Is Life Insurance a Good Investment?

Should you buy life insurance, and if so, what type?

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If you're considering purchasing life insurance as an investment, you need to understand two things: 1) the differences between the four types of life insurance, and 2) the purposes of those different types of life insurance.

Traditionally, life insurance in the form of "whole life insurance," or permanent life insurance was considered a part of a sound investment portfolio. This type of insurance can provide investment returns in the form of dividends in retirement, and then a cash benefit upon death.

Meanwhile, "term life insurance," which doesn't pay dividends, wasn't considered a financial investment. However, many people still consider it a sound investment in financial security, since it pays a cash benefit to the policyholder's family (or other beneficiaries) upon the policyholder's death.

Insurers also offer variable life insurance and universal life insurance, each of which have their own benefits and drawbacks.

Times have changed, and most investment advisors no longer recommend that their clients purchase whole life insurance as an investment. Term life insurance still is an important piece of your financial puzzle if you have people who rely on you for financial support. Therefore, your individual life insurance needs will depend on your personal situation.

Whole Life Insurance vs. Term Life Insurance

A whole life insurance policy covers the insured for their whole life while simultaneously building cash value.

The cash value grows tax-deferred. This is considered permanent insurance.

Payments on a whole life insurance policy remain the same throughout the policyholder's life, and policyholders can borrow against the cash value of their policies. If the policyholder stops paying premiums, then the insurer pays out the cash value of the policy to that policyholder.

Term life insurance, meanwhile, covers the insured for a specific period of time, usually 10 or 20 years. The premiums are a fixed rate, and the policy itself has no cash value. Term life insurance is intended solely as financial protection for your heirs.

Variable life insurance is similar to whole life insurance but has the added feature of allowing the policy holder to invest some of the premium payments in a separate account, which may consist of different investment funds.

Universal life insurance also is similar to whole life insurance but offers more flexibility with respect to making adjustments to premiums or the face amount of insurance.

But Is Life Insurance a Good Investment?

For most people with basic financial needs and no complicated financial assets to protect, whole life insurance is not a good investment. That advice also applies to variable life insurance and universal life insurance products.

Term life insurance, meanwhile, most likely wouldn't be considered an "investment" by many in the financial field. But it's still an important part of your overall financial picture if you are a main source of income or of financial stability for anyone in your life.