Is whole life insurance a good investment? The bottom-line answer is that it is not an investment. It is a savings alternative that provides many additional benefits.
So you don’t want to think of whole life insurance as an investment. However, for wise and sophisticated investors, it can make your investing more efficient. Furthermore, it can unlock the benefits of your wealth once you’ve earned it.
Garrett Gunderson and I co-authored the bestselling book, What Would the Rockefellers Do? In it, we answer the question of is whole life insurance a good investment in great detail. Get your free audiobook and or free hardcover copy now to learn more.
Whole Life Insurance is a Better Savings Alternative than Banks
Whole life insurance is a permanent policy that builds a cash value with a guaranteed interest rate plus dividends. You can use the cash value as a savings vehicle and bank alternative. It can create a structure to save on insurance costs from term life, long-term care, or even taxes.
So how does whole life insurance work as an investment? It doesn’t, exactly. But you can save money in a properly structured, optimally funded whole life insurance program. You can coordinate those savings with all of your money-making decisions.
You can use your own money instead of a bank’s money. You set up a loan scenario where you are in control of your payback periods. You use your cash value to access money from the insurance company.
This can be an asset allocation choice instead of other fixed-income vehicles like bonds, money markets, or certificates of deposit. It removes the risk of capital depreciation when interest rates fluctuate. This is because your cash values and minimum interest rates are guaranteed.
This gives you access to money during times of distress or economic downturns. Not only does your money have minimum guarantees, but once a dividend is paid, it becomes guaranteed.
So is whole life insurance a good investment? Not exactly. But it is the foundation of wise wealth planning.
Whole Life Insurance is Not an Investment
It is important to emphasize that whole life insurance is not an investment.
From a cash standpoint, it is a mid-term strategy to store your money with long-term legacy benefits. It gives you access to a myriad of benefits that allow for the Rockefeller Method of wealth planning. This includes a death benefit that grows with paid up additions and dividends.
You may have heard the term “overfunded whole life insurance.” We prefer to call it properly structured, optimally funded whole life insurance. This means you pay more into the cash value of the policy than is required to cover the cost of insurance. This is done with paid up additions (PUA).
However, there is a capitalization period. This means that for the first few years, you will have less cash value than you would with a savings account. If you set it up with the wrong company, don’t fund it properly, or design it poorly, it could take a decade or longer to break even.
So is whole life insurance a good investment for you? Not if you need access to the money immediately.
Whole Life Insurance Gives You Control
Optimally funded whole life allows you to retain control of your money rather than hand it over to a bank. Banks may or may not lend you money and you may or may not like their terms.
With insurance, you can access your money anytime through a withdrawal or take out a loan from the insurance company. This allows you to keep your money earning interest while you borrow. It also gives you tax advantages.
Is whole life insurance a good investment compared to other investments? This obviously depends on what you invest in. But your highest rates of return will likely not come from your cash value. Your best-performing investments will likely be things you fund with your cash value.
Use Whole Life Insurance as an Investment and Pay Yourself Interest
Instead of paying interest to the bank, you can earn interest on your money while borrowing from the insurance company. This can be done while building your legacy plan and Rockefeller Method trust at the same time.
Whole Life Insurance as an Investment for Auto Loans
One of the most common ways we and our clients leverage the living benefits of whole life insurance is to fund auto loans. In fact, as I write this, my son Kadin is doing it, as is my assistant, Lacey, and multiple clients.
Wendy and I started paying into an optimally funded whole life policy for Kadin when he was young. We’ve paid $350 per month into it for over twenty years now. It currently has about $60,000 in cash value.
When Kadin bought his new car, he took out a $20,000 loan against his policy. The life insurance company loaned him $20,000 at 5% interest and put a $20,000 lien against his cash value.
When looking to purchase a car, Kadin checked out interest rates with various banks and credit unions. He was quoted 7.5–8% interest on auto loans.
Instead of getting a loan through them, he took out a loan from his policy, using his cash value as collateral. His cash in the policy continues to grow uninterrupted. He used the current auto loan rate at the local bank, 7.5%, to pay himself back.
5% interest went back to the life insurance company, but he kept the 2.5% spread. His policy continues to grow uninterrupted while he borrows the money.
The spread between his cash value loan interest rate and the bank auto loan interest rate is only 2.5%. However, this represents a 50% better return, comparatively!
This example could be used for any investment that yields a positive rate of return on a taxable basis.
