When I talk with clients about their financial planning, one question comes up more than almost any other: “Is life insurance a good investment?” I get it—there’s a lot of conflicting information out there, and it can be confusing to sort through all the opinions from financial advisors, insurance agents, and online articles.
For a complete overview, see our comprehensive MPI guide.
After helping hundreds of families protect their financial future, I’ve learned that this question usually means people are trying to understand if life insurance can do more than just provide a death benefit. And the honest answer? It depends on what type of life insurance you’re talking about and what you’re trying to accomplish.
Let me walk you through what you need to know so you can make an informed decision for your family.
The Short Answer: It Depends on the Type
Here’s the thing—when people ask “is life insurance a good investment,” they’re usually not talking about term life insurance. Term life is pure protection: you pay premiums, and if you pass away during the term, your beneficiaries get the death benefit. If you don’t pass away, the policy expires with no cash value. That’s not an “investment” in the traditional sense.
But permanent life insurance—whole life, universal life, and indexed universal life—these policies build cash value alongside the death benefit. This is where the investment question becomes relevant.
Why Traditional Financial Advice Often Gets This Wrong
I’ve noticed that many financial advisors automatically say “buy term and invest the difference.” The logic sounds simple: term insurance is cheaper, so take the money you’d spend on permanent coverage and put it in the stock market instead.
But here’s what I’ve observed from working with real families: most people never actually invest that difference. They spend it. And even when they do invest it, they’re taking on market risk that permanent life insurance policies can help them avoid.
My parents learned this lesson the hard way. They ran multiple businesses in the Chicago suburbs, raised five boys, and worked incredibly hard to give us a great life. When they tried to catch up on retirement savings through real estate and the stock market, 2008 wiped them out. Watching them lose their properties, their savings, and their retirement plans changed how I looked at the traditional financial system.
How Cash Value Actually Works
When you pay premiums on a permanent life insurance policy, part of that premium goes toward the cost of insurance (the death benefit), and part builds cash value inside the policy. This cash value grows over time and can be accessed while you’re alive.
Think of it like having two benefits in one policy:
- Protection for your family if something happens to you
- A financial asset you can use during your lifetime
The cash value in these policies grows in different ways depending on the type:
Whole Life Insurance: Your cash value grows at a guaranteed rate, plus potential dividends from the insurance company (though dividends aren’t guaranteed).
Universal Life: Your cash value earns interest based on current market rates, but there’s usually a guaranteed minimum.
Indexed Universal Life: Your cash value growth is linked to a market index like the S&P 500, but with a guaranteed floor (typically 0%) so you can’t lose money when the market goes down.
The Real Question You Should Be Asking
Instead of asking “is life insurance a good investment,” I think the better question is: “What am I trying to accomplish, and is there a way life insurance can help?”
Here are some situations where the cash value component of life insurance might make sense:
Tax-Advantaged Growth
The cash value in permanent life insurance grows tax-deferred. You don’t pay taxes on the growth as long as it stays in the policy. And if structured properly, you can access that cash value through policy loans that are generally not treated as taxable income.
Principal Protection
Unlike investments in the stock market, many permanent life insurance policies offer guarantees. With indexed universal life, for example, you might participate in market gains up to a certain cap, but you’re protected from losses with a 0% floor.
No Contribution Limits
Unlike retirement accounts that have annual contribution limits, permanent life insurance doesn’t have government-imposed limits on how much you can contribute (though there are limits to maintain the tax benefits).
Supplemental Retirement Income
Some people use cash value life insurance as part of their retirement planning. The idea is to build substantial cash value over time, then access it through loans during retirement to supplement other income sources.
When Life Insurance Probably Isn’t the Right Choice
Let me be honest about when life insurance doesn’t make sense as a wealth-building strategy:
If you’re just starting out financially: If you’re struggling to make ends meet or don’t have an emergency fund, term life insurance is probably a better choice. Focus on building your financial foundation first.
If you need maximum growth potential: If you’re young, have a high risk tolerance, and want to maximize growth potential over decades, direct market investing might serve you better.
If you’re not committed for the long term: Permanent life insurance works best as a long-term strategy. If you might need to cancel the policy within the first 10-15 years, the surrender charges could make it a poor financial choice.
The MPI Strategy: A Different Approach
In my practice, I work with clients who are interested in a specific strategy called MPI (Maximum Premium Indexing). This approach uses a properly designed, max-funded indexed universal life policy to create retirement income.
