Life Insurance as an Investment

Permanent life insurance can act as an appropriate investment vehicle for individuals and families who have passed a certain set of financial milestones. Learn about the multiple types of permanent life insurance, how it should be used and alternatives for when it doesn’t meet your financial needs.

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  • Written By
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

    Read More
  • Edited By
    Lamia Chowdhury
    Headshot of Lamia Chowdhury, editor for

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

    Read More
  • Financially Reviewed By Eric Estevez
  • Updated: January 24, 2024
  • 8 min read time
  • This page features 5 Cited Research Articles

Key Takeaways:

  • Life insurance is primarily meant for the protection of family and loved ones from financial uncertainties in the event of an unexpected death.
  • Life insurance can be the cornerstone of a prudent estate plan for many families but must be considered within the context of a comprehensive financial plan.
  • Permanent life insurance, which contains an investable cash value, can offer benefits and flexibility for individuals who have exhausted other saving and investing avenues.
  • Investing in life insurance is best implemented when the owner is investing not for themselves but for their heirs or other parties.

Life Insurance as an Investment

The number one reason to buy life insurance is to protect another party from the financial uncertainties of a premature death. Most often, life insurance is used to protect family or loved ones that depend on a person’s income or financial support. However, life insurance can also be used to protect professional interests where partners may depend on one another for vital parts of the business strategy.

Life insurance can play an important role to any comprehensive financial plan if it’s intended to manage the risk of an unexpected death. People may choose to insure themselves for many of their financial responsibilities such as lifestyle costs, mortgage debt or future college tuition.

In the right circumstances, certain types of life insurance policies can also be used as an investment vehicle. That’s because life insurance policies are given preferential tax treatment, which makes them a compelling savings product for people who may be in a high tax bracket, have substantial other assets or want to utilize guaranteed conservative growth over many years. When paired with proper estate planning, life insurance can also act as a powerful wealth transfer tool.

While life insurance can be the cornerstone of a protection strategy for parents and spouses in the event of an unexpected death, using life insurance primarily as an investment is not right for everyone. Often, choosing the simplest solution to mitigate financial risk can yield better results.

As part of the life insurance policy review process, have your agent or broker explain an “illustration” of your proposed policy. Pay careful attention to the guaranteed vs non-guaranteed cash values and what rate of growth is being presented to you.

What Is Cash Value Life Insurance?

Unlike term insurance, permanent life insurance contains a cash value component. This means a portion of each premium payment is allocated towards the cash value account within your insurance policy. Over time, this value will grow through contributions and accrued interest on the existing balance.

The cash value grows tax-deferred, meaning the growth of your money will not be subject to any income or capital gains taxes while it is growing inside the account. There are circumstances where withdrawal can trigger taxes, but this situation can be avoided by working with your insurance company to borrow against the cash value using a loan.

The added benefit of the cash value account means that permanent insurance, such as whole life or universal life, are much more expensive than a term insurance policy with a comparable death benefit.

Experian reports that “a healthy 35-year-old man might pay around $29.97 in monthly premiums for a 20-year, $500,000 term life policy. However, the premium jumps to $571 per month for a $500,000 permanent life insurance policy.”

The growth of your cash value account will depend on the type of policy you have chosen. So, it is important to understand the differences in benefits between the two types of permanent policies.

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What Types of Life Insurance Have a Cash Value Feature?

Permanent life insurance contains a cash value account within the policy. The main types of permanent life insurance are whole life insurance and universal life insurance. Whole life insurance is the simpler of the two.

Cash Value in Whole Life vs. Universal Life

Whole Life Insurance
Cash value grows at a minimum guaranteed rate of interest but can be slightly higher depending on the insurer and the market conditions impacting the growth of insurers’ investments. A typical guaranteed growth rate for a whole life policy is between 1% to 2% per year. While slow, the constant compounding and continual contributions from your premiums can add up over many years.
Universal Life Insurance
Universal life policies provide investment options tied to either a benchmark index or direct investments into stocks, bonds or mutual funds. Tying your cash value to an investment vehicle not guaranteed by the issuing insurance company will create additional risk, since you can lose money when your chosen investment(s) fall in value. While universal life policies provide greater upside potential for faster cash value growth, they also allow for loss of your cash value.

Universal life insurance is a permanent life insurance policy but can vary in its structure depending on the underlying cash value investments. There are three main types of universal life insurance.

