Is whole life insurance a bad investment?


Many advisors who strictly sell term life insurance will tell you that whole life insurance is a “bad investment.” This is because it may not generate huge returns like the open stock market might. However, whole life insurance can be an excellent long-term, steady investment if it suits your risk appetite.

By Parmeet Singh
Insurance Advisor, LLQP
11 min read

If you’ve been searching for life insurance quotes, you’ll find that there are two types of life insurance: term life insurance and whole life insurance. Perhaps you’ve come across advisors, bloggers, or even TikTokers encouraging you to opt for a term life policy. They brag about its affordability and say that permanent life insurance policies are a bad investment. But with any sort of insurance or investment, using a blanket statement of “good” or “bad” isn’t really fair.

There is no one-size-fits-all solution for insurance. So, let’s dig into three common claims and misconceptions made about whole life insurance to find out if it’s a good investment or not.

Whole life insurance definition

Whole life insurance policies are permanent, meaning you get lifelong coverage. This type of life insurance guarantees your beneficiaries receive a tax-free death benefit regardless of when you pass away. This is in contrast to term life insurance, which only provides coverage for a set amount of time. The terms are usually 10, 20, 25, or 30 years. If you die after that term is up, there is no payout.

Other than the policy coverage period, some permanent policies offer living benefits, investment vehicles, and savings accounts. Because the payout is guaranteed with permanent life insurance, the coverage can be used for funeral expenses, end-of-life medical bills, and other final costs.

Whole life insurance is a bad investment

Those in favour of term life insurance will argue that as an investment whole life insurance is “bad”. Often, they’ll say it’s better to buy a cheaper term life policy, and use your excess funds to invest in traditional stocks as opposed to whole life investment portfolios. It’s true that you may be able to make better returns this way — but the keyword here is “may.”

If someone spent time learning the tools it takes to become a savvy trader, they could make millions. But, the reality is that most of us don’t have the time or money needed to get rich off of the stock market.

Whole life insurance can actually be a good investment for two main reasons.

First, your beneficiaries are guaranteed to receive a tax-free payout upon your death. This is great if you want to ensure those you leave behind are left with some financial aid or stability.

Second, you can access funds from your policy during your life. When you pay your premiums, that money is used in two ways. Part of the money is used to cover the cost of insurance, meaning it goes toward the final payout. The other part of the money is invested in a portfolio that is managed by the insurance company.

The income made on these investments gives the policy a cash value that is available for you to withdraw from, borrow, or use as loan collateral. Because of this additional benefit, sometimes this type of insurance is called “cash value life insurance.”

With permanent policies, you may also be entitled to dividends from the investments made with your premium payments. You can use this annual return to purchase additional insurance or reduce your monthly premiums.

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Whole life insurance is expensive

It’s true that permanent life insurance policies are more expensive than term life insurance. In fact, whole life insurance premiums can be five to 15 times more expensive than term payments. The exact difference in the cost of insurance will vary for individual policies, but that difference can be significant for those looking for a more budget-friendly life insurance policy.

However, this difference in premium cost isn’t without reason. Whole life insurance offers lifelong coverage, cash value, and investment options.  Another thing to note is that this type of permanent policy generally has guaranteed level premiums. This means you will pay the same amount for the duration of the policy (i.e. for your whole life). So, if you apply when you’re younger and healthy, the premiums can be quite reasonable and much more affordable than if you were applying later in life.

With term insurance, your premiums may increase with each term renewal or new application, creating quite the sticker shock later in life.

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You have to surrender the policy to benefit from the cash value

As mentioned above, the cash value of your whole life insurance policy is grown from the premium investments made by your insurance provider.

You can access the cash value of your policy in a few ways. One way is to surrender, or cancel, your policy. But, this will leave you without an insurance policy. In this way, the cash value could be considered an emergency fund. When you surrender your policy you will receive the cash surrender value which is your cash value minus certain surrender fees. These are charges you would have agreed upon at the start of your policy, such as a cancellation fee. They can range from the hundreds to the thousands.

However, you may be able to utilize your cash value without cancelling your policy. Some policies allow a partial withdrawal. But, this will ultimately reduce the value of your life insurance death benefit. You can also take a loan out on the cash value. But, if that loan is not repaid during your lifetime, its remaining debt will be deducted from the final payout.

There will be a fee involved with a withdrawal or policy loan. It could be a flat rate cash payment (e.g. a few hundred dollars or more) or it could be a percentage fee based on the cash value of your policy. These policy loans may include interest fees as well.

The tax implications of withdrawing your cash value can be complicated, especially if you have made any capital gains on the policy. It’s best to speak to an accounting professional to before choosing this option.

It’s also important to note: while your beneficiaries are entitled to your death benefit, they are not entitled to the cash value of your policy after you die. At that time, the cash value is absorbed by the insurance company.

