Is Whole Life Insurance a Good Investment?

Sean McGinn is assistant director of risk product positioning at Northwestern Mutual

Is whole life insurance a “good” investment? That’s a tricky question because a “good” investment is relative to each person’s situation. In the most literal sense, whole life insurance is not an investment—it’s life insurance. Its main role is to provide a death benefit for your family someday. And with whole life insurance, the death benefit never expires. So long as you pay the required premiums and keep your policy in place, it will pay a death benefit someday. In addition, whole life insurance also accumulates cash value that’s tax-advantaged and guaranteed to grow. 

Is whole life insurance worth it? 

Just as you might “invest” in a home renovation to add value to your home, a whole life insurance policy will accumulate value that you can access throughout your life. Ultimately, you invest in assets that help you achieve financial goals, and whole life insurance becomes an asset that can add significant value throughout your life. You get the immediate peace of mind since the death benefit will protect your family. Cash value growth eventually gives you a source of funding that’s available throughout your life (although accessing cash value will reduce your death benefit). And ultimately, the death benefit can become a key part of your legacy. 

Life insurance and 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. That means a plan can include a range of financial options, including investments for growth, insurance for protection and guaranteed growth, and even annuities for guaranteed income in retirement. In addition, planning will look at things like your debt, emergency savings, cash flow, estate planning and other financial considerations. 

Combining 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 will 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 financial goal. Retirement? 401(k). Protection for your loved ones? Term life insurance. College savings? 529s. 

But if you want to use a 401(k) to help fund college, you’ll typically pay a penalty. Term life insurance doesn’t help with anything other than death benefit. Whole life insurance is the only product that can flex to help you meet different goals through life. That’s where its true long-term value really shines.  

1. Goal: Financial protection for your family  

Many people first 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. It’s also not an either/or—many people use a mix of term and whole life to get the death benefit protection they need along with the additional benefits whole life offers at a cost that fits their budget. 

How much life insurance do you need? Our whole life insurance calculator can help get an idea.

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 use that money for something other than retirement. 

Whole life insurance cash value is guaranteed to grow in a tax-advantaged way. It’s also available at any time (although accessing 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 good old bank 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. Once you accumulate cash value with whole life insurance, it may grow faster than funds you keep in the bank, and it’s easily accessible. That means you can put the money that you’d otherwise keep in the bank to work elsewhere. 

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 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 deliberate about your legacy. 

So, when is whole life insurance worth it? 

If you’re simply looking to grow your money quickly, investments alone may seem like the best option now. But 10, 20 or 30 years from now, your priorities may be a little 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 positioned your assets prior to that time, 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. That’s the value it adds to your financial plan. 

A 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. 

Cash value accumulates slowly in the early years of the policy; it typically takes several years for cash value to become a useful source of funds. There are different ways to use your policy’s cash value. These different methods have advantages and disadvantages. Utilizing the cash value through policy loans, surrenders or cash withdrawals will reduce the death benefit and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.