How to Use Whole Life Insurance to Create Wealth

Investors and high-net worth clients often ask us how to use whole life insurance to create wealth. Although it’s not the main reason we suggest buying coverage, there is a well-known asset maximization strategy that uses the cash value of a whole life policy to store and protect wealth. We’ll explain how it works, but keep in mind that the main reason to have coverage is for the death benefit. When you pass away, your loved ones will get an income-tax-free cash payout that protects their financial future.

Here’s what we’ll cover:

How Whole Life Insurance Works
Accessing Your Cash Value
How to Use Whole Life Insurance to Create Wealth
Quick Strategy Outline for Using Whole Life to Create Wealth
Whole Life & Wealth Generation: Considerations
Whole Life & Wealth Generation: Benefits

How Whole Life Insurance Works

Before we can talk about how to use whole life insurance to create wealth, we have to understand how it works. Whole life is one type of cash value life insurance, which covers you for your entire life (as opposed to a term policy, which expires). The price of your coverage is locked in when you buy. Your payment amount will never go up, which makes it easy to budget for over the long haul.

Every payment you make on your policy gets divided in two parts: one part goes to pay the cost of your coverage as well as any administrative fees. The rest goes into a cash value account, which grows with a flat, guaranteed rate of interest set by your insurer when you bought the policy. Whole life is the only type of cash value coverage with a guaranteed, unchanging rate of interest – that’s what makes it useful for people looking to create wealth.

Colorful stack of different U.S. cash denominations: $50, $20, $10, and $5

Accessing Your Cash Value

Over time, your cash value grows. You can access it in a number of ways:

Borrow against your policy’s cash value with a loan from your insurer. You’re not actually removing money from your policy – you’re using it as collateral to borrow the insurer’s money.
Withdraw a portion of your policy’s cash value. This is income-tax-free as long as you withdraw less that the total amount you’ve paid into your policy since you purchased it.
Withdraw all of your policy’s cash value if you ever surrender your policy. Surrendering is insurance-speak for cancelling your policy.

Now, we don’t recommend cancelling your policy – that death benefit protects your loved ones, and unless they’ve become independently wealthy, they’re likely to need that money when you pass away. Instead, we recommend accessing that money through policy loans and partial withdrawals if needed, while still keeping your coverage active.

Need real-life advice on whole life insurance? Call us or email us! You can reach us at (800) 521-7873 or info@lifequote.com. Or, if you’re curious about pricing, click the button below to start with a free term life quote.

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How to Use Whole Life Insurance to Create Wealth

If you hear a financial advisor talking about how to use whole life insurance to create wealth, they’re talking about growing your money through compounding interest. There are two main ways to do this with whole life insurance:

Overfunding your policy. Since whole life insurance’s cash value grows with a steady rate of compounding interest, having more principal means you earn more interest. To generate that interest, you can overfund your policy. By “overfund,” we just mean they pay more into their policy than their minimum payments require. They use the policy as a place to store money and have it grow, with interest, over time, tax-deferred.
Paid up additions. A second method of generating more cash value is to use “paid up additions,” which you can do if your policy pays yearly dividends and/or is issued by a mutual company. A mutual company will have “mutual” in the name, which means that policyholders are also part-owners of the company. These companies will redistribute profits above a certain benchmark among policyholders. When this happens, you can use a paid-up addition to purchase additional coverage – a policy contained your original policy that will have its own cash value. Now you have multiple cash value accounts growing with zero out-of-pocket expense, since you used the dividend or profit-share payout. This is a key factor in term of how to use whole life insurance to create wealth.

Desk with accessories and a note on it that says ‘make money’

Later, when you need capital to make other investments, you can leverage your whole life insurance policy’s cash value to get either bank loans or policy loans (from your insurer) at rates that are ideally the same or less than what your money is earning in interest in its cash value account. That way, even when you take a loan using cash value as collateral, your overall cash flow is positive because of your interest earnings.

