Investing In Cash Value Life Insurance: The Basics

This article will be the start to a small mini-series of articles based around cash value life insurance. There seems to be some confusion about how cash value …

This article will be the start to a small mini-series of articles based around cash value life insurance. There seems to be some confusion about how cash value life insurance works. Thanks to the internet, there is a ton of bad information out there on the topic, and this misinformation hasn’t been helping the individual investor.

My goal with these articles is to get to the core principles of using life insurance as an investment, and in the process, I plan to address some of the common misconceptions behind this investment strategy. As with anything investment related, I have to give my standard disclaimer before getting started; this strategy isn’t going to be for everyone, however, it is important to understand how this works so you can figure out for yourself if it is a viable option that fits your financial situation.

Cash Value Life Insurance Overview

Let me clarify a few things. When I say ‘Cash value life insurance’ I’m talking about using whole life insurance, structured properly, for the cash value growth and benefits. Cash value, by definition, is the amount of money you have built up inside your life insurance policy that you can liquidate at any time.

These are also life insurance policies with specific carriers handpicked based on the advantages they offer to policy holders. This isn’t just any whole life insurance policy, it is quite specific.

There is also a big difference between a regular whole life insurance policy and one built for the cash value, or as I like to call it a ‘high cash value life insurance policy.’ All this means is that we are not focusing on the death benefit—this isn’t a typical life insurance conversation. This is an investment conversation — we are looking at how much money we have put into our life insurance policy and how much money we are getting out.

The other benefits that go along with this are very important as well, but our main objective is to have a successful investment. If you’re looking to compare whole life insurance to term insurance, this isn’t the place for it. Once again, this is not an insurance conversation it is an investment conversation.

So, let’s move into the discussion and look at the benefits and growth that come with a high cash value life insurance policy.

Benefits of Life Insurance as an Investment

The core of any investment is the capital growth. That being said, the growth will vary depending on the benefits within the investment. For instance, a tax-free growth will yield a higher overall growth when compared to an investment that is taxed—because when it’s all said and done the after tax return is what goes into your pocket.

Let’s then look at the growth inside of a life insurance policy, and then look at the benefits surrounding that growth.


As you can see, here is one example of a life insurance policy’s growth. This life insurance policy was not created specifically for cash value, in fact front loading a policy, like we do now, wasn’t really in practice until the late 80’s or even the 90’s.


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This should give you an idea, though, of how a life insurance policy can grow. On this chart we can see the “Illustrated” growth number and the “Actual.” The illustrated is what the life insurance company predicted to the policy holder, a female age 35 at the time, before she purchased the policy. The actual represents what was actually realized inside the policy.

For this policy the predicted rate of return was 4.85%, and the actual internal rate of return was 6.25% on the cash value. We also see that if she were to die, her family would receive the equivalent of a 9.21% return on her money.

This gives us a general idea of the 30 year overall growth with a life insurance policy. A substantial, competitive, rate of return.

Now, this is not the end of the life insurance policy either, and as you get to understand cash value life insurance more you will see that life insurance growth continues to get better with age. We can assume this number will be higher in the end, but for now this gives us a good picture. Had this policy also been stacked, up-front, for cash value it would have performed even better.

Before we jump into a conversation about what this all really means, let’s talk about one more key factor that plays a role here.


As long as we keep a few dollars in our life insurance policy we will never pay taxes on the growth. We structure it in such a way that we can use the money inside our policy without ever paying taxes.

We have the ability to keep our life insurance policy tax-free. This is an important factor in understanding the growth. Although life insurance is great to talk about all by itself, we want to compare it to other investments. That’s the point, right?

Since we pay taxes on our money before we put it into our life insurance policy, when we die our death benefit will transfer income tax free. This is how we can have a life insurance policy grow and never pay taxes on that growth.

These two key factors give us the overall picture of how cash value life insurance as an investment works.

This gives you the bread and butter of life insurance as an investment. Now we can really start making our own comparisons to the investments we use everyday.

