How does whole life insurance compare to other financial assets?

Whole life insurance is a type of permanent life insurance that provides a death benefit to your beneficiaries while building cash value that you can access while you’re living as long as premiums are paid.

No matter what age you are, you want your family to feel protected. And when you die, you’ll want them to be able to take care of the mortgage, bills, caregiving needs and educational costs without you. A whole life policy can help give them that financial protection.

Unlike term life insurance, however, whole life also comes with a cash-value component that grows over time on a tax-deferred basis, making it a unique asset for many investors. You can access that cash value through loans or withdrawals—but not without tradeoffs: whole life policies typically have higher premiums; cash value takes time to build; and loans or withdrawals can reduce your cash value and death benefit.

Here’s how to think about whole life insurance in the broader context of your investment portfolio.

Unlike stocks, bonds and mutual funds, whole life insurance isn’t an investment product. It’s permanent life insurance made to provide a death benefit for your beneficiaries with premiums that generally stay level for life.

However, the cash value of a whole life insurance grows tax-deferred according to guarantees in your policy; some policies may also pay dividends, though they aren’t guaranteed. Together, these features can give you another way to build wealth over time.

That doesn’t make whole life insurance directly comparable to traditional investments. Stocks, bonds and mutual funds offer more potential for growth, but their value also can rise and fall with the market. Whole life insurance, on the other hand, offers guaranteed policy features and more predictable fixed rate cash-value growth while still serving its primary purpose: providing lifelong insurance protection.

Briefly, whole life insurance offers lifelong coverage, cash-value growth and access, tax-deferred accumulation and, for some policies, the potential to earn dividends as long as premiums are paid.

Term life insurance provides coverage for a specific period, such as 10, 20 or 30 years. Whole life insurance can remain in place for your lifetime as long as the policy stays in force. So if you expect to need life insurance for the long haul, you won't have to worry about your coverage ending after a set number of years.

For example, the death benefit can help support a dependent with lifelong needs, provide funds for your estate plan or help your family cover final expenses. Premiums also typically remain level, making your costs easier to plan for over time.

A portion of each premium goes toward your policy's cash value, which grows according to the guarantees outlined in your contract and is not tied directly to the ups and downs of the investment market. While cash-value growth is guaranteed, other policy benefits, such as dividends, aren’t.

You typically don't owe income taxes on cash-value growth while it remains inside the policy. This allows the cash value to continue compounding without annual taxation.

However, the tax treatment can change when you access that cash value. In some cases, policy loans may not trigger immediate income taxes, while certain withdrawals or a policy lapse with an outstanding loan could create taxable income. Because tax consequences vary, speak with a qualified tax professional or financial advisor before accessing your policy's cash value.

Some whole life policies issued by mutual and fraternal life insurance companies may pay dividends to you. Dividends aren’t guaranteed, though, and depend on factors such as investment results, claims experience, expenses, and the company's overall financial performance.

If dividends are paid, you can typically use the money to purchase paid-up additional insurance, reduce future premiums, leave dividends with the insurer to earn interest, or take the cash.

Having cash value also gives you some flexibility when you need extra funds. You can take out a policy loan or make a withdrawal, depending on your needs and the terms of your policy.

Just keep in mind that tapping into your cash value can affect your policy. Loans accrue interest, must be repaid, may be taxable and loans or withdrawals can reduce your cash value and death benefit. If the policy's value drops too far, it also could lapse.

Higher premiums, slower early cash-value growth and no investment flexibility are all important tradeoffs to consider with whole life insurance. Here's a breakdown.

Premiums are generally higher than term options because your policy provides lifelong coverage rather than coverage for 10, 20 or 30 years. Part of your premium also helps fund the cash-value component. If you’re already on a limited budget, paying higher premiums could reduce the amount of money available for other financial priorities, such as retirement savings or paying down debt.

During the early years of the policy, a larger portion of premiums may go toward policy expenses, insurance costs and other charges, so the available cash value can increase slowly. If you anticipate needing access to your money soon, that slower accumulation is worth considering.

Whole life insurance emphasizes stability and guarantees rather than maximizing investment returns. The policy's guaranteed cash-value growth can provide predictability, but it may not match the long-term growth potential of stocks or stock-based mutual funds. Additionally, only a portion of the amount paid in premiums on whole life insurance accumulates as cash value that earns the guaranteed rate, unlike a traditional investment where the entire amount invested may earn interest, dividends and/or grow in the market.

Traditional investments typically offer greater opportunities for higher returns, but they also can expose you to market fluctuations and potential losses. Whole life insurance gives you more predictable growth, which may be especially appealing if you don't enjoy the highs and lows of stock market investing.

Compared with a brokerage account or many retirement investment accounts, whole life insurance gives you no control over how the cash value is managed. The insurance company determines how the policy operates according to the contract, and you generally can't choose individual stocks, bonds or mutual funds for the cash-value portion.

