Whole life insurance comes with a unique feature — the cash value — that steadily grows as you pay your premiums. While this growth may seem appealing, it’s important to remember that the whole life insurance rate of return is not designed to compete with traditional investments like stocks, bonds or mutual funds. Life insurance, after all, is about protection, not wealth-building. The cash value offers a stable, consistent increase over time, but it won’t deliver the same returns as other financial assets. Instead, its true benefit lies in the lifelong coverage and security it’s designed to provide. In this article, we’ll guide you through understanding how to evaluate the rate of return on your whole life policy and why it could be a valuable piece of your overall financial plan.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that provides coverage typically for your entire lifetime, as long as you continue paying your premiums. Unlike term life insurance, which only lasts for a set number of years, whole life insurance guarantees protection until a maximum coverage age, typically ranging from 95 to 121 years. If you’re looking for lifelong financial security rather than a short-term solution, this could be an option worth considering.
However, it’s important to remember that whole life insurance is primarily designed to provide a death benefit, not to act as a conservative investment. While it does include a cash value component that builds over time, the rate of return on this cash value will likely never match more traditional investment vehicles. If you’re looking to conservatively invest, you might want to explore options such as:
- High-yield savings accounts
- Dividend-paying stocks
- Money market accounts
- Treasury bills, notes or bonds
- Corporate bonds
It’s also worth noting that whole life insurance policies often take at least 10 years to accumulate significant cash value unless you’re purchasing a single premium or limited-pay policy. This is because a portion of the premium goes towards paying for the cost of insurance and there are significant surrender charges in the first few years. So, while whole life insurance provides valuable long-term protection, it’s not an investment strategy focused on rapid cash growth. Instead, it offers a reliable way to ensure your loved ones are taken care of with a guaranteed death benefit while also allowing for gradual cash accumulation that can be accessed later on if needed.
How to calculate your whole life insurance’s rate of return
Calculating the rate of return (RoR), also known as return on investment (ROI), on your whole life insurance policy helps you understand how much your investment has grown over time. In life insurance, the calculation can get tricky because you’re working with both a death benefit and a cash value component.
Let’s break down how RoR applies to both the death benefit and cash value.
- If you purchase a whole life policy with a $250,000 death benefit and pay $200 per month in premiums, the death benefit RoR is extremely high if you pass away in the first year. Your loved ones would receive the full $250,000 even though you only paid a few hundred dollars in premiums. However, as the years go on, and you continue paying premiums, the death benefit RoR decreases because your total contribution grows closer to the payout amount.
- On the cash value side, the RoR works differently. Imagine you buy the same $250,000 whole life policy at age 30, paying $200 per month. By age 70, you decide to surrender the policy for its cash value, which has grown to $100,000. After paying a total of $96,000 in premiums, your cash value RoR would be a positive 4.7 percent. However, if you surrender the policy early — before enough cash value has accumulated — the RoR would likely be negative due to high surrender charges and the policy needing time to accumulate cash value.
One key point to remember is that whole life policies have guarantees that typically ensure the cash value equals the death benefit by the time the policy matures, which usually falls between ages 95 and 121. But if you take out loans against the policy and don’t pay them back, this does lower the cash value.
Calculating the rate of return is an important part of understanding how profitable an investment has been or may be in the future. In general, rate of return accounts for the various cash flows that are laid out or received over the life of an investment, while also accounting for the time value of money. Rate of return is a useful tool for comparing different investment options, but it’s important to remember that future return projections are not guaranteed.
— Brian Baker, CFA, Bankrate Investing and Retirement Senior Writer
Ultimately, understanding your rate of return helps you evaluate how well your policy is performing and whether it aligns with your overall financial goals. While whole life insurance isn’t typically a high-growth investment, it provides valuable lifelong protection and the stability of guaranteed cash value growth over time.
Meet with your agent
To get the clearest picture of your whole life insurance rate of return, one of the best steps you can take is to request an in-force illustration from your insurance agent. This document is tailored specifically to your policy, showing detailed projections of how your cash value and death benefit could evolve over time. It’s a personalized snapshot of your policy’s performance, far more accurate than using a generic RoR calculator, which can’t account for the nuances of your specific coverage.
Sitting down with your insurance agent to review the illustration gives you an opportunity to ask questions and understand the factors that influence your policy’s returns. This approach is ideal because your agent is already familiar with your policy’s structure, including how dividends, premiums and loans might impact the overall return. By reviewing this illustration together, you’ll get a clearer sense of how your policy is performing and what to expect in the future.
How might dividends affect your rate of return?
Dividends can play an important role in boosting your whole life insurance policy’s rate of return, especially if you have a participating policy. When an insurance company performs well financially, it may distribute dividends to participating policyholders. You can choose to receive these dividends as cash, use them to reduce premiums or leave them in the policy to earn interest, which can potentially increase your cash value over time.
While dividends aren’t guaranteed, they can enhance your policy’s performance. If you leave your dividends invested, they contribute to the overall cash value growth, which could improve your rate of return. However, the impact of dividends on your return will vary based on how they are applied to your policy and the insurer’s financial health.
Is whole life insurance worth it?
Whole life insurance can offer an appealing sense of security thanks to its guarantees. Your death benefit and cash value grow at a steady pace as long as you keep paying your premiums. But here’s the catch: if you plan on tapping into that cash value through loans, there’s a bit more to consider. Those loans accrue interest, and if not managed carefully, they could reduce your death benefit or even cause your policy to lapse. So, while the low risk of whole life insurance might make it seem like a smart choice on the surface, the reality can be a bit more complicated.
Now, let’s talk about how it stacks up against other low-risk investments. Imagine you take the same amount of money you’d put into a whole life policy and instead funnel it into something like a Certificate of Deposit (CD). A CD doesn’t come with the added fees, insurance costs or commissions that eat away at your returns in a whole life policy. In the end, the CD will likely earn you more, plain and simple.
The bottom line? Whole life insurance is really only worth it if you need permanent coverage. It’s not a shortcut to building wealth. If you’re eyeing it as an investment, you’ll probably be disappointed with the returns. But if lifelong protection is what you’re after, with the bonus of a steadily growing cash value, it can give you peace of mind. Just remember, whole life insurance shines as a tool for long-term security, not as a way to grow your financial portfolio. Choose it for the right reasons, and it might just be worth it.
Frequently asked questions
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