Cash Building Life Insurance: A Good Investment?

by Miranda Marquit · 14 comments

Soon after my husband and I were married, we decided that it would be a good idea to purchase life insurance for each of us. We spoke with an insurance agent, and he gushed about the great investment a universal life policy would be. According to him, it would build cash value, we could use it during retirement, and we could borrow against it!

At the time, we were students, and in debt. We couldn’t afford a whole lot of coverage, but we decided that we would each be covered by a policy that would pay off our debts, and allow the other one to finish school debt-free, and get a good start on life. So we went with the universal life insurance policy. While I suppose it’s a “safe” investment (as long as the life insurance company doesn’t tank), looking back I think I would have done things differently.

Could You Do Better with a Term Life?

Four years ago, when my home business really started taking off, and we bought a house, it became apparent that I would need more coverage. I decided to go with a term life insurance policy, in addition to the universal life policy. Obviously, there was a huge different in price. I was able to get three times the coverage for less than half the price of my universal life insurance policy. It got me thinking. What if, instead of getting those universal policies in 2002, we had decided on term life insurance — getting more coverage — and investing the difference?

For the five years between 2002 and 2007 (the year I bought my term policy), we would have seen rather huge gains. (GenX Finance did a visual history of the stock market, and pointed out that, between April 2003 and early 2007, the Dow gained 75%.) And, if we had kept investing the difference during the stock market downturn following the financial crisis, and continued our investments, we would be sitting rather pretty, especially if we had been invested in an index tracking the Dow.

How Much Cash Value Will You Build?

Of course, part of the issue is how much cash value you will actually build. You build cash value in such a policy according to your premium. The part of your premium building cash value grows at a set rate, usually determined at regular intervals. Right now, the statement from my life insurance company says that I am earning 4% on the money that is building cash value. That’s not a horrible return. After all, 4% is expected to beat inflation, and it’s a fairly safe investment. However, the premium isn’t that big, so the portion that contributes to the cash value builds slowly (to say the least). At the rate our cash building life insurance policies are growing, we’ll probably have enough cash value to take a nice vacation when we’re ready to retire and surrender the policies. But we certainly won’t have enough to retire on, so it won’t make that big a difference.

Before you decide that a cash building life insurance policy is the way to go, carefully consider your options, and determine whether or not you are willing to take the risk that the stock market might provide better overall returns if you were to get term life insurance coverage and then invest the difference.

This post is in support for the Life Insurance Movement started by Good Financial Cents.

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  • Edward says:

    Nice post.

  • Thomas says:

    Term life insurance makes the most sense. I retired last year at 59 and was still eligible for term insurance from my company at 1 to 5 times my salary level at group rates until age 70 at which time I will no longer need protection. I had one ‘adviser’ try to steer me into a $1,000,000 whole life policy on the basis that this insurance was a legitimate ‘asset class’. It was nonsensical to pay a $25,000 yearly premium for whole life insurance.

    Another said they could beat my companies rates for the term insurance. After the physical they weren’t even close to beating the insurance I already had. For those that have access to term insurance keep it as long as you need it; it gets more expensive as you get older but it is still the cheapest way to go.

    You don’t think of your home, car insurance as a way to build your investment nest egg, neither should you think of whole life as an investment option unless you are completely shut out of the cheaper options.

    It is amazing how the whole life industry has completely hazed over the concept of insurance and made whole life the best way to invest in their minds. Don’t believe it.

  • CMG says:

    Thanks, Tangurena! Very helpful to know what should be considered. I don’t have a will… I do have a health care proxy… I guess I need to think seriously about whether I care to pay for enough insurance to just cover funeral expenses and debts, or expand it to cover paying off the mortgage.

