“Is life insurance an investment?” Ask a financial planner this question and you’ll get varied responses. The truth is it depends on the type of insurance you buy. Some insurance policies come with built-in components that are either tied to investment options or function as investments. But are these types of policies right for you?
In this article, we’ll explain when a life insurance investment makes sense and break down which insurance products qualify as investments. Plus, we’ll show you how to maximize your investment with a supplement insurance product called a paid-up additions rider and how to use your investment gains for a tax-free retirement.
Term vs. Permanent Life Insurance
The most common type of life insurance is term life insurance. It’s fairly simple to understand: You buy a certain amount of life insurance, and if you pass away during the specified term—usually 20 or 30 years—your insurance company pays out a death benefit to your beneficiary. It is the least expensive type of life insurance and is used to cover final expenses, pay off outstanding debts, and supplement living costs for your loved ones.
Term life insurance does not have an investment feature.
Permanent life insurance is a bit more complicated. You still buy a certain amount of life insurance, but your coverage lasts for the duration of your life and is guaranteed to pay out a death benefit regardless of when you pass away, provided your premiums are paid. It’s more expensive than term life insurance. In addition to covering final expenses, paying off outstanding debts, and supplementing living costs for your loved ones, permanent life insurance can be used to pass on generational wealth, increase cash flow and liquidity, fund a tax-free retirement, and protect assets. These are called living benefits.
Permanent life insurance is able to offer these living benefits thanks to a built-in investment feature called cash value.
Cash Value as an Investment
The reason permanent life insurance premiums are more expensive than term life insurance premiums is that, after you pay for your death benefit and administrative fees, the remainder of your payment goes into your cash value account, which resembles a high-interest savings account.
The cash value of a permanent life insurance policy grows tax-deferred, and you can borrow your cash value at any time tax-free. Policyholders typically borrow cash value in the form of a policy loan to pay for investment properties, generate business capital, pay for children’s college tuition, or to fund retirement.
The way your cash value grows inside your permanent insurance policy depends on the type of insurance policy you buy, and may or may not be guaranteed. Here are the most common types of permanent life insurance and how they grow wealth:
| Type of Insurance | Guaranteed Rate of Return | Non-Guaranteed Investment |
| Whole Life Insurance | Yes | Dividends based on insurance company performance (with mutual insurance company) |
| Universal Life Insurance* | No | Returns based on insurance company performance |
| Indexed Universal Life Insurance | No | Returns based on index performance |
| Variable Universal Life Insurance | No | Returns based on stock market performance |
*Guaranteed universal life insurance policies earn little to no cash value.
Indexed and variable universal life insurance policies assume more risk, although there is potential for greater investment upside. It should be noted, however, that fees for these types of policies tend to be higher and insurance companies often cap investment gains or limit your participation rate.
Whole life and traditional universal life insurance policies function a bit more similarly. The primary difference is that whole life policies offer a guaranteed rate of return and guaranteed level premiums for life. Universal life insurance premiums are flexible, which can be appealing to policyholders, but it’s important to understand your insurance company may raise your premium at any time.
In addition to a guaranteed rate of return, whole life policies underwritten by mutual insurance companies are also eligible to earn non-guaranteed dividends, which can work to further increase your investment gains. The top-rated mutual insurance companies we work with at Paradigm Life have historically paid out dividends for well over 100 years. You can reinvest dividends in your policy, use them to buy supplemental paid-up additions insurance, or cash them out tax-free up to your basis (the amount you’ve paid in premiums).
Who Benefits From a Life Insurance Investment?
The primary function of life insurance, regardless of which type you buy, is to provide a death benefit. But that doesn’t mean it can’t be used as a smart wealth building strategy too. Here’s who benefits most from using life insurance as an investment:
Individuals Looking to Pass Down Generational Wealth
Taxes are one of the biggest destroyers of wealth—even more so for high-net worth individuals. When it comes to passing down generational wealth, there are a number of taxes to consider, including estate taxes, gift taxes, and generation-skipping transfer (GST) taxes. Funding life insurance policies serves to generate tax advantaged wealth while an individual is still living and has the added benefit of paying out a tax-free death benefit to your beneficiaries.
In addition to purchasing whole life insurance policies, insurance can also be purchased and held in an irrevocable life insurance trust (ILIT), which further protects generational wealth from estate, gift, and GST taxes. This financial strategy has been used for hundreds of years by some of the wealthiest families in the world, including the Rockefellers, and continues to be used by high-net worth individuals today.
It’s worth noting that the federal estate tax exemption for 2021 is $11.7 million for individuals and $23.4 million for couples, with a top estate-tax rate of 40%, but individual states set their own estate tax thresholds and can be much lower—in some cases, as little as $2 million. Historically adjusted for inflation every year, the federal estate tax is set to drop back down to just $5 million in 2026, so if you’re looking for tax-advantaged strategies to pass down generational wealth and protect your assets, now is the time to act on a life insurance investment.
Individuals Already Maxing Out Qualified Retirement Plans
Having any type of retirement plan in place is essential and, unfortunately, something far too many people overlook. But a 401(k) isn’t the only way to save for retirement. A life insurance investment can also provide monthly income in later years.
By utilizing a dividend-paying whole life insurance policy from a mutual insurance company that is structured for retirement growth (also called a life insurance retirement plan, or LIRP), it’s possible to generate comparable income to a 401(k), IRA, or Roth IRA. And if you’re already maxing out your qualified retirement plan options, all of which place limits on your annual contributions ($19,500 and $6,000 for individuals under 50, respectively), a life insurance investment can be a secure way to boost your income in retirement.
