Is Cash Value Life Insurance Really a Good Investment?

By | May 16, 2011

When my husband and I were newly weds, our insurance agent convinced us that a whole life policy that built cash value was a “good investment.” He was quite enthusiastic about it: “If you decide you don’t need the insurance in 40 years, you can turn it in and get cash!”

Hooray! We got a policy for each of us. They aren’t huge policies (thank heaven), but the more I’ve thought about it, the more I’ve decided that — at least for my husband and me — a cash value life insurance policy isn’t really that good of an investment.

Giving Up Better Returns

Whenever you give up safety in an investment, you give up the chance of better returns. Most cash building life insurance policies do that cash building at a snail’s pace. You are guaranteed an eventual return (provided the company doesn’t fold), but the returns are often quite low. Sometimes your returns won’t even keep pace with inflation!

The price difference between my 30-year term life policy (which has a much bigger benefit) and my whole life policy is about $15 a month. That’s $180 a year that I pay more for my cash building policy. If, instead of having a whole life policy, I invested that $180 in securities with better potential yields, I could make a great deal more. Over the past 8 years, the cash value of my policy has grown to about $72. Now, let’s say that over that last 8 years I had put the $15 difference in an index fund tracking the Dow. Using a dollar cost averaging calculator, I see that if I had put that $15 a month in ^DJA, the value of shares today would be $1,709.36. That’s a lot better than $72. Of course, the cash value will supposedly build faster over time, but it’s still discouraging.

What About Equity Indexed Policies?

In some cases, you might try equity indexed policies. These are whole life cash value policies tied to the performance of an index. You have a guaranteed minimum return, and the potential for more, based on how the index does. As the index rises, you benefit. This can be a good option for some.

However, it is important to note that there might be additional costs and fees associated with this type of life insurance policy, and those expenses can erode your returns. You should carefully consider your options before deciding that an equity indexed policy is a good way to balance safety with increased returns.

In the end, whether or not cash value life insurance represents a good investment for you largely depends on your financial goals, and the role that your insurance policies play in reaching them. Before you decide, carefully weigh your options.

Miranda Marquit is a personal finance blogger. She writes for a number of sites, including the AllBusiness Personal Finance Corner and

5 thoughts on “Is Cash Value Life Insurance Really a Good Investment?

  1. Bret @ Hope to Prosper


    A whole life insurance policy is a great investment, for the insurance company and the agent who sold it to you.

    For the customer, it’s one fo the worst “investments” I know of.

    Term life is the affordable way to have enough coverage to actually replace a lost income.

    Everything else is just a smokescreen to separate people from thier money.


  2. Something to think about

    Actually why would you invest your hard earned money in the market these days. I wouldn’t invest in Whole life either… the returns are small. It’s all about the education of what life insurance is all about. There are such policies called Global Index Universal Life. When you talk whole and term that’s old school. How bout being taken for saving in your kids college fund 529. Hmmm… you save and save and guess what there are high losses there as well. How many of you are ready in the later years to spend thousands on life insurance to ensure you have proper protection for your family in case something happens to you.
    Understand the rate of return on your “whole life”. How bout yielding an average of 10.5% a year???? Now that is powerful. You won’t get that on a whole life, and understand the guarantee of never the loss. Get the education most importantly before you decide on where to put your money.
    Understand all tax ramifications and know your goal long term.

  3. guest

    You don’t use whole life insurance as an investment. You use it as a savings tool. Obviously it is not smart only saving money into insurance. You need a well diversified portfolio with an asset allocation tuned to your risk tolerance. In addition whole life insurance is a good place to SAVE money and shelter it from taxes and still get a good rate of return. Did you know that by using mutual insurance companies and NOT using a variable type policy you can get a tax free internal rate of return of 6-8 % over 30-40 years?

    The purpose of life insurance is long term financial security. Your cash value never depletes in value it grows every year and will provide income for your family WHEN you die.

    If I were you I would fire that insurance agent who recommended you by a small amount of whole life and not the proper protection. Protect the majority of your need in term insurance and if possible find a way to save money with whole life. This way when your term expires you still have death benefit for your retirement.

  4. Fernando

    It’s important to understand the individuals current financial situation and specific needs first and foremost. I would never recommend Whole Life as an investment, let alone, your ONLY investment option. Although, there are some investment aspects that are attached, Whole Life should be used as a long term savings with minimal guaranteed growth that possesses levaraging power against the risk of death. It should be part of a larger portfolio of different asset classes. I am certain that Whole Life is valuable and will serve it’s purpose if positioned appropriately.

    Term Insurance serves it’s purpose as well. Again, if used appropriately and dependent on the individual’s needs. It is definitely not the end all solution for protecting against the risk of death. Term Insurance is used primarily to cover “expiring debt” that may otherwise be left behind for surviving family members to relieve due to the insureds premature debt. (mortgage, cc debt, auto note, etc.). With a specific end date to coverage, along with it’s affordability, term coverage is ideal for these specific circumstances. On the other hand, Term Insurance is, in my opinion, a poor choice if your need is to provide income protection for a surviving spouse or child. Unless, your intent is to convert it to permanent insurance at some point in the future. We have no idea of when we will die, so therefore, how can we assume when life coverage should end? What if my 30 year term is up and I am still living with the need for life insurance? I have the choice of paying an astronomical premium for more term or run the risk of not even being insurable at that point in time.

    Either way, I am a huge advocate for the benefits of life insurance whether permanent or temporary. IF the need presents itself and structured properly.


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