However, with participating whole life insurance policies (and some universal life insurance policies), it is possible to use the dividends to buy up your death benefit coverage using the tax-deferred growth of the policy’s investment component. This is known as enhanced life insurance.

Is term life insurance better than whole life insurance?

The insurance policy that works best for you will depend on a few factors such as your budget and your motivation for getting a life insurance policy in the first place. If you want a policy that ensures your children are financially taken care if you die while they are minors, a term policy could be sufficient. If you want to guarantee that your beneficiaries receive a death benefit to cover your funeral costs or the estate taxes that might be put on an inheritance, whole life insurance might be the better choice.

One common claim is that you will pay more for permanent life insurance policies but end up with the same death benefit as a term policy. This is both true and false. Let’s say you purchase a ten-year term life insurance policy with $50,000 in coverage. The cost of term life premiums will be less than those for a whole life policy with the same coverage of $50,000. If you die within the 10-year term, you will have spent less for that $50,000 payout. However, with a term policy, if you do not die within the 10-year term, there is no benefit at all. Your more expensive premiums with whole life insurance guarantee a payout whether that be 5, 10, or 30 years after purchasing the policy.

The key difference is paying for a policy if you die (term life insurance) versus when you die (whole life insurance). For some, they are willing to take the risk of the term policy if it means less expensive premiums. For others, they want that guaranteed payout of a whole life policy and the knowledge that when they pay their premiums, it was for something after all.

To answer the question of is term life better than whole life, you have to ask which you value more—a better price now or a guaranteed payout later?

Is whole life a good retirement investment?

Whole life insurance can be a valuable retirement investment, especially for those who aren’t able or willing to save on their own. You can make a significant rate of return over time off of the cash value of your policy if you use it as an investment tool. This cash can also be a handy way to help you meet your financial goals after retirement. It just takes some financial planning with your life insurance agent and a comprehensive understanding of your policy and cash withdrawal terms.

There’s a misconception that permanent coverage premiums will eat away at your retirement income. This is possible if sufficient financial planning isn’t completed prior to retirement. If this is a concern, here are some steps you can take so premiums don’t leave you in a bad financial situation. 

  1. Budget your premiums
    When setting up your life insurance plan, ensure you include your monthly premium payments into your post-retirement budgeting, not just your income-earning years.

  2. Choose a limited pay plan
    Limited pay plans condense a lifetime of premiums into a shorter time period. You only pay your annual premium for a set number of years. Some examples include paying for 8, 10, or 15 years only. After this payment term is up, you get to keep the policy without paying any more premiums. Limited pay premium payments are higher than traditional monthly or yearly payment plans, but you only pay during your prime earning years, freeing up your retirement income.

  1. Utilize policy dividends
    With participating whole life policies and universal life policies, you are entitled to policy dividends as well as the living benefits of your cash value component. This kind of permanent insurance offers attractive options for using your dividends to reduce your premium payments, as a cash payout, or to purchase a combination of term and whole life insurance for a cheaper rate — this is known as enhanced whole life insurance.

What are the investment advantages and disadvantages of whole life insurance?

A whole life insurance policy is not advantageous for those with limited funds or those who want to get rich quickly. It is advantageous for those who can afford to pay premiums and are willing to take some time to understand the ways they can grow their policy.

Investment pros and cons won’t be the same for all; everyone has different financial limitations and investment know-how. A whole life insurance policy is not a suitable investment if your aim is to make a lot of money fast — it’s more of a slow and steady gain. Life insurance companies generally choose stable investment portfolios, such as government bonds, so they can competitively report on the annual rate of returns.

A whole life insurance policy is advantageous if you’re looking for consistent growth and a guaranteed life insurance payout. There are many ways to grow the value of your policy, but it requires an intimate understanding of your finances and policy stipulations.

Is whole life insurance actually bad?

Insurance needs differ for everyone. We all have unique situations, needs, and financial circumstances that determine what we purchase. Term coverage can offer great peace of mind for a period of time, but once the term is up, you’re left looking for coverage again. Whole life insurance can offer a guaranteed payout, but it may lack affordability depending on your budget and needs.

Determining which life insurance type suits you best can be complicated. It comes down to being honest about your expectations, needs, and financial situations. All of this can be discussed with our advisors who will help you decide which kind of affordable life insurance policy best offers you peace of mind.

Start a conversation with an advisor today to get life insurance quotes from over 25 life insurance companies and find the ideal policy for you!

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  • Whole life insurance isn’t designed as an investment tool for those who want to get rich quick
  • Whole life insurance utilizes stable, steady investment portfolios to grow your cash value over your whole life
  • Whole life insurance can be more expensive than term life, but the living benefit of the policy’s cash value, dividends, and other savings opportunities
  • Choosing whether whole life is a good investment for YOU, will depend on your personal financial goals

By Parmeet Singh
Insurance Advisor, LLQP
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