The strategy addresses a problem I see all the time: people who diligently save for retirement but discover that their account balance doesn’t produce enough spendable income. Let’s say you have $1 million in your 401k. Using the 4% rule—which is what most advisors recommend—that gives you $40,000 a year. After taxes, you’re looking at maybe $32,000 take-home. That’s less than $3,000 a month.
Now compare that to $1 million in cash value using the MPI strategy. You could potentially take distributions at a higher rate—possibly up to 10%—and access that money tax-free through policy loans. That’s the difference between scraping by and actually having financial freedom in retirement.
But here’s the catch—this isn’t a get-rich-quick scheme. It requires commitment, discipline, and a long-term perspective. The strategy works best for people who understand compound growth and are willing to stick with it for 20-40 years.
What to Look for in a Policy Design
If you’re considering permanent life insurance as part of your financial strategy, here’s what I recommend focusing on:
Minimize the Death Benefit
For wealth building purposes, you want the lowest death benefit the IRS allows while still maintaining the tax benefits. This is called a Modified Endowment Contract (MEC) limit.
Maximize the Premium
The more premium you can put in (up to the MEC limit), the more cash value you can build.
Understand the Costs
All life insurance policies have internal costs. In a properly designed policy for wealth building, you want these costs minimized relative to the premium you’re paying.
Choose the Right Index Options
If you’re looking at indexed universal life, understand how the caps, floors, and participation rates work. These determine how much of the index performance you actually receive.
The Tax Advantages You Need to Know
One of the most compelling aspects of using life insurance for wealth building is the tax treatment:
Tax-Deferred Growth: Your cash value grows without annual tax consequences.
Tax-Free Access: When structured properly, you can access cash value through policy loans that aren’t treated as taxable income.
Tax-Free Death Benefit: Your beneficiaries receive the death benefit income tax-free.
This tax treatment can make a significant difference in your net retirement income compared to traditional taxable accounts.
Common Misconceptions I Hear
“Life insurance returns are terrible” This might be true for traditional whole life insurance, but indexed universal life has historically provided returns in the 7-8% range while protecting your principal.
“The fees are too high” A properly designed max-funded policy can have lower long-term costs than many managed investment portfolios, especially when you factor in the tax savings.
“I can do better in the stock market” Maybe, during bull markets. But can you do better after taxes, after market losses, and with the peace of mind of principal protection? That’s the real comparison.
Questions to Ask Yourself
Before deciding if life insurance makes sense as part of your financial strategy, consider these questions:
- Do I need life insurance for protection anyway?
- Am I maximizing my employer 401k match first?
- Do I have adequate emergency savings?
- Am I looking for tax diversification in retirement?
- Do I want principal protection as part of my strategy?
- Am I committed to a long-term approach?
- Do I understand how the policy works?
- Choose permanent life insurance over term if you want both death benefit protection and cash value growth that you can access while alive.
- Avoid the common “buy term and invest the difference” advice since most people never actually invest that difference and end up spending it instead.
- Understand that cash value in permanent policies grows through guaranteed rates, market-linked interest, or index performance depending on whether you choose whole life, universal life, or indexed universal life.
- Consider permanent life insurance as protection against market volatility since these policies can provide guaranteed floors and avoid the losses that traditional investments face during market downturns.
- Recognize that permanent life insurance serves dual purposes by combining family protection with a financial asset you can use during your lifetime through cash value access.
The Bottom Line
Is life insurance a good investment? For some people, in some situations, with the right policy design—yes, it can be an effective part of a comprehensive financial strategy. But it’s not right for everyone, and it’s definitely not a substitute for understanding your overall financial picture.
The key is working with someone who takes the time to understand your specific situation and can show you how different strategies might work for your family. I’ve seen too many people get sold inappropriate policies because the agent was focused on commission rather than what was truly best for the client.
What I’ve learned after helping hundreds of families is that there’s no one-size-fits-all answer. Your age, income, risk tolerance, other assets, and financial goals all play a role in determining whether permanent life insurance makes sense for you.
Every family’s situation is different, which is why I don’t believe in cookie-cutter solutions. As an independent agent, I’ll take the time to understand your needs and show you how different strategies—including the MPI strategy—might work for your specific situation.
Related Reading
- Benefits of IUL: What You Should Know
- Indexed Universal Life Insurance Pros and Cons
- Retirement Income Solutions: What You Should Know
- Policy Loan Life Insurance: What You Should Know
Ready to explore your options? Schedule a free consultation and let’s discuss whether life insurance could be a smart addition to your financial plan. I’ll help you understand the numbers and make a decision that’s right for your family’s future.