  • Tangurena says:

    CMG, generally, for a single person, you want enough to pay off your funeral costs. It would probably be cheaper for you to pre-pay the funeral expenses (my parents did that). If you had pets, perhaps some money so that your next-of-kin could take care of the pets. If you have family that you want to leave stuff (like house, car, etc) that you’re still making mortgage payments on (maybe you borrowed against the equity in the “old family farm”) and want those to pass on unencumbered to your kin, then you might also want to see about enough insurance to pay off that stuff.

    A death in the family tends to lower people’s resistance to financial predators, so they might get called by debt collectors expecting *them* to pay up for your now-uncollectable debts. If you think that the executor of your estate (you *do* have a will don’t you?) might not be able to say no, then perhaps have enough insurance to pay off your debts.

  • CMG says:

    Thanks for the link, gujuknick. But, I am trying to understand the pros and cons of life insurance for someone who is single with no dependents. I am looking for advice as to whether I even need life insurance…

  • CMG says:

    I am wondering about life insurance for single adults with no children… Is there a general rule of thumb to be followed here? Should I even bother to have a policy at all?

  • Keith says:

    When applying for life insurance, you need to make sure that what you get fits the needs of your situation.

    For instance, we have a young daughter (18 months) and 25 years left on our mortgage. In the next 20 years, my daughter would need assistance were we to kick off, therefore we have a 20 year policy. After she’s 20, presumably she’ll be able to care for herself and that need wouldn’t apply any longer.

    We have a smaller 30 year term to pay of things like the mortgage, etc. After 30 years, that need would no longer apply.

    Then we have a whole life policy we are using as a “just in case” / retirement fund.

    The point is, as long as the policy you get suits your needs, as opposed to being what someone tells you that you should have — you really can’t go wrong.

  • gujuknick says:

    Recently my wife and I each purchased a 30 year term-life insurance policy from Prudential. We chose the Return of Premium policy (we are both 29 years old). This product returns all of the premiums we paid throughout our 30 years of coverage (assuming nothing happens to either us in the next 30 years).

    The obvious downside to this is we don’t make any interest on our premium. However we both felt comfortable with this because any interest we would have made on our premium is essentially going towards the “What If” factor. And to know that we have financial security in case something happens to either of us is comforting.

    I would love to hear other people’s thoughts on term ROP policies.

  • CMG says:

    I am wondering about life insurance for single adults with no children… Is there a general rule of thumb to be followed here?

  • Justin Victor says:

    Insurance makes a horrible investment and investments make horrible insurance. Most people get sold whole life/ universal life / variable life policies by insurance agents that make a fat commission. You would be WAY better off buying term and investing the difference. PLUS, anytime you cash out a universal life policy you will pay tax on the gains at ordinary income tax levels (although you probably won’t have any gains). However, when investing the difference you can invest in funds/ stocks and only pay tax at capital gains rates – Or, you can invest into IRA/ROTH’s which have huge tax advantages.

  • Ginger says:

    Term life insurance is the only life insurance anyone who is not super wealthy should get. Otherwise you are paying too much for the insurance and the cash value will not make up the difference.

    • KM says:

      I disagree. The whole life policy that I have guarantees my beneficiaries the sum I chose if I die, but if I stay alive after the 10 years, I can cash out that entire amount. If I leave it alone after 10 years, it builds up with an interest (just as it does in the meantime too). I also don’t believe I end up paying the whole amount either, so that growth is noticeable. It just depends the type of insurance you get and where you get it from.

  • KM says:

    I am firm believer in not keeping all of your eggs in one basket. So while I don’t want to have too many different accounts, I found a plan that worked for me: I have a term life policy with a rather large sum that would pay off the house and take care of my son should anything happen to me (the monthly fee is quite small), two whole life policies (one for me and one for my son) that would act as an investment and an additional life insurance (if he is smart, he will withdraw the money at retirement age and have a nice sum that had his entire life to grow), two IRA accounts (a personal Roth and the one that my company offers), and several mutual funds that are my main investment. This is also spread over 3 companies, so if one goes under, I don’t lose everything.

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