Should Life Insurance Be Used as a Savings Plan?

Whole Life Insurance
Whole is the most popular type of permanent life insurance, because its usually the most straightforward. Whole life insurance offers a guaranteed death benefit, fixed premiums, and a cash value component that grows tax-deferred. Most whole life policies also have non-guaranteed cash value growth in the form of dividends. (See more about dividends below.)

Guaranteed issue is a type of whole policy that doesnt require a medical exam or any health information at all as part of the application process. Anyone can be accepted. As such, coverage is usually limited to $25,000 and there is often a waiting period involved. Read our article about guaranteed issue.

Universal Life Insurance
Universal offers flexible premium payments and a guaranteed minimum death benefit. While universal comes with greater flexibility, its guarantees regarding the death benefit and cash value growth are not as strong as whole.

There are subcategories of universal life insurance, including indexed and variable. In these policies, the cash value account is tied to external markets, so the investment aspect is a little riskier.

The way the savings component works for any type of permanent life insurance is similar: part of your monthly premium goes toward the death benefit, a portion goes to the insurer for administration fees, and another portion goes into a cash account, which grows tax-deferred.

1. Tax-deferred – The tax-deferred aspect of the cash value account means that you dont need to pay taxes on your earnings, and its one of the more desirable aspects of this type of policy.

2. Borrow against it – If you need to take out a loan, for a mortgage, car, college, or anything else, you can borrow against the cash value of your policy and you wont have to pay taxes on the loan as long as the policy is valid.

3. Withdraw during your lifetime – Once your policy has accumulated a significant cash value, you can then withdraw portions of it to use during your time. The cash value can also be used to pay your monthly premiums.

4. Dividends – Some life insurance companies offer dividends to policyholders, which means that every year you will get a certain amount of money, either from an excess of premiums youve paid and/or as a portion of the insurers profits. You have all sorts of options with dividends, which you can read about in our blog post, Whole Life Insurance Dividends.

Life Insurance vs. Savings: Whats More Worthwhile?
You may be struggling with the question of whats more worthwhile: to put aside money in a savings account or to pay monthly premiums for a life insurance policy. The question is a good one, but it depends on what type of life insurance policy youre considering.

Permanent Life Insurance vs. Savings
Due to the details discussed above, permanent life insurance comes with a cash value that can be used for certain things, but that money does not get passed on to your loved ones as savings. They do, however, get a death benefit.

The question of whether the high monthly premiums will be worth the death benefit in terms of savings is something only you can answer. But generally, for most middle-class or working-class people, the answer is usually no. In one of our previous blog posts about the average cost of life insurance, you can get an idea of how much you can expect to pay in monthly premiums for whole life insurance.

Term Life Insurance vs. SavingsTerm life insurance is simple, straightforward, doesnt accumulate a cash value, and therefore, is much more affordable. If youre deciding between a savings account or term life insurance policy, the latter can usually provide greater financial coverage than the amount you could save. To be certain, lets do the math.

Well take a typical exam: you buy a $500,000 30-year term policy when youre 30 years old. A male 30-year old in fairly good health can expect to pay about $30/month, while a female in similar health can expect about $25 in monthly premiums. (According to the CDC, women live longer than men. For life insurance companies, this means women get lower insurance rates.)

Lets take the higher rate of $30 a month, for the sake of this analysis. $30 times 12 months a year is $360/year. $360/year for 30 years is $10,800. As you can see, this figure doesnt come close to the policy death benefit of $500,000. So if youre looking to pass on savings to your loved ones, paying monthly premiums of a term life insurance policy will earn you much more than putting aside that same amount of money in a savings account.

1. Are in a high tax bracket

2. Have maxed out your retirement plan

3. Need an estate planning tool

4. Dont like risky investments

5. Have a family member with a disability
   a permanent life insurance policy can offer benefits that other types of policies cant.

Whats better: permanent or term life insurance?
In the world of life insurance, theres no better or worse there is only whats right for YOU. Permanent life insurance has its pros and cons, as does term life insurance. The main idea behind life insurance is to provide financial protection to your loved ones in case you die.

Term life insurance accomplishes that goal at a lower cost than permanent life insurance. Permanent life insurance can accomplish that goal and offer additional benefits. For many, the higher cost of permanent life insurance is reason enough to choose term, but for those who can afford it, there are several benefits of permanent insurance, including the savings component, that can be worthwhile. As always, its important to consult with a financial or insurance expert before making this important decision.