How to Use Your Whole Life Insurance

Summary: Learn how to use whole life insurance effectively by understanding its unique benefits, tax advantages and practical tips to help maximize its value for long-term security. Life insurance is one of those things many people know they should have but aren’t entirely sure why or how it fits into their lives. In fact, while 70 percent of people recognize the need for life insurance, fewer than 60 percent are covered.¹

In this article:

With so many options out there, understanding which policy serves you best can be a challenge. If you're exploring whole life insurance specifically, you’re looking at more than just protection for loved ones—it's also a tool for long-term savings and even tax advantages.

Let’s take a closer look at how to use whole life insurance to your advantage.

Whole life insurance as an investment

Whole life insurance isn’t just about protection—it also builds cash value over time, giving you access to a growing financial resource during your lifetime. This feature allows you to use your life insurance as an investment.

This cash value component grows tax-deferred, which means your money compounds without adding to your annual tax bill. Many people see this as a way to diversify their financial portfolio with steady growth, much like a savings account but with added security.

Think of it as using whole life insurance as a bank. You can borrow against your policy’s cash value or even take out a loan from it if an unexpected need arises. However, unpaid loans will impact your death benefit, so it's wise to keep an eye on your policy’s performance and understand the penalties in advance.^**

This approach gives you a financial safety net while allowing you to build equity you can access if needed.

Whole life insurance is tax-deferred

One standout benefit of whole life insurance is its tax-deferred growth. As your policy’s cash value grows, you won’t pay taxes on the gains each year, allowing your savings to build faster than in a regular, taxable account. This is why some view whole life insurance as an investment—you can increase your wealth without increasing your tax burden, making it a savvy tool for long-term planning.

One standout benefit of whole life insurance is its tax-deferred growth. As your policy’s cash value grows, you won’t pay taxes on the gains each year, allowing your savings to build faster than in a regular, taxable account. This is why some view whole life insurance as an investment—you can increase your wealth without increasing your tax burden, making it a savvy tool for long-term planning.

This tax advantage can be especially helpful if you’re looking for ways to reduce taxable income in retirement. However, any interest on loans will impact the policy’s value and future death benefit, so plan wisely to maximize your benefits.

It’s worth consulting a tax advisor to fully understand how this strategy fits into your financial picture, especially if you’re aiming to diversify your assets while enjoying tax-free growth.

Whole life insurance makes a great gift

When we think about meaningful, lasting gifts, whole life insurance isn’t usually the first thing that comes to mind—but it’s a gift that can truly keep giving.

Purchasing a whole life insurance policy for a child or grandchild may help provide them with lifelong financial security. This type of policy accumulates cash value over time, which they can access in the future if needed. While the cash value can help cover expenses, like college tuition or purchasing a car it may not fully cover these costs. Additionally, borrowing money from the policy will reduce the death benefit, impacting the payout to beneficiaries.^*

What makes this gift even more appealing is its tax-deferred growth. The cash value increases without adding to the tax bill, giving the recipient a savings tool that builds value without the usual tax worries.

Using whole life insurance as collateral for loans

One lesser-known benefit of whole life insurance is its ability to serve as collateral for loans, giving you flexible access to funds when you need them most.

The cash value that accumulates in a whole life insurance policy can be used as collateral for personal or business loans. This added financial backing may help secure more favorable loan terms, particularly for individuals who are self-employed or have unconventional financial situations.

Using whole life insurance as collateral can help you secure funds for major expenses—such as expanding a business or investing in property—without affecting your death benefit or dipping into other assets. Plus, borrowing against your policy tends to be faster and comes with fewer credit restrictions compared to traditional loans.

However, there are some cons to consider:

While leveraging your whole life insurance can provide financial flexibility, it’s essential to weigh the risks and manage the loan responsibly to help ensure you maintain your coverage and protect your loved ones.

Five whole life insurance tips you need to know

Whole life insurance can be a powerful part of your financial strategy, but understanding how to make the most of it is essential. Here are five key tips to help you maximize the value of your policy:

1Define your “why”

Whole life insurance isn’t just about coverage; it’s a financial tool. Get clear on your goals—whether it’s protecting loved ones, building retirement income, or creating cash value for the future. Knowing your “why” will guide you in selecting the policy that best fits your vision.

2The early bird gets the better rate

Premiums for whole life insurance are typically lower when you’re young and in good health. Locking in a policy early can save money long-term and give your policy more time to grow.

3Leverage dividends if available

Some whole-life policies are dividend-paying, meaning they provide annual dividends based on the insurer’s profits. Dividends can be used to buy additional coverage, reduce premiums, or taken as cash. Leveraging dividends can help grow your policy's value over time.

4Regularly review your policy

Life is constantly changing, and your financial needs evolve too. Make it a habit to review your policy annually or after any major life changes (such as marriage, having children, or retirement). This way, you ensure your policy continues to align with your financial goals.

5Use policy loans with caution

While whole life insurance allows you to borrow against your cash value, it’s essential to be cautious. Unpaid loans reduce both the cash value and the death benefit, potentially leaving your beneficiaries with less coverage. Borrow only what you need and have a repayment plan.

Frequently asked questions (FAQs)

Can I use whole life insurance as a bank?

You can utilize whole life insurance as a bank by borrowing against the cash value of your policy. This allows you to access funds for personal needs without taking out a loan from your policy or affecting your death benefit. Penalties may apply, so be sure to consult with a tax advisor before taking action.

What happens if I stop paying premiums on a whole life policy?

If you stop paying premiums, most whole life insurance policies provide options like using accumulated cash value to cover premiums or converting the policy to reduced coverage. However, if the cash value is insufficient, the policy may lapse, terminating your coverage.

Is whole life insurance worth the cost?

Whole life insurance can be worth the higher premiums for individuals looking for a combination of lifetime coverage, guaranteed cash value growth, and potential dividends. Assess your financial needs and goals or consult a financial advisor to determine if it's the right choice for you.

Sources:
1. Forbes Advisor, Life Insurance Statistics, Data And Industry Trends 2024, January 2024