Term Life vs. Whole Life Insurance as an Investment

Years ago, life insurance was meant to provide for surviving family members upon one’s death and the stock market was used for investments. With changes in the market, the economy and the laws, many people put money in the stock market as a way to make a living and life insurance as a potentially-liquid asset. If you are considering investing in a life insurance policy, it’s a good idea to understand how – and when – you can make a withdrawal.

Term Life as an Investment
Term life insurance is a policy that expires after a specified number of years. This is called the “term” of the policy. Premiums are much lower for term compared to whole life because the chances of a claim are lower (what are the chances you’ll die in the next 10 years, compared to 100 years?) Your money doesn’t usually accrue interest or dividends on investments – you simply own a policy that pays if you die before the term is complete.

That’s not to say term life can’t be a worthwhile investment. Many policies offer a renewal upon expiration of the term. The renewal usually converts the term policy to a whole life policy. Young, healthy people often benefit from a term life policy because they pay very little during the first 10 to 30 years then begin to accrue dividends once the policy converts to whole life.

Whole Life as an Investment
Whole life policies are what most people consider “traditional” life insurance. You purchase a policy and it pays out when you die, whether that’s one year or 90 after activating the policy. The premiums are a bit higher than term life but the policy is yours forever.

Whole life policies often include dividends earnings, used to buy paid-up additions (PUAs). PUAs can be cashed in for money to use now or reinvested in the policy. Dividends are earned because the insurance company invests your policy premiums into one of their many ventures and they return a portion of the profits to you. The longer you’ve paid premiums, the more money you have and the more investing the insurer does. In turn, you receive more profits.

You aren’t taxed on the dividends or PUAs unless and until you make a withdrawal. Withdrawing these dividends or PUAs is usually done in a lump sum with a once per year restriction. This makes your accounting much simpler, since the income received from your dividends won’t need to be calculated just entered onto your tax form.

Different Strokes for Different Folks
Toward the beginning of your life, say the first 50 years, your best bet for insurance is a term life policy with a renewal period at the end of your term IF you don’t expect to pull out any money. It is an investment in your survivor’s future with very little chance of providing you any return until you are of retirement age. You’ll save money by not paying on a policy you aren’t likely to need for many, many years.

By mid-life, you should be enrolled or considering enrollment in a whole life policy. This will give you the option of withdrawal during your years of retirement as well as a death benefit to your children or kin.