If you prefer actively managing your investments or adjusting your portfolio based on changing market conditions, a more traditional investment vehicle may be a better fit for you. 

While you may be able to access your policy's cash value through loans or withdrawals, outstanding policy loans accrue interest. And unpaid balances must be repaid and can reduce your policy's cash value and death benefit. If they significantly reduce the policy's value, the policy could lapse and leave you without coverage. Depending on the circumstances, a policy lapse or certain distributions may be subject to ordinary income taxation.

Whole life insurance may be a good fit if you're looking for lifelong coverage, guaranteed policy features and support for estate or legacy planning. It also can complement your other savings and investments once you've addressed other financial priorities. Because of its higher costs and long-term commitment, whether it's right for you depends on your individual financial goals.

If you have investments that rise and fall with the market, you may like the predictability that whole life insurance can offer. Its guaranteed cash-value growth isn't a replacement for traditional investments, but it can add some stability alongside them.

Before purchasing a whole life policy, take stock of your other financial priorities. Do you have emergency savings? Are you paying down high-interest debt and saving for retirement? Do you have the life insurance coverage you need?

Then look at your budget. Whole life premiums are an ongoing expense, so make sure you can comfortably afford them without putting your other financial goals on hold. Your financial advisor can help you look at the bigger picture and decide where whole life insurance might fit.

If leaving money to your family or other beneficiaries is important to you, whole life insurance can help you plan for that. The death benefit also can give your beneficiaries money to cover estate-related expenses without having to sell other assets.

For more complex estate plans, permanent life insurance also can be held in an irrevocable life insurance trust (ILIT) as part of a broader estate planning strategy. When properly structured, an ILIT can help keep life insurance proceeds outside your federal and state taxable estates, providing liquidity to cover estate tax bills and preserve wealth for heirs or your go-to charities.

This specialized legal arrangement should be established with guidance from qualified legal and tax professionals to make sure your bases are covered.

Your policy's cash value can give you another source of money to draw on, with your savings, investments or retirement income. Just remember that whole life is a long-term commitment: premiums are generally higher than term life insurance and cash value takes time to build.

Whole life insurance may not be appropriate if you only need temporary death benefit coverage, want to maximize investment growth, require lower-cost life insurance or expect to access your money soon. In these situations, term life insurance or traditional investment accounts may better align with your financial goals, budget and time horizon.

Term policies provide coverage for a set number of years, such as 10, 20 or 30 years, and are often used to replace income while children are young. They also can help your family cover household expenses or pay off a mortgage if you die. Once those financial obligations end, permanent life insurance may no longer be necessary. Additionally, with term coverage, you generally can purchase a larger death benefit for a lower premium.

If your main objective is maximizing long-term investment returns, brokerage accounts, employer-sponsored retirement plans and individual retirement accounts (IRAs) generally provide access to a wider range of investments, including stocks, bonds, ETFs and mutual funds. Those investments may offer greater potential for growth than whole life insurance, but they also come with the risk of losing value when markets fall.

If keeping your life insurance costs low is a priority, term life insurance may make more sense. Because term insurance covers you for a set period and doesn't build cash value, premiums are generally lower than whole life. Paying more for permanent coverage may not be worth it if you don't expect to need insurance for your entire life.

Whole life insurance may not be the best place for money you expect to need soon. Cash value can take time to build, especially in the early years of the policy, and surrendering the policy or tapping into its cash value early can reduce its value and affect your coverage.

Once your policy has built cash value, you may be able to use it in several ways. Just keep in mind that accessing cash value can affect your policy and may have tax consequences.

1. Take a policy loan. You can borrow against your cash value, but the loan accrues interest, must be repaid and may be subject to income tax. Unpaid loans can reduce your death benefit and may increase the risk of your policy lapsing.
2. Withdraw cash value. Unlike a loan, a withdrawal doesn't need to be repaid, but it reduces your cash value and may reduce your death benefit. Depending on your policy and circumstances, there also may be tax consequences.
3. Supplement retirement income. Loans or withdrawals can give you another source of funds in retirement alongside your other income and savings. Make sure you understand how accessing the money will affect your policy first.
4. Support legacy and estate planning. Permanent life insurance can be part of a broader legacy or estate plan, including through an ILIT, in some cases.
5. Use eligible dividends. If your policy pays dividends, you may be able to take them as cash, reduce premiums, accumulate value, repay policy loans or purchase paid-up additional insurance.

Whether whole life insurance is worth it depends on your needs and financial goals. First and foremost, life insurance is about protecting the people you care about through the policy’s death benefit. Whole life pairs that lifelong protection with cash-value growth but generally costs more and does not offer the investment flexibility available with traditional investments.

Rather than viewing whole life insurance and traditional investments as competitors, consider how each might fit into your broader financial strategy. A Thrivent financial advisor can help you examine your insurance needs, investment objectives and long-term goals.