Do You Need an Investment Provision In Life Insurance Policy?
Both term and whole life insurance provide a death benefit. But only one—whole life—also provides an investment provision.
The main reason why whole life is so much more expensive than term life is the investment provision. Most of the difference in price between the two goes into the cash value of the policy.
The cash value represents an account value that you can borrow against, or liquidate by canceling the policy.
That means that a whole life insurance policy, besides providing a death benefit, will also provide an investment benefit. And that benefit can be substantial after 20 or 30 years, even to the point of representing an additional retirement resource.
It is often said that the best strategy is to buy term, and invest the difference. This refers to buying an inexpensive term life insurance policy, then investing the savings (versus a whole life policy premium) in an index fund. You will generally have more money at the end of many years using that strategy, simply because the index fund is highly likely to outperform the whole life insurance investment. However, you do have to factor in tax since there are ways to use the cash value in whole life policies tax-free, while in your own investment, you have to pay tax on any gains.
If you don’t have an orientation toward saving money, you’ll want to take out a whole life policy instead, so you don’t just blow through the savings intended for your investment.