At first glance, life insurance seems like a simple concept: you pay an insurance company a premium, and when you die, the company pays your beneficiaries. Permanent life insurance policies such as whole life insurance also contain an investment component, where things can get complex.

A portion of the premium for your whole life insurance policy goes into a tax-deferred account that accumulates “cash value” over time. With any life insurance with cash value policy, as the account grows, you can borrow from it or possibly withdraw money. Insurance companies tout these policies not only as a way to leave a financial legacy for your heirs, but also as a good investment tool.

Critics of this strategy point out that the returns on these investments tend to be lower and the fees higher than with other investment vehicles. They say term life insurance – a cheaper life insurance option that does not contain an investment component – is more suitable for most people.

The benefits of whole life insurance

When you pay premiums on a term life insurance policy, the payment has two basic parts: the first covers the cost of the insurance and the second pays the administrative costs. Once these installments are paid, there is nothing left.

In a whole life insurance policy, you will pay more than the insurance and administration costs, and that excess will accumulate in a cash value account. The account grows at a fixed rate, much like a savings account. The advantage of whole life insurance and the reason you might prefer it over a savings account is the tax treatment and flexibility of the cash account.

Whole life cash accounts grow tax free. This means that the interest you pay is not taxed, as long as the money remains in the account. You will only have to pay tax if you withdraw more money than you paid.

Because of this, money can grow faster than it could outside of your account. All of your interests remain on the account, earning even more interest in the years to come.

You can then use this cash value at retirement to supplement your income. Permanent life insurance policies allow you to borrow against the value of your cash account without withdrawing it or having to pay taxes.

We asked certified financial planners Steven Elwell, Damon Gonzalez, and Brian McCann for their thoughts on whether whole life insurance is a good investment.

Should everyone consider whole life insurance as part of a retirement strategy?

Steven elwell, Level Financial Advisors, Amherst, New York: While anyone can consider a whole life insurance policy as part of their retirement savings strategy, for the vast majority of people there will be others more attractive options to use first. For the most part, the employer 401 (k) will be the first choice, especially if there is an employer match, which is basically free money. After that, the IRA and Roth IRA the accounts should be the next consideration.

Brian mccann, Bootstrap Capital, San Jose, Calif .: There are some very important reasons for having a whole life insurance policy, such as estate tax issues, caring for a disabled child, or caring for a disabled child. dependents and cash flow for private businesses. If you need a whole life insurance policy for such a reason, you can also benefit from the cash value that builds up in the policy for retirement. But I don’t generally encourage people to save for retirement using life insurance policies. They can be an expensive way to save money.

Damon gonzález, Domestic Capital, Plano, Texas: I do not recommend these policies to everyone. Most Americans cannot afford to purchase the appropriate amount of life insurance coverage through whole life insurance alone. The median income in the United States is around $ 62,000 per household [in 2018, the latest figure available from the U.S. Census Bureau’s American Community Survey], and I think only the richest 20% should consider lifelong. Term insurance is cheaper and is almost always the best type of insurance for 80% of the nation.

When would whole life insurance be a good investment?

Steven Elwell: For very high income people who have maximized their 401 (k) plans, IRA options, and Roth IRAs, a whole life savings strategy may make sense, especially if they are in need of life insurance. Another viable option for high income earners could be the use of a non-qualifying tax-deferred annuity if they do not need life insurance.

Damon Gonzalez: I generally recommend this strategy to people who are already maximizing their 401 (k), Roth IRA plans (if they are eligible) and 529 packages (if they have children). Cash value is protected from creditors in many states. It also makes sense for someone who has built a good nest egg and wants to diversify part of their portfolio into permanent insurance. If you’re in a high tax bracket, risk averse, and happy with bond yields, you should be looking at the whole life.

What are the main drawbacks of a lifetime as a retirement savings strategy?

Steven Elwell: Whole life insurance can come with high premiums and high investment costs when it comes to variable universal life insurance. Many times an investor can find much cheaper investment options outside of life insurance. The longer the investment period, the higher these investment costs become.

Damon Gonzalez: The insurance company expects the premium you commit to each year, and they are not very flexible. Your policy could expire if you lose your job and can no longer pay premiums. It is important to keep in mind that you are paying for life insurance and the cost of the insurance will be a drag on your overall performance.

Anything else consumers should keep in mind?

Damon Gonzalez: If you are considering purchasing a whole life insurance policy, there is a plethora of endorsements and acronyms involved, and you should hire an honest advisor who has experience designing policies to maximize cash value. . The advisor will need to access illustration software from different insurers to design the best policy for you based on your condition, age, and how much you want to save. You may receive drastically different illustrations from agents representing the same company, so don’t be afraid to shop around.

Optimizing a policy for a client often means integrating term insurance into the entire life insurance policy. This pays the agent less commission and puts more money in your policy. Unfortunately, some officers are unwilling to present these policy views.

Steven Elwell: Consumers should keep in mind that many people who call themselves financial advisers have a financial interest in selling whole life insurance as a retirement strategy when other means have yet to be used. I would like to caution investors that “buyer beware” should apply when an advisor appears to be promoting a product without considering other less expensive options.

Brian McCann: If you don’t need permanent insurance, term insurance is a very affordable option. You can invest the money saved on the premiums to build up a retirement nest egg. If you haven’t maximized your tax-advantaged accounts, such as an IRA or 401 (k), you may also receive tax benefits on your contributions.

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