Strategy Outline for How to Use Whole Life Insurance to Create Wealth

Grow cash value until there’s enough to borrow against.
Borrow from your insurer at a low, simple rate of interest (around 5%, usually).
Invest that money in a way that generates more than what you’re paying in interest.
Continue to earn interest on your policy’s cash value in the meantime.
Repay the loan for the amount you borrowed, plus any interest charged – keep anything your investment earned over that amount.
Repeat.

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Whole Life & Wealth Generation: Considerations

There are several things to consider regarding whole life insurance as a wealth generation strategy:

Whole life premiums are higher than other types of coverage. You will pay more for a whole life policy than you would for a term or universal life policy. That’s because the cash value is guaranteed – and the insurer is going to charge more for that guarantee. Expect to pay anywhere from 5 – 10 times more than a term policy. Do you have the budget for that right now? Can you commit to making those payments for years?
This is not a speedy way or a guaranteed way to get rich. This is a strategy that takes time – years, in fact. That’s why it’s important that you be able to commit to making those payments for years on end. If you’re already down to a bare minimum budget, you’re not going to be able to commit to the payments or the time frame needed to make this strategy pay off. Instead of thinking of this as “how to use whole life insurance to create wealth,” think of it as a way to protect the wealth you have and insulate it from market risk.
If you die with outstanding loans, your loved ones’ death benefit will be reduced. Careful planning can help prevent this, but just be aware that the insurance company will deduct any outstanding loans, plus fees and interest, from the death benefit before they pay it to your beneficiary(ies).
The rate you pay for policy loans may end up being as high as what you can generate from other investments. If this is the case, your chance to make a profit is slim. When you’re shopping for policies, pay close attention to the fine print on the interest rate each company will charge on whole life policy loans. Be realistic about what you expect your other investments to generate. Is there enough of a cushion to keep you profitable? If not, are there enough other benefits that the policy provides you with (death benefit, living benefits, lower interest rate on loans than a bank would charge, etc.)?

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Whole Life & Wealth Generation: Benefits

And here are the main reasons you’ll see this strategy touted as a good wealth-growing strategy:

Your cash value is not subject to market fluctuations. If the Federal Reserve reduces interest rates, your remains locked in as per your whole life insurance contract. If the stock market crashes and sheds value, your interest earnings are safe since they are in no way connected to the performance of any market index, stock, or fund.
You can borrow against your cash value with no income tax due. Because that money is structured as a loan, it is not income. You do not owe any income tax on that money. Some investors use this as seed money to generate even more income. If your investment pays off, you only owe income tax on the money you generate, not the money you were loaned.
There are no loan rejections if you borrow from your insurer. Unlike borrowing from a bank, there is no possibility of rejection as long as you are borrowing less than is present in your cash value account. And since you’re not removing that cash value – simply borrowing against it – it will continue to earn interest while you’re using the insurer’s loan as seed money for another investment.
You can act as your own bank. Because you’re in charge of generating your cash value and borrowing against it through your insurer, you are acting as your own bank. The insurer provides the tools in (a) the guaranteed rate of interest paid, and (b) additional sources of funds like dividends and profit-sharing for mutual company policyholders. What you do with those tools is up to you. For example, if the loan rate from your insurer is 5-6% and the bank would charge you 7-8%, you are saving yourself 2% by “banking” with your insurer instead.
Policy loans have no set repayment schedule. Unlike bank or credit card loans, there are no strict repayment time frames for policy loans. In fact, you technically don’t have to repay them at all. However, the insurer will deduct any open policy loans plus fees and interest from the death benefit before they pay it out to your loved ones. It’s a trade-off to keep in mind!

Need real-life advice on how to use whole life insurance to create wealth? Call us or email us! You can reach us at (800) 521-7873 or info@lifequote.com. Or, if you’re curious about pricing, click the button below to start with a free term life quote.

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This content is provided for informational purposes only. Please consult with the appropriate insurance, financial, and tax professionals for customized advice on your unique situation, policy illustrations, and any resulting income tax obligations.