Whole Life Insurance as an Investment
Some life insurance agents attempt to sell whole life insurance for its investment potential. While whole can provide needed cash after a period of time, there are also some disadvantages to the whole life investment strategy. For some people, a better strategy is to keep their life insurance program separate from their investment portfolio.
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Identification
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As its name implies, whole life insurance is designed to last for the rest of your life. As you pay premiums over time, a portion of your payment is used to build a guaranteed cash fund, which you can access while you're still alive by taking a low-interest loan against the cash value. If you live to a ripe old age, typically 95 or 100, the policy endows, meaning you would receive the face amount of the policy. If you die before that time, your beneficiaries receive the face amount.
Investment Benefits
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Whole life can be used for investment purposes. The cash fund continues to increase over time, and you can take a policy loan to cover financial emergencies, to help pay for a child's education or to supplement income in retirement. You are not required to pay back the money, and you typically don't need to pay taxes on the loan amount. Whole life can be a form of "forced savings," which can be a benefit if you are not very disciplined at putting money away.
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Drawbacks
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A drawback to using whole life as an investment vehicle is that a number of fees are deducted from the cash value to cover the insurance company's expenses. The cash value tends to build slowly, so it can be several years until you're able to accumulate a significant amount. And while you aren't required to pay back money you withdraw in the form of a loan, any outstanding balance plus interest will be deducted from the face amount upon your death.
Term Insurance Strategy
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An alternative to using whole life as an investment is to purchase a less expensive term life policy for an equal face amount, and invest the premium savings into a financial instrument of your choosing. While term insurance does not build cash value, you may be able to build more cash by investing in products like mutual funds, an IRA or a 401k plan at work. You'll still have the insurance protection you need and you'll have greater control over your money.
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