Insurance and investments don't mix.
For years, financial advisor Suze Orman has gotten questions from listeners about whole life insurance. Many of them have wanted to know specifically about using whole life insurance as an investment. This idea is usually prompted by a life insurance agent or financial advisor.
Orman's answer is always the same -- no, no, no. She even says, "Whenever someone tries to sell you a life insurance policy with some story that it is a fantastic way to invest, you are to shut down that conversation and never work with that person again." It may sound extreme, but she's right on the money here.
Why Suze Orman doesn't recommend investing in whole life insurance
Before getting into why whole life insurance is a poor investment, let's go over how this "investment" works. Whole life insurance is, first and foremost, a life insurance policy that pays out upon your death. Unlike term life insurance, which lasts for a set amount of time, whole life is permanent.
The insurance company invests a portion of your premiums, giving your policy a cash value. After you've put in enough money, you can access it through withdrawals and loans. When you die, these withdrawals and any outstanding loans are subtracted from the death benefit.
On the surface, it might seem like a reasonable deal. But according to Orman, there are a few things the people pushing these policies don't tell you:
- The annual fees for your insurance policy's portfolio will be much higher than what you'd pay in a low-cost mutual fund or exchange-traded fund (ETF).
- There will be a hefty cash surrender fee if you want to cash out your plan early.
- The real reason life insurance agents and financial advisors push these plans is because they get huge commissions.
It's also worth mentioning that whole life insurance policies tend to have very conservative investment portfolios. Since the insurer manages your portfolio, you can't decide how to invest your money.
Lots of people prefer a hands-off investing approach, so this isn't all bad. However, you could likely get a much better return with a mutual fund or ETF that isn't as conservative.
What you should do instead
As Orman puts it, "investments are investments, insurance is insurance." It's much better for you financially if you keep the two separate.
For your investments, you have several options. If your employer offers a 401(k) plan, this is a good, tax-advantaged way to save for retirement, especially if your employer will match your contributions up to a certain amount. There are also two types of individual retirement accounts (IRAs) you can open through online stock brokers:
- With traditional IRAs, your contributions are tax deductible, and you pay income taxes on withdrawals.
- With Roth IRAs, contributions aren't tax deductible, but withdrawals are tax-free.
Once you've chosen a retirement plan, make sure to pick how you want your money invested, as well. Retirement accounts offer a variety of investment funds, and IRAs also let you pick stocks.
As far as life insurance goes, term life insurance is generally the better option. Premiums are much cheaper, and most people don't need life insurance to cover them their entire life. Pick a term life policy that will last for as long as your family will be relying on your income, and you're good to go.
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FAQs
Suze Orman isn't a fan of whole life insurance, and especially not as an investment. Investment portfolios for whole life policies usually have expensive fees and are overly conservative. Keep your investments and insurance separate, and stick to term life insurance instead of whole life.
Why are whole life insurance policies a bad investment? ›
The two main disadvantages of whole life insurance are its higher cost compared to term life insurance and the fact that any dividends or profits earned are taxed as income.
What type of insurance does Suze Orman recommend? ›
Suze Orman recommends that generally most people should get a 20 year term life insurance policy at 20 times your annual income. What does that mean? That means if you're 30 years old and you make $50,000 a year you should get a million dollar 20 year term life insurance policy.
Can you use life insurance as an investment vehicle? ›
Life insurance can be a good investment tool, but the key is to use it effectively. Permanent life insurance can provide portfolio diversification, risk management benefits and help you achieve long-term financial goals.
Why do advisors push whole life insurance? ›
So, sales reps may try to push a whole life policy, which is life insurance that lasts until the policyholder's death and includes a tax-advantaged cash value savings component. Whole life coverage is more expensive, leading to more commission income for the agent.
What are 2 disadvantages of whole life insurance? ›
A more complex product than term life insurance. Higher premiums than term life insurance. Could be costly if coverage lapses early.
What is a disadvantage of using a whole life policy for saving? ›
Cons of Whole Life Insurance
Whole life is more expensive than term life, and you will receive a lower death benefit than you could get with the same amount of money with a term policy.
Why doesn't Suze Orman like whole life insurance? ›
Suze Orman isn't a fan of whole life insurance, and especially not as an investment. Investment portfolios for whole life policies usually have expensive fees and are overly conservative. Keep your investments and insurance separate, and stick to term life insurance instead of whole life.
What insurance company does Dave Ramsey recommend? ›
Zander Insurance Is RamseyTrusted
It means Zander is the only company Dave and the entire Ramsey team trusts to help you find term life insurance.
What type of life insurance is considered a good investment? ›
While both pay out death benefits, only permanent life insurance has the potential to grow a cash value. That's because permanent policies like whole life insurance include a reserve called the “cash value.” A portion of your premium goes toward the cash value, and the money grows tax-deferred.
Because whole life insurance policies also accrue a tax-deferred cash value over the life of the policy, they could be considered an investment. Depending on the terms of your policy, you could withdraw money to use for such expenses as college tuition, buying a car, or paying for home improvements.
Why do people use life insurance as an investment? ›
Pros of a life insurance investment:
The cash value can act as a stream of income during retirement. This can be particularly appealing if you want extra funds to rely on. Your cash value grows tax-deferred. This means you don't need to pay taxes on the funds as they grow in the account.
How do millionaires build wealth using life insurance? ›
How can you use life insurance to build wealth? Term life insurance can be used to build wealth across generations by providing a payout to your surviving loved ones. The death benefit can be used to pay estate tax, as well as preserve remaining assets.
Which life insurance does Suze Orman recommend? ›
Consumers buying life insurance have a choice between term and whole life policies. Suze Orman recommends term life policies. Term life can be a cheaper and better option for many people.
Why do millionaires get whole life insurance? ›
The cash value within a whole life policy grows without income taxation for the individual. An additional benefit of life insurance compared to other assets is the tax treatment of the death benefits.
Does whole life insurance ever make sense? ›
Financial experts typically don't recommend life insurance as a primary investment tool. However, buying whole life insurance might make sense if you've maxed out your 401(k) and want to avoid some of the tax implications of an additional traditional investment account.
What is the biggest risk for whole life insurance? ›
One of the most notable risks of Whole Life Insurance is its cost. The premiums associated with whole-life policies tend to be significantly higher compared to those of Term Life Insurance. The reason behind this lies in the policy's structure, which combines a death benefit with savings or cash value accumulation.
Why is life insurance not a good investment? ›
Any permanent life insurance policy with a cash value can be used to invest — but for most people, it isn't the best strategy due to high costs and low returns. Buying a term life policy and contributing to a 401(k) or IRA account is often a better option.
Why do the rich buy whole life insurance? ›
One result of accumulating wealth may be a desire to keep it in the family by passing along assets to future generations. Life insurance is a popular way for the wealthy to maximize their after-tax estate and have more money to pass on to heirs.
Why would whole life insurance not pay out? ›
Instances of lying, criminal activity, or dangerous behavior that's not disclosed upfront could all be reasons life insurance won't pay out. Here are nine reasons life insurance may not issue a payment to beneficiaries and ways you can avoid having this happen to your loved ones.