Types of Universal Life Insurance

Indexed Universal Life Insurance (IUL)
This type of universal life insurance offers policyholders the ability to earn interest on their cash value that is tied to the performance of an index benchmark (such as the S&P 500). Many insurers may put a ceiling on the potential return. Some or all your cash value may be allocated toward a fixed interest rate of return. Understanding the options from your chosen insurer will be the first step in evaluating this option.
Variable Universal Life Insurance (VUL)
This type of universal life insurance allows policyholders to invest their cash value in one or more market-based investment option such as stocks, bonds or mutual funds. Performance of these underlying investments will reflect directly on your cash value and there is risk of loss. Understanding the investment options and risk from your chosen insurer will be the first step in evaluating this option.
Guaranteed Universal Life Insurance (GUL)
Also called “no-lapse guaranteed,” this type of universal life insurance provides policyholders with a guaranteed death benefit and stable premiums for the length of the policy. Although still considered permanent insurance, there is an end-date built into the policy (typically age 95+). Cash value will remain minimal throughout the policy life.

How Cash Value Life Insurance Generates Tax-Deferred Growth

The cash value portion of your permanent insurance policy will not be taxed while it is growing inside of your policy. This shield from taxes is referred to as tax-deferred growth, and it is an advantageous treatment implemented by the IRS due to the investment being inside of an insurance contract. As a result, your money can potentially grow faster because it is not being taxed each year.

Later in life, this cash balance inside your policy can be accessed through loans or withdrawals. Loans or withdrawals, if structured properly, can be utilized without creating a taxable event. It is important to work with your insurance company to understand how these payments work before accessing your money.

Any amount that is withdrawn or taken as a loan will be accessible tax free, as long as it is less than the amount contributed through premiums, which is known as the cost basis. However, these withdrawals or loans will have consequences.

Any money withdrawn will reduce the policy value and, if taken in full, could increase the possibility of the policy lapsing. Policy loans are tax-free if the policy remains in good standing, but it will require the owner to pay interest back to the policy. If the policy is cancelled, the loan will be considered a distribution. Any distributions that exceed the cost basis of the policy’s cash value will be taxed as income.

When To Consider Purchasing Life Insurance as an Investment

All life insurance policy purchases should be carefully considered within the context of a financial plan. When contemplating whether to use a life insurance product as an investment instead of only as a method of protection, there is a much higher threshold for appropriate suitability. It is prudent to discuss any potential purchases with a fiduciary financial advisor who is required to consider products that will be in your best interest.

A life insurance policy could be a worthwhile investment for someone who is already wealthy and looks at life insurance not only as an investment for themselves but also for their heirs. Life insurance, either as protection or an investment, is still meant primarily for passing on assets and wealth to the next generation.

The cash value growth available through either whole life or universal life will have a higher cost than similarly performing investments in a bank account or investment account. Therefore, the best time to use life insurance as an investment is when an individual has already exhausted or satisfied all other investment opportunities.

For example, someone who is not already maxing out their 401k or IRA contributions should not buy life insurance with the intention of using it as an investment. Owning a policy for the protection against untimely death is the best and primary use for life insurance, and for that purpose, most should choose term life.

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Alternatives To Investing in Life Insurance

Permanent life insurance is meant to be a product that lasts a lifetime. For this reason, it has great benefits for those that use it correctly, but it is not a one-size-fits-all product. Like any financial tool, inappropriate use, either for the wrong reasons or at the wrong time, can be costly. Fortunately, there are some alternative options available if life insurance doesn’t align with your financial goals.

Investment Alternatives

Tax-Deferred Savings
  1. 401(k)/403(b)/457 or other employer-sponsored retirement plan
  2. Traditional or Roth IRA
  3. Health Savings Account
  4. Deferred annuities (fixed or variable)
  5. 529 (college savings) plan
Conservative/Guaranteed Investment
  1. Bank CDs
  2. Government bonds (treasuries, TIPS, I-Bonds, state municipal bonds)
  3. Deferred fixed annuities
Retirement Income
  1. Employer-sponsored retirement plans, IRAs
  2. Income annuities (period certain, joint contracts, or return of premium riders can offer benefits to loved ones)
  3. Dividend portfolios
  4. Bond or CD ladders

Creating a balanced and diversified portfolio involves more than just stocks or bonds. Utilizing different account types, tax-deferral vehicles and asset locations can lay a strong financial foundation. Life insurance can play an important role in a financial plan, but its benefits and drawbacks should be fully understood before signing a contract.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 24, 2024