Life Insurance as an Investment Tool: Risks and Rewards
(Five-minute read time)
When most people think of life insurance, they imagine a safety net for loved ones in the event of an untimely death. However, some financial professionals and insurance salespeople position certain types of life insurance—especially whole life, universal life, or indexed universal life policies—as investment tools.
These policies promise a combination of lifelong coverage and cash value accumulation. But is life insurance truly a sound investment? Or is it a high-fee, low-return financial gimmick in disguise?
Let’s unpack the risks and rewards of using life insurance as an investment, and what you should know before buying in.
Types of Life Insurance with Investment Components
There are two primary categories of life insurance: term and permanent.
Term life insurance provides coverage for a specific time period (e.g., 10, 20, or 30 years) and has no investment component. It’s generally affordable and straightforward.
Permanent life insurance, which includes whole life, universal life, and variable life, lasts for your lifetime (as long as premiums are paid) and includes a cash value feature that grows over time.
It’s this second category—particularly whole life and indexed universal life (IUL)—that’s often sold as a two-in-one: insurance and investment.
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The Promised Rewards of Permanent Life Insurance
1. Tax-Deferred Growth
One of the biggest selling points is that the cash value in a permanent life policy grows tax-deferred, similar to an RRSP or TFSA. This can be attractive to those seeking additional tax shelters after maxing out retirement accounts.
2. Lifetime Coverage
Unlike term life, permanent policies offer guaranteed lifelong coverage. This can be useful for estate planning, especially for wealthy individuals who want to leave behind a tax-free inheritance.
3. Access to Cash Value
You can borrow against the cash value of your policy or even withdraw it, potentially using the funds for emergencies or retirement. Loans are tax-free if structured properly, and withdrawals up to your basis (i.e., the amount you've paid in) are typically not taxed.
4. Stability and Predictability
Whole life policies, in particular, are known for their guaranteed returns. While the returns may be modest, they are predictable, and for risk-averse individuals, that predictability can feel like a comfort in volatile markets.
5. Asset Protection and Estate Benefits
In many provinces, the cash value of life insurance is protected from creditors. Also, death benefits are tax-free to beneficiaries, making them a useful estate planning tool for high-net-worth individuals.
The Hidden Risks of Permanent Life Insurance
While these benefits may sound compelling, there are substantial risks and downsides that need to be considered—especially for the average investor.
1. High Fees and Commissions
One of the most common criticisms is that these policies come with high front-loaded fees, often including steep commissions for the salesperson. The first few years of premiums often go entirely toward administrative and sales costs—not cash value growth.
In fact, it can take 10+ years before the cash value begins to accumulate meaningfully, making it a poor choice for those who might need liquidity or better returns in the short term.
2. Low Returns Compared to Traditional Investments
Whole life policies typically offer returns in the range of 2% to 5%, depending on dividends or guarantees. That’s significantly lower than what you’d expect from a low-cost index fund or diversified retirement portfolio over the same timeframe.
When you factor in inflation, these policies may barely keep your money’s value intact, let alone grow it.
3. Complexity and Lack of Transparency
Permanent life policies can be difficult to understand, even for financially literate individuals. Variables like cost of insurance charges, interest crediting rates, surrender charges, and policy loans create a level of complexity that allows unscrupulous agents to manipulate terms in their favor.
Many buyers don’t fully grasp what they’re purchasing until years later—sometimes when it’s too late.
4. Surrender Charges and Penalties
Cancelling or cashing out your policy within the first 10-15 years can lead to substantial surrender charges. That means if your circumstances change and you need access to the cash value or can no longer afford premiums, you might lose much of your initial investment.
5. Investment Is Tied to Insurance
A core issue is that your investment is tied to an insurance contract. If you need more life coverage or more investment flexibility, you’re stuck. With term insurance and a separate brokerage account, you can optimize both independently.
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Who Might Benefit from Life Insurance as an Investment?
Despite the drawbacks, there are situations where using life insurance as an investment can make sense—but they are generally niche.
High-net-worth individuals who’ve maxed out retirement contributions and need additional tax-advantaged vehicles.
Those with estate tax concerns who want to leave a guaranteed death benefit to heirs or a trust.
Business owners who use policies as part of succession planning or executive compensation packages.
People with specific health or asset protection needs, where traditional investing may not provide enough security.
In these cases, a carefully structured permanent life policy—especially if designed by an independent licensed advisor—can be a part of a diversified financial strategy.
Who Should Be Cautious Using Life Insurance as Investment?
While life insurance can be an important part of a financial plan, it is not always the best primary investment vehicle for everyone.
Young professionals, middle-income earners, and individuals focused on building wealth through traditional investing may find that term life insurance — combined with disciplined contributions to low-cost index funds — offers greater long-term growth potential.
However, in certain circumstances, such as for high-net-worth individuals with estate planning needs, permanent life insurance can play a strategic role. It’s important to evaluate life insurance products carefully and seek advice from a fiduciary or unbiased financial professional to ensure they align with your broader financial goals.
Red Flags to Watch Out For in Life Insurance
If you're considering a life insurance policy with an investment component, watch for these warning signs:
The advisor is employed by an insurance company and primarily recommends the company's own products, rather than offering a range of options from different providers.
They pitch the policy as a way to get rich or beat the market.
They don’t explain fees, commissions, or alternatives.
They prioritize selling products over providing objective financial advice, rather than being legally required to act in your best interest.
They claim that “everyone should have whole life” regardless of income or goals.
While seeking a second opinion can be helpful for major decisions or when something feels unclear, the most important step is finding a trusted advisor who takes the time to understand your full financial picture. Building a long-term relationship with an advisor who puts your best interests first is more valuable than constantly fact-checking advice from multiple sources.
Here in Canada, resources like Advocis can help you find a qualified professional.
The Bottom Line
While certain life insurance policies with cash value can play a role in a financial plan, they are not always the best fit for every individual. For many people, particularly those focused on building wealth efficiently, the higher fees and lower expected returns of these policies may not align with their goals. Term life insurance combined with disciplined investing in a low-cost, diversified portfolio often remains a more effective strategy for straightforward protection and growth.
That said, cash value policies can make sense in specific situations—such as estate planning, business succession, or unique tax considerations—when integrated thoughtfully into a comprehensive financial plan developed with your financial advisor. The key is ensuring that any life insurance recommendation fits your full financial picture, not just a sales script.
Want help choosing the right life insurance strategy for your goals? Book a free call with us today.
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