Bonus: Whole life insurance even acts as a volatility buffer in years the market experiences a downturn.
Individuals interested in using whole life insurance to fund retirement should seek out policies structured for rapid growth of cash value utilizing a type of supplemental insurance called a paid-up additions rider. This rider allows the policyholder to “overfund” their policy while still falling within the IRS thresholds required to qualify for tax-advantaged growth. By frontloading the policy in the first 7-10 years, policyholders supercharge the cash value to earn more interest and potential dividends, which can result in hundreds of thousands more dollars for retirement.
With this strategy, policies tend to be “paid-up” or “self-paying” by retirement. The dividends are sufficient enough to cover the policy premiums. An individual then “borrows” the cash value in the form of tax-free policy loans to pay for retirement—accessing both their retirement savings and earned interest without tax implications. In this case, the loans are not intended to be paid back and interest accrued will be deducted from the policy’s death benefit when the individual passes away.
Explore the Case Study: 401(k) or Whole Life Insurance
Individuals With Low Risk Tolerance
Opponents of using life insurance as an investment will typically argue you can find greater returns with other investment vehicles, and they’re often right. At its core, life insurance is meant to offer a death benefit, not a get-rich-quick strategy. For high-net worth individuals and those who are already maxing out other investment options, permanent life insurance offers an additional way to grow wealth and diversify a financial portfolio. But they’re not the only ones who benefit from a life insurance investment.
Whole life insurance policies from top-rated mutual insurance companies offer one of the least risky investment options money can buy. For people who can’t tolerate market fluctuations but want greater guaranteed returns than those found in a high-interest savings account, whole life insurance is an appealing option. Add to that the fact you receive a guaranteed death benefit, and for people looking for both life insurance and a safe investment, it’s a no-brainer.
A properly structured whole life insurance policy not only grows wealth and protects your income and assets, it can also act as your financial foundation.
Individuals Who Own Businesses
If you’ve ever heard someone talk about banking on themself, becoming their own bank, or infinite banking, they’re talking about the cash value of whole life insurance. The reason is it acts as your own personal line of credit. You don’t need approval from a bank or private money lender and you determine the payback terms. Plus, when utilize a policy loan, you continue to earn interest on the full cash value of your policy.
This is an incredible feature not found with any other investment. And it’s especially valuable for business owners. If you’re an entrepreneur or you own a company, you know how critical business capital is and how hard it can be to come by from a bank or other lender. By becoming your own bank and utilizing the cash value of your whole life insurance policy for business capital, you’re essentially investing in yourself and capturing your own opportunity cost. Further, you can utilize policy loans again and again throughout your lifetime.
Aside from insuring yourself, it may also make sense to insure key people in your company for which you would incur a financial loss or hardship if they died. Called key man insurance or key person insurance, these types of policies may also be underwritten by dividend-paying mutual insurance companies and earn guaranteed rates of return, thereby increasing your company’s lines of credit.
Individuals Who Need Permanent Life Insurance
In some cases, individuals need permanent life insurance due to the need to provide for lifelong dependants such as a spouse or disabled child. In these instances, it makes the most sense to purchase whole life insurance from a mutual life insurance company, rather than other types of permanent insurance like universal, indexed, or variable life. By opting for dividend-paying whole life insurance, you can optimize your investment for greater wealth over the lifetime of the policy.
Getting More Out of Your Policy
If you want to maximize the investment portion (cash value) of your whole life insurance policy, a paid-up additions rider is essential. As previously mentioned, a paid-up additions rider allows the policyholder to “overfund” their policy while still falling within the IRS thresholds required to qualify for tax-advantaged growth. By frontloading the policy, cash value is supercharged to earn more interest and potential dividends. But it’s not the only type of rider you can add to increase the benefits of your life insurance policy.
Riders like guaranteed insurability, which allow you to increase the face value of your policy at a later date, chronic or terminal illness riders, which allow you to access a portion of your death benefit for certain health conditions, disability or waiver of premium riders, which pay out in the event you become disabled or cover policy premiums if you’re unable to work, are all common ways to customize a whole life insurance policy and make it more valuable to the policyholder.
It’s also worth mentioning that individuals who are concerned about affording whole life insurance now but who many want life insurance investment options in the future may be able to purchase convertible-term insurance. It’s essentially term life insurance with a rider that allows the policyholder to convert to a whole life insurance policy at a later date without the need to qualify with an additional medical exam. Convertible-term insurance can help lock in a lower premium payment with a whole life insurance policy that is guaranteed for life.
How to Start a Life Insurance Investment
A life insurance investment with a permanent insurance policy isn’t something to take lightly. It’s important to have clear financial goals in mind and understand that policies structured for rapid growth of cash value can still take nearly a decade to generate positive returns. That said, the sooner you apply for a policy, the more favorable your premiums are likely to be, which means the better the investment.
The Wealth Strategists at Paradigm Life are expert advisors with years of experience designing dividend-paying whole life insurance policies with the nation’s top-rated mutual insurance companies. 
, and your Wealth Strategist can provide insurance illustrations to help educate you on the investment portion of your policy, including guaranteed rates of return and illustrations for non-guaranteed dividends using historical data. If you’re currently working with a tax advisor, estate planning attorney, or other financial planner, we encourage you to include them in the consultation process. Defining clear financial goals and outcomes is key to successful life insurance investments as part of a diverse financial portfolio. .
