Term vs. Whole Life Insurance: Is Whole Life The Right Vehicle To Build Wealth?

Life insurance is not just to insure your life and to pass on funds to your heirs. Life insurance can be used as a tool to build wealth. In fact, many of the rich and famous use the technique of borrowing against mega-million dollar policies to buy other assets.

It’s something hip-hop artist/reality show Waka Flocka Flame does.

He reportedly uses Indexed universal life (IUL) insurance to grow his wealth.

IUL is permanent life insurance, which means it lasts your entire life and builds cash value. An IUL policy allows for some cash value growth through an equity index account.

Waka Flocka reportedly holds an estimated net worth of $7 million in insurance policies. “I used to spend money on everything.” Now, he says he keeps millions of dollars in an insurance policy that he can borrow from.

Universal life insurance products have two key features: Death benefit and a cash account. With the cash account, you take withdrawals and loans, Market Realist reported. On top of that, the cash in your cash account can grow at a rate that’s likely higher than bank interest rates.

Besides ULI there is also whole life insurance and term life insurance.

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So should you use whole life insurance or term life as an investment tool?

First you will need to research both.

Whole life insurance isn’t a fit for everyone– it’s expensive and high maintenance. Whole life premiums can cost five to 15 times more than term policies with the same death benefit, so they may not be an option for budget-conscious consumers, Investopedia reported.

Whole life lasts your entire life and accrues a cash value that you can borrow against or withdraw while still alive.

But as an investment, whole life insurance may be best for high net worth individuals.

These policies earn interest in a tax-advantaged account, however, since they are expensive in terms of premiums, whole life policies might not suitable for most people, Nerd Wallet reported.

Whole life insurance is actually two products “rolled into one.” It includes a permanent life insurance policy that offers lifelong coverage and it also offers a savings account.

Here’s how the whole life policy works: You pay your premium and then the insurer invests a portion of it to give your policy a cash value. Your account grows over time at a fixed rate guaranteed by your insurer. The cash value portion grows tax-deferred, meaning that any interest you earn isn’t taxed as long as you keep the funds in the account, Nerd Wallet reported.

Once you’ve accumulated enough cash value, you can begin to take out loans against your policy. Your insurer will subtract any outstanding loans from the payout when you die.

Whole life can make sense as an investment in these situations. You’ve maxed out your retirement accounts. If you’re a high-net-worth individual who has made all the allowable contributions to your tax-advantaged accounts like 401(k) plans or individual retirement accounts, you could use a whole life policy to top up your tax-deferred savings.

Now, term life insurance if different and might not be as effective as a wealth-building tool.

Term lasts only for a certain number of years (the term) and does not accrue any cash value.
In addition to whole and term life, several other variations have arisen, such as universal life (UL). Term life is “pure” insurance and only protects you for a limited number of years.

“Term is really cheap and all you’re doing is investing in your death benefit, whether it’s a good investment or not. If you have loved ones that’s an investment that will take care of them,” explains business coach Kris Krohn on his YouTube show on an episode called “INSIDE THE VAULT: How to Use Life Insurance to Live Your Best Life.”

To make sure you select the right insurance policy for the purpose of increasing you wealth, it is advisable to speak with either a financial advisor or a life insurance expert.

Credit: fizkes, https://www.istockphoto.com/portfolio/fizkes?mediatype=photography