Whole Life Insurance as an Investment for Real Estate Loans
For example, one of my clients, Troy, does hard money loans. When I met Troy, he was taking cash from his regular bank account and lending it to others.
For ease of calculation, I’m going to assume 10% earnings on his money. If Troy took $10,000 cash from his regular bank account, loaned it to someone, and made a 10% return, that would be a $1,000 gain in a year. If he were in a 30% total tax bracket, he would pay $300 in tax, netting him $700.
But what if Troy were to overfund a whole life policy and use the cash value, instead of his personal bank account, to lend to borrowers?
Let’s assume he does the same deal and borrows $10,000 from his cash value, lends it out, and makes a $1,000 profit in interest. However, before he pays taxes on the $1,000, he writes off the $500 he pays the life insurance company to borrow the $10,000 through the policy loan. This leaves him with a net taxable gain of $500.
In his case, it was 5% to borrow the $10,000 from his policy; 5% on $10,000 is $500 in interest paid to the life insurance company. A $1,000 gain minus the $500 paid to borrow the $10,000 is a net taxable gain of $500. The 30% tax on the $500 gain is $150, and $150 minus the $500 equals a net $350.
But that’s not the end of the story. Because he uses his cash value as collateral for the loan, the life insurance company puts a lien against the cash value. The cash value grows tax-free by 4.5%—for a total of $450.
A $350 net gain plus $450 is $800. This is opposed to the $700 net gain Troy would realize if he used a regular bank account for this type of investment. While $700 to $800 is a $100 gain, it also represents a 14.29% profit.
Other clients have used this strategy for equipment loans and leases, and to inject cash surpluses into their businesses.
This is how whole life insurance can be a good investment.
Whole Life Insurance is a Good Investment Because of the Many Benefits
Don’t keep the majority of your cash in banks where it’s exposed, taxable, and without additional benefits.
Instead, store your money where you gain additional advantages, including a death benefit, asset protection, and dividends.
Whole life insurance offers guarantees from 2–4%, plus a probable dividend minus the cost of insurance.
I only recommend companies that have paid above the guarantee for at least 100 years or more without missing a single dividend.
Depending on your age, health, and how you fund, you can net between 1–6%. (Or higher, if interest rates keep increasing). With a whole life policy, dividends typically move slower when interest rates increase or decrease.
So is whole life insurance a good investment? Whole life insurance is not an investment in and of itself. Rather, it is a value and capital capture process to store your money until it is time to invest.
It is a place to protect your economic replacement value, with the following benefits:
- When you die, your trust is funded, income tax-free.
- If you become disabled, the premiums are covered (assuming you have a waiver of premium rider).
- If you are sued, your money is either partially or fully protected (depending on the state in which you sign your policy).
- If the market goes down, your money is safe.
- You create contingencies for future cash flow by having a permanent death benefit (more explanation to come).
Use whole life insurance as an investment to automatically save and deliberately invest. The money will be available when opportunities arise.
Whole Life Insurance is a Good Investment Within the Right Philosophy
“Is whole life insurance a good investment?” is an incomplete question. A better question is, is whole life insurance a good investment for you?
Because the truth is, whole life insurance as an investment is not the best strategy for everyone. Investing in whole life insurance should be done within the right wealth planning philosophy.
We promote whole life insurance as an investment within the context of our core philosophy. This is comprised of the three points of the AIS triangle: Asset, Investment, Strategy.
Your #1 ASSET is You
Your first and best asset is YOU. Not your business or any investment. We prioritize protecting and growing you above all else.
Your human life value is a measure of your future economic worth. But it’s more than this. It also includes your knowledge, character, values, mindset, and skills applied productively to create value for others.
To grow your wealth, grow your human life value by investing in yourself.
Start now by claiming your free hardcover copy of What Would the Rockefellers Do? by Garrett Gunderson and myself.
Your #1 INVESTMENT is Your Business
As an entrepreneur, your business is the main source of your income and long-term wealth. This is where you have the most passion, knowledge, and control. It’s also where you have the most opportunities for wealth creation.
If you’re going to take any risk, do it in your business. But don’t do it with any other outside investments.
Whole life insurance is a good investment because it helps you mitigate your risk.
Your #1 STRATEGY is Guaranteed, Protected, and Liquid
Your number one strategy is to store extra cash in places that are guaranteed, protected, and liquid.
The wealthy do not gamble or speculate. This means using whole life insurance as an investment.
This is like locking your money in a vault. You still have access to it for other investments. But you have a solid foundation for wealth with certainty and control.