than in the stock can beat this form of guaranteed growth in security.
- Tax-Deferred Growth: It grows on a tax-deferred basis so that you will not pay tax on the gains as long as they stay in the policy. This would be an appealing feature for the one who desires to defer his taxes on the wealth.
- Cash-value access: With whole life, a policy’s cash value can be borrowed against. The loan amount may be applied toward college funding, business capital, or retirement, among other things. Withdrawals may also be available based on the policy.
- Dividends: Some whole life insurance policies pay dividends, which can be used to purchase additional coverage or be taken as a cash payout. This gives policyholders a chance to benefit from the performance of the insurer.
- Permanent Coverage: The other difference between the two is that whole life insurance covers you for the entire lifetime, provided you are paying the premiums throughout; that can be reassuring since the death benefits will certainly be covered, come what may, regarding how long you would live.
Disadvantages of Whole Life as an Investment
- High Premiums: The biggest disadvantage of whole life is that premiums are always pretty high. For example, you might be paying several times more for a whole life policy than you are for term life insurance.
- Low Returns: Such investment usually bears low returns rates, if compared to other investment plans. For whole life policies, the growth rate has been put at around 2% to 4%. For instance, one would easily acquire a good return rate on investment in a diversified investment portfolio especially on long-run portfolios.
- Complexity: Whole life policies are much more complex than term policies. They require more oversight, an understanding of the policy’s terms, and management to be sure they operate as expected.
- Fees and Costs: Administrative fees, commissions and other fees associated with whole life insurance can chip away at your dollars, particularly over the first several years. In part because of these costs, which tend to reduce the cash value contributions to your policy, that money can grow very slowly.
- Opportunity Cost: The opportunity cost of choosing whole life insurance as an investment opportunity is that you would have given up a better-performing investment such as stock, bonds, or real estate. If you want to accumulate wealth over a long period, you may end up getting a better return on investment by choosing a more conventional investment.
Difference between Term and Whole Life Insurance
One question usually asked in this regard is how whole life insurance compares to term life coverage as far as the investment is concerned. Term life is the game: It provides coverage for a specific term, usually between 10 to 30 years. This type of life insurance with no cash value; as a result, term premiums are much lower than whole life premiums.
Unlike whole life insurance, term insurance earns little or no interest. The purpose is coverage in case a person dies while insured in the policy term. If you want to consider taking a term life policy, it would be important for you to calculate your coverage using a term insurance calculator as it relates to your financial planning.
Is Whole Life Insurance a Good Investment?
The appeal of whole life insurance as an investment largely depends on your financial goals and situation. For those people who want assured growth with tax-deferred benefits and permanent coverage, whole life insurance is very attractive. Its growth is generally slow, however, and is not as good as other vehicles for investments.
If you need investments mainly to increase wealth, then perhaps stocks, bonds, or mutual funds are more appropriate for you. Whole life insurance should thus be considered an investment that provides some insurance and perhaps some investment growth.