Life Insurance or 401(k)?

Usually, the comparison that is most relevant is how does life insurance match up to a 401k? It’s hard to get a good idea of how things in reality work when comparing an investment like life insurance to market based investments like 401(k)s. Also, a 401(k) will most likely have a match—up to a certain point—which can drastically impact overall returns. This doesn’t have to be a black and white conversation, though, often times people will use these investment hand in hand.

Here are a few of the factors that we can look at from a closer perspective.

Returns – Earning 7-8% in a 401(k) is, from what I have read and people I have talked to, a realistic return on investment. Some people earn substantially less, and some people will earn more. Again, there are a lot of differences between 401(k) plans and the investment options they have, so we are going to have to work off some generalities.

For the most part, 401(k)s will fluctuate along with the stock and bond markets. Typically, investment options available to 401(k) participants are made up of various mutual funds and ETFs.

Risk – With that in mind, let’s talk about risk. A life insurance policy has guaranteed minimums and is considered a safe, risk-free, investment. 401(k) investments are not guaranteed and will adjust with the markets. The closest thing to a risk free investment you can get in a 401(k) is investing in the cash (money market) fund. The problem there is that the returns are typically below inflation, so in reality you are losing money if you go with the ‘no risk’ option.

When you invest in whole life insurance you aren’t going to see huge swings up and down. You are going to get a steady 5%-7% year over year, regardless of what happens in the stock market. If you were invested in stocks, you might end up with the same return, but it is going to be much more volatile. One year your portfolio might be up 20%, and then the next year it is down 20%.

Taxes – A traditional 401(k) will eventually be taxed. When making a direct comparison to a life insurance policy we need to start by comparing our growth to a 6.5% growth is tax-free. In a 401(k) or IRA, this is the equivalent of 7-8% after fees. If we are comparing this to annually taxable investments then the number becomes even higher.

Liquidity – Life insurance is completely liquid and you can access the money anytime you need to. While it is possible to access 401(k) funds, unless you are 59-1/2 there are many strings attached. Here is an article from Fidelity that talks more about early 401(k) withdrawals.

Death Benefit – On top of all this, when you put money into cash value life insurance you also receive a death benefit. This is only an added benefit, something to understand and consider, but this is not the purpose of the investment.

Putting it Together

This isn’t a black and white discussion, nor should it be. Often times we hear one side of the argument or the other—one person is all for it, the other is completely against it. No investment should be this way. Some individuals don’t see a need for this, others will use the life insurance strategy in conjunction with a 401(k) because they want to take advantage of an employer match. Another person may use life insurance almost exclusively, or as place to store money to fund real estate or business ventures.

This isn’t a religious argument and it doesn’t require the zeal of extremism. Understand your options, weigh them, and make an informed decision. The overall goal is to do what’s for you and your family, and create a financial plan that works.

Other Benefits

This is not a complete summary of the benefits of cash value life insurance. This is meant to be an introduction to the product so you can get an idea about how it works. In my next articles we will discuss more of the benefits of whole life insurance and some of the strategies you can use to implement it into your financial plan. There are many diverse ways to use life insurance.

After that we will have an advanced segment discussing more of the more technical ways individuals, business owners and investors can use whole life insurance to their advantage.

Whole life insurance can be a great option for many individuals. My last words are a small disclaimer. These policies must be setup by a professional who knows what they are doing. Talk to an expert before making any decisions. Most life insurance salesman do not understand how this works. Remember, this is an investment and not just a life insurance policy.

Hopefully you now have a better idea of how cash value life insurance works. As always, talk to a professional before making any financial decisions.
Joshua Thompson is an advisor and advocate for using life insurance as an investment. He has been educating individuals and agents on the benefits of cash value life insurance, 401k alternatives, Infinite Banking, and other alternative investment topics for over 10 years. He has written a few books on this topic, including “The Simple Banking System” and can be reached personally through or at mailjosht (at) gmail.(com).


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