Is Whole Life Insurance a Good Investment?

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

Whole life insurance isn’t an investment—it’s life insurance. Its main purpose is to provide your beneficiaries with a death benefit when you die.

But a whole life policy can offer much-needed flexibility to your broader financial plan. That’s especially true when paired with actual investments like stocks, bonds and a diversified portfolio.

Below, you’ll learn what whole life insurance is, how its features can be paired with investments and the different roles that it could play in your financial plan.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that, unlike term life insurance, is designed to last your entire life. In other words, it never expires. As long as you pay the required premiums, a whole life policy will pay your beneficiaries a death benefit someday—whether you die next year or 50 years from now.

Another way that it differs from term life is that whole life insurance policies accumulate cash value as you pay your premiums. This cash value is tax advantaged and guaranteed to grow over the course of your policy.

And once you’ve accrued enough of it, you can tap into it while you’re still alive. Cash value is where the real flexibility of a whole life policy shines through, because you can use it for whatever you want or need—including to help you reach your financial goals while you’re still living. It’s important to note, though, that accessing your policy’s cash value will reduce your death benefit.

Is whole life insurance worth it?

A whole life policy can add a lot of value throughout your life, such as:

• Peace of mind: The policy’s death benefit provides immediate peace of mind that your family will be taken care of financially regardless of when you pass.
• Financial flexibility: The policy’s cash value provides you with a source of funding that’s available throughout your life.
• Guaranteed growth: Cash value grows at a guaranteed rate that is independent of market performance, offering protection against volatility.
• Legacy building: Because your policy’s death benefit never expires, it can form the foundation of whatever financial legacy you intend to leave—whether it is through an inheritance to your heirs or some form of charitable giving.

Consider life insurance within your financial plan

A financial plan can mean different things to different people. At its core, a financial plan is a road map that shows you where you are today, where you want to go and how you’ll get there.

So, a plan should consider a range of financial options—such as investments for growth, insurance for protection and guaranteed growth, and guaranteed income in retirement through annuities. In addition, planning with a thorough financial advisor will help you take into account your debt, emergency savings, cash flow, estate planning and other financial considerations.

Combine life insurance with investments

The different financial options are paths (and sometimes detours) that you can use to get to your financial goals. Having multiple options can benefit your plan. In fact, independent research found that a plan that uses life insurance alongside investments and eventually an annuity can result in more retirement income and more money for your legacy than a plan that includes only investments.

Now let’s take a closer look at how whole life insurance can help you reach your financial goals throughout your life.

Whole life insurance can flex to help you reach many financial goals

At first glance, it may be difficult to see the true value of whole life insurance. That’s because in almost any case, there’s a best product to help you reach a specific financial goal. Retirement? 401(k). Protection for your loved ones? Term life insurance. College savings? 529s and other college savings plans.

But if you want to use a 401(k) to help fund college, you’ll typically pay a penalty. And term life insurance doesn’t help with anything other than a death benefit. Whole life insurance is a financial tool with flexibility to help you meet different goals throughout life. That’s where its true long-term value really shines. Let’s consider some examples.

1. Goal: Financial protection for your family

Many people think of term life insurance for this goal. After all, term insurance tends to be the most cost-effective way to get a large death benefit. But term life insurance will expire someday, and it offers no cash value. With whole life insurance, you get immediate death benefit protection plus its additional benefits. And many people use a mix of term and whole life to get the death benefit protection they need along with the additional benefits of whole life—at a cost that fits their budget.

At Northwestern Mutual, you can easily convert term life insurance to whole life over time. Many people start with a large term policy and a smaller whole life policy. Then, as the years go by, they convert portions of their term insurance into whole life.

2. Goal: Grow your wealth

People often think about retirement accounts or traditional investments for this goal. And those are both great ways to accumulate funds. But any market-based investment can be somewhat volatile. In addition, with accounts like a 401(k), you’ll typically pay a penalty if you’re under 59½ and use that money for something other than retirement, like paying off debt.

Whole life insurance cash value can be a good tool to have alongside investments because it’s guaranteed to grow in a tax-advantaged way. It’s also available at any time (although using it will reduce your death benefit). Because it’s not affected by the market, it can be a stable source of funding that you can tap throughout your life.

3. Goal: Set aside funds for emergencies

It’s a good idea to have access to about six months’ worth of your expenses (and more when you get to retirement). A plain old bank account, high-yield savings account or money market account might seem like the perfect place to keep these funds. And it’s a good idea to keep some cash there.

But bank accounts typically don’t offer much in the way of interest on your funds, especially for money held in a checking account or traditional savings account. Once you accumulate cash value with whole life insurance, it may increase faster than funds you keep in the bank, and it’s easily accessible. And remember that whole life insurance cash value is guaranteed to grow tax-deferred.

4. Goal: Reliable, tax-efficient income in retirement

Your 401(k) is a great way to save for retirement. But when it’s up to you to create your own retirement income, investments alone can leave you vulnerable. Having a mix of different assets to draw from in retirement can help you squeeze more out of your dollars. In retirement, whole life insurance cash value can help you ride out market downturns (remember, it’s not affected by market swings).

In addition, it can help you be more tax efficient with your withdrawals. That’s because you can withdraw the basis (essentially, the amount that you paid into a policy) tax-free. And if you borrow against your cash value, you won’t owe tax (so long as the policy remains in place).

5. Goal: Leave something behind for your family

Among all the ways whole life insurance can help you reach financial goals throughout your life, this is perhaps one of its greatest values. Knowing that your family will receive the guaranteed death benefit can help you be more confident about your financial legacy.

Understand when whole life insurance is worth it

If you’re simply looking to grow your money as much as possible, investments alone—like stocks, bonds or real estate—may feel like the best option. This can seem especially true if you’re young and investing for the long term, when you can take on more risk in exchange for higher potential returns.

But 10, 20 or 30 years from now, your priorities may be different. When you get to the point where you need your savings, protecting it and making it last will become more important. Unfortunately, if you haven’t given your assets time to grow, it could be too late.

That’s why the best financial planning includes a range of financial options that reinforce each other. Whole life insurance isn’t an investment, but the long-term value it provides can help you feel more confident about your money over time. It’s not always right for everyone, but it can often add real value to your financial plan.

Your Northwestern Mutual financial advisor can help you learn more. When you connect with an advisor, they will get to know you and what’s important to you. Based on your situation, your advisor can recommend the right mix of insurance and investments to help you achieve your goals. Your advisor can also help you take advantage of opportunities and navigate blind spots. That way, you can feel confident you’re on the right path to reach your goals.

There are different ways to use your policy’s cash value. These different methods have advantages and disadvantages. There may also be tax implications. Whether you take your money in the form of a surrender, withdrawal, or loan, the policy’s value and death benefit will be reduced. Taking money out will also affect dividends paid on the policy, if those are available. Any money withdrawn from the policy, beyond what you paid in cumulative premiums, will be taxable. Loans are not taxable when they are taken, and can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or cash values when the policy terminates, or the insured person dies. Repaying loans from cash values (other than death benefit funds) can trigger a significant tax event, and there may be little or no cash value left to pay the tax. If loans and accrued interest reach the amount of your cash value, additional cash payments are necessary or the policy will terminate. Policyowners should consult with their tax advisors about the impact of using their policy’s cash value.