Insurance and investments don't mix.
For years, financial advisor Suze Orman has gotten questions from listeners about whole life insurance. Many of them have wanted to know specifically about using whole life insurance as an investment. This idea is usually prompted by a life insurance agent or financial advisor.
Orman's answer is always the same -- no, no, no. She even says, "Whenever someone tries to sell you a life insurance policy with some story that it is a fantastic way to invest, you are to shut down that conversation and never work with that person again." It may sound extreme, but she's right on the money here.
Why Suze Orman doesn't recommend investing in whole life insurance
Before getting into why whole life insurance is a poor investment, let's go over how this "investment" works. Whole life insurance is, first and foremost, a life insurance policy that pays out upon your death. Unlike term life insurance, which lasts for a set amount of time, whole life is permanent.
The insurance company invests a portion of your premiums, giving your policy a cash value. After you've put in enough money, you can access it through withdrawals and loans. When you die, these withdrawals and any outstanding loans are subtracted from the death benefit.
On the surface, it might seem like a reasonable deal. But according to Orman, there are a few things the people pushing these policies don't tell you:
- The annual fees for your insurance policy's portfolio will be much higher than what you'd pay in a low-cost mutual fund or exchange-traded fund (ETF).
- There will be a hefty cash surrender fee if you want to cash out your plan early.
- The real reason life insurance agents and financial advisors push these plans is because they get huge commissions.
It's also worth mentioning that whole life insurance policies tend to have very conservative investment portfolios. Since the insurer manages your portfolio, you can't decide how to invest your money.
Lots of people prefer a hands-off investing approach, so this isn't all bad. However, you could likely get a much better return with a mutual fund or ETF that isn't as conservative.
What you should do instead
As Orman puts it, "investments are investments, insurance is insurance." It's much better for you financially if you keep the two separate.
For your investments, you have several options. If your employer offers a 401(k) plan, this is a good, tax-advantaged way to save for retirement, especially if your employer will match your contributions up to a certain amount. There are also two types of individual retirement accounts (IRAs) you can open through online stock brokers:
- With traditional IRAs, your contributions are tax deductible, and you pay income taxes on withdrawals.
- With Roth IRAs, contributions aren't tax deductible, but withdrawals are tax-free.
Once you've chosen a retirement plan, make sure to pick how you want your money invested, as well. Retirement accounts offer a variety of investment funds, and IRAs also let you pick stocks.
As far as life insurance goes, term life insurance is generally the better option. Premiums are much cheaper, and most people don't need life insurance to cover them their entire life. Pick a term life policy that will last for as long as your family will be relying on your income, and you're good to go.
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FAQs
The annual fees for your insurance policy's portfolio will be much higher than what you'd pay in a low-cost mutual fund or exchange-traded fund (ETF). There will be a hefty cash surrender fee if you want to cash out your plan early.
Why would life insurance not be used as an investment? ›
Limited Flexibility: Some types of permanent life insurance have limited flexibility when adjusting premium payments or death benefits, making them less attractive for certain investors who prefer more control over their financial planning decisions.
Why is whole life not a good investment? ›
The two main disadvantages of whole life insurance are its higher cost compared to term life insurance and the fact that any dividends or profits earned are taxed as income.
What is a disadvantage of using a whole life policy for saving? ›
Cons of Whole Life Insurance
Whole life is more expensive than term life, and you will receive a lower death benefit than you could get with the same amount of money with a term policy.
What are two disadvantages of using life insurance as an investment? ›
Disadvantages of buying life insurance
- It can be expensive if you're older or have health conditions.
- Whole life insurance can be unaffordable in the long run.
- Cash value can be a weak investment tool.
- Applying can be daunting.
Permanent life insurance can create value you can tap into while you're still alive — to pay for your children's college tuition, make improvements on your home or even fund a dream vacation. It could be a good option for those who have reached the caps on their investment accounts, like 401(k)s, IRAs, and 529 plans.
What is a better investment than life insurance? ›
Annuities offer better investment and income benefits while you're alive. Your return is higher because you aren't also paying for life insurance coverage. Instead, all the money is put toward an investment. Annuities also offer more income options, like guaranteed income for life.
Why does Dave Ramsey say no to whole life insurance? ›
For every $100 you invest in whole life insurance, the first $5 goes to purchasing the insurance itself; the other $95 goes to the cash value buildup from your investment, Ramsey says. But for about the first three years, your money goes to fees alone. Someone is making out, and it's not your beneficiary.
Do rich people really use whole life insurance? ›
Life insurance is a popular way for the wealthy to maximize their after-tax estate and have more money to pass on to heirs. A life insurance policy can be used as an investment tool or simply provide added financial reassurance.
What is the downside of whole life insurance? ›
A more complex product than term life insurance. Higher premiums than term life insurance. Could be costly if coverage lapses early.
Cash value? The pros and cons of term and whole life insurance are clear: Term life insurance is simpler and more affordable but has an expiration date and doesn't include a cash value feature. Whole life insurance is more expensive and complex, but it provides lifelong coverage and builds cash value over time.
Can you cash out a whole life insurance policy? ›
The cash value in your whole or universal life insurance policy can come in handy when you need funds for large, ongoing or unexpected expenses. There are four ways to get the cash from your policy while you're still alive: borrow, withdraw, surrender, or sell.
How much is whole life insurance for a 55 year old? ›
Whole life insurance rates chart by age
| Men | Women |
|---|
| Age 25 | $199 per month | $175 per month |
| Age 35 | $288 per month | $243 per month |
| Age 45 | $435 per month | $360 per month |
| Age 55 | $692 per month | $589 per month |
A financial advisor who makes a living through commissions has a strong financial incentive to include life insurance, as some insurance companies pay rather well for selling their products.
Who should have whole life insurance? ›
If you're a high net worth individual who has made all the allowable contributions to your tax-advantaged accounts like 401(k) plans or individual retirement accounts, you could use a whole life insurance policy to top up your tax-deferred savings.
Is life insurance worth it after 60? ›
Life insurance is a smart idea for most seniors. That's especially the case if you have a spouse, lack plans to cover end-of-life costs or don't have a long-term care insurance policy. The simple fact is that just about everyone has someone who loves them, depends on them or both.
Why is insurance not an investment? ›
In conclusion, insurance is not an investment. While insurance provides protection against unforeseen risks, investments are aimed at growing wealth over time. Insurance premiums are a form of risk management, not a form of investment.
Why should life insurance not be used as an investment quizlet? ›
Why should life insurance NOT be used as an investment? Cash value policies are more expensive than term insurance. You will become self-insured and not need lifetime coverage. The return value of cash value is small in comparison to investing the $ and buying a low-cost term policy.
Why should life insurance not be used as a savings plan? ›
This is true, but life insurance is one of the most expensive ways to invest. Whole life policies pay low to mid-single-digit dividends. All types of policies add the cost of insurance, selling and administrative expenses, and a host of additional riders to the total cost.
Which type of life insurance does not serve as a type of investment? ›
Term Life insurance Cons: If you outlive the term length, your coverage will end and you won't receive any benefits. You will not be covered your entire lifetime and your policy will not accumulate cash value like an investment account does.
