Is whole life insurance a worthwhile investment?
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You are unique, and so are your life insurance needs. While term life policies are the most popular life insurance option due to their lower premiums, they aren't the only option. Some people may need lifelong coverage, or want a policy that can help build financial assets. Depending on your budget and needs, whole life insurance policies offer several benefits to consider as you buy coverage. In this article, we'll help you understand:
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What is a whole life insurance policy?
Life insurance policies come in two primary types: permanent life and term life. The most popular is term life, primarily because it is typically less expensive. However, your policy eventually expires with term life insurance – either at the end of a set period (the "term") or when you reach a maximum age limit. At that point, you must either get a new policy at a higher rate — if possible — or go without protection.
Unlike term life, permanent life insurance does not expire. It's designed to cover you for your entire life. As long as you pay the premiums and don't cancel your policy, the policy will pay a death benefit.1 There are several kinds of permanent coverage, but whole life insurance is the simplest and most popular. While the premium is more expensive than for term life insurance, the list of whole life insurance advantages is significant:
Your whole life premium stays the same for life: The fixed premium of a term insurance policy typically ends after 10, 20, or 30 years. And with some other types of permanent coverage, the premium cost can go up later. But with whole life, the premium you pay when you take out your policy never increases. The younger and healthier you are when you take out your whole life coverage, the lower your rates will generally be – for life.
You build cash value at a guaranteed rate2: A whole life policy has a tax-deferred cash value that grows at a guaranteed rate every year.3
Your death benefit is guaranteed: With some other forms of permanent life insurance, the death benefit may vary based on how well the policy's market investments and cash value fare. With whole life, your policy is guaranteed to pay out at least the face value.
You may receive dividends.4: If you purchase whole life insurance from a mutual company, like Guardian, you may also receive dividends. Mutuals are owned by their policyholders, so annual profits can be redistributed as dividends each year that there is a profit. That has consistently been the case with Guardian policies, and those dividends can be distributed as cash, used to pay premiums, or reinvested in your existing whole life policy.
How does whole life compare to other kinds of permanent coverage?
Whole life insurance is the most popular and straightforward type of permanent policy, but it is not the only permanent option.
Universal life insurance, also called UL, is a type of permanent life policy that offers more flexibility than whole life but fewer guarantees.5 Unlike whole life, universal life premiums are variable, allowing you to raise or lower your payments within certain limits.6 This can make the advantages of permanent life insurance more easily attainable. However, universal life insurance offers fewer guarantees: minimum premium payments can eventually reduce cash value growth and erode its value. This can result in a need to pay more money in later years to keep the same level of coverage or death benefit. However, with sufficient funding, the cash value is guaranteed to grow at a specified minimum interest rate with tax benefits. Depending on the insurance company's investing performance or market interest rates, it can also grow faster. However, universal policies are not likely to earn dividends, even when issued by a mutual company. Other types of universal life insurance policies are available, and they can provide even more cash growth potential, albeit with fewer guarantees.
Indexed universal life policies, also known as IUL, tie cash value growth to the performance of an index, such as the S&P 500, with caps for minimum and maximum rates of return.7 For example, in a year where the index is up 20%, your money may only see a 10%-12% gain. Conversely, if your chosen index is negative for the year, your cash value may stay the same or even grow slightly (depending on the specific terms of the indexed policy). Each insurance company has its own selection of indices available, and you may be able to choose more than one. You may also be able to allocate a portion of your cash value to a fixed-rate interest account.
Guaranteed universal life policies, also called GUL, offer little or no cash value. Instead of providing cash value growth, this policy is structured to provide permanent coverage with lower premiums than whole life insurance. In many respects, it acts like a term policy that ends at the maturity date, i.e., when the policyholder turns a specific age (typically 100 or older). This type of policy is not suitable for building wealth.
Variable universal life insurance policies, also referred to as VUL, give you the option to tie cash value growth to grouped investment sub-accounts.8 With these policies, the insurance company gives you the same asset, performance history, and fee information that a brokerage would, and you have to choose how much to invest in each option. However, unlike with whole life, your cash value can actually decrease if the funds you select do poorly.
Finally, as mentioned earlier, term life insurance is a popular form of life insurance, but there is no cash value, and it does not provide permanent coverage. Term life only lasts for a specified amount of time (or "term"), although many policies can be converted to a permanent policy at some point before they expire. You are only paying for life insurance with no wealth-building component, so the cost can be significantly lower than whole life.
Pros and cons of whole life insurance at a glance
Pros | Cons |
Permanent protection that lasts your entire life | Significantly more expensive than term life |
Premiums never increase | Best to take out when younger for more affordable premiums |
The death benefit will not decrease | Your protection needs may change as your life changes |
Builds tax-deferred cash value at a guaranteed rate | Cash value may grow at a slower pace than some other permanent policies |
May pay dividends (if purchased from a mutual insurer) | Requires paying higher premiums compared to term |
Cash can be borrowed without a credit check9 | Loans against the policy are charged interest |
You can withdraw money from your policy | You may have to pay taxes on money withdrawn from the policy |
One of the simplest forms of permanent insurance | More complex than term life |
How whole life insurance works as an investment
The most important part of any life insurance policy is the protection provided by the death benefit payout. However, because a whole life policy builds cash value, it can also function as a relatively low-risk, long-term investment that supplements other savings. That's because the cash value component grows at a guaranteed rate, insulated from market fluctuations. It's an asset you can access during your lifetime for policy loans or surrender for cash to help supplement your retirement funds. Cash value can even be used to help pay premiums and keep coverage in force later in life.
Dividends can add value
While not guaranteed, mutual insurance companies, like Guardian, may pay annual dividends to participating policyholders based on company performance. These can increase a policy's value beyond the growth rate guarantee and help build your overall wealth.
Unique tax advantages
The cash value growth in your policy is tax-deferred, so you don't have to pay taxes on it every year. When you borrow against the cash value, the money you withdraw up to the premiums paid may not be taxed as income. Also, the death benefit is paid income tax-free to your beneficiaries.
Is whole life insurance a good investment?
Like any other financial product, whole life has advantages and disadvantages, along with some unique features—starting with the fact that the death benefit is guaranteed and payable in full from the first day the policy is in force. It also provides permanent coverage, guaranteed premiums that don't increase, guaranteed cash values, and offers possible dividends. However, it is typically more expensive than most other policies, and the cash value growth may be more limited than other permanent policies, depending on the performance.
Whether whole life insurance is worth it depends on your life situation and goals. If you want protection that lasts your entire life, then a whole life policy from a reputable provider can be an option to consider for your needs. It can also be worthwhile for older people who are concerned about estate planning strategies and reducing the effects of taxes on their heirs. And there are certain scenarios in which whole life insurance — with a permanent, guaranteed death benefit and tax-advantaged growth — is a particularly good choice. These may include:
Ensuring that a dependent beneficiary receives support after you pass away—even if its decades away
Funding a family or special needs trust for loved ones.
Having an added, tax-advantages way to build wealth after your other retirement accounts are maxed out
Distributing funds to beneficiaries in a way that avoids the uncertainties of probate
Diversifying a portfolio
In business, ensuring finds are available to buy out a deceased partner’s share or offset the impact of losing a key employee
To learn more, you can contact Guardian. We’ll help you find a nearby financial professional who will take the time to learn about your unique situation, listen to your concerns, and clearly explain the different insurance options that best fit your needs and your budget.