A life insurance agent talks through options with a client.

Is Life Insurance Considered an Investment?

Unsure if your life insurance is just for death benefits? Find out how whole and universal life policies can accumulate cash value, and whether they can serve as a greater long-term financial tool than you expected.

Published by Motley Fool Wealth Management Originally posted on Tue, Jul 15, 2025 Last updated on July 16, 2025

read time 4 min read

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Life insurance is often considered to be an important component of a well-rounded financial plan, thanks to the peace of mind it can offer your loved ones. But for some policyholders, a life insurance policy delivers more than financial protection in the event of death—it can be used to build wealth gradually over time.

Certain types of life insurance accumulate a cash value, which policyholders can borrow against, use to pay their premiums, or otherwise leverage as they wish (often in retirement).

But do you know how a life insurance’s cash value really works? And does it count as an investment vehicle… or is it more of a savings account? Let’s take a look at our answer below.

A Quick Breakdown of Term vs. Whole Life Insurance

Before we dive into the investment component of life insurance, we need to distinguish first between the two types of policies: term and whole (or permanent) life insurance.

A term life insurance policy will provide coverage over a predetermined period of time (hence the name “term”). You might obtain, for example, a 10-year, 15-year, or 20-year term policy to provide financial protection while your children are still young and fully dependent on your income. Once the term has finished, you stop paying premiums and coverage ends. 

Term life policy premiums are generally lower than whole life premiums, though again, they aren’t meant to last forever.

A whole life insurance policy is designed to last your lifetime. As long as you continue paying your premiums, it has no expiration date, and your beneficiary is guaranteed to receive a payout.

Whole life premiums are almost always higher than their term life counterparts, and participants are usually required to obtain a medical examination as part of the policy’s underwriting process. Term life policyholders may need a medical exam as well, though not all policy issuers require it.

How Whole Life Insurance Accrues a Cash Value

Unlike a term life policy, a whole life insurance policy may act as a savings or investment vehicle for the policyholder. Typically, when you pay your policy’s premium each month, the funds will be divided into different “buckets,” including:

  • Your death benefits
  • Policy fees and expenses
  • A cash value

Over time, the cash value will grow from your monthly contributions—though you may notice a rather slow start. This is because, in most cases, the cash value accumulates after the other “buckets” have been addressed. In other words, most of your premiums will go towards the policy’s fees and costs in the beginning. Eventually, a greater portion of your premiums will be used to fund the death benefit and cash value.   

Depending on what your policy provider offers, you may have a few options for increasing the account value beyond your initial contributions:

Interest: The cash value of your insurance policy will typically accrue interest, based on a fixed rate established in your policy contract. The interest rate will vary, but it’s likely comparable to a high-yield savings account. 

Dividends: Some policy providers are considered mutual life insurers, meaning they’re owned by the policyholders instead of investors. If your policy is through a mutual life insurer, you may be entitled to annual dividends. You can use your dividends in different ways, such as lowering your monthly premiums or increasing your policy’s cash value. You might also be given the option to cash out your dividends right away.

Paid-up additions (PUAs): If your policy does offer dividends, you can typically use them to purchase paid-up additions (PUAs). A PUA is essentially a small chunk of life insurance, with its own death benefit and cash value—but because it’s “paid up,” there are no ongoing premiums. This means any PUA added to your policy will increase the cash value, but not your monthly out-of-pocket costs. Policyholders may have the option to buy additional PUAs with cash. Doing so helps grow the policy’s cash value beyond what’s contributed from their premiums and dividends.

A Note on Universal Life Insurance

While term and whole are the most common types of life insurance, there is another option—one that allows policyholders to take on more market risk in return for greater potential growth.

A universal life insurance policy is similar to whole life insurance. Both are permanent policies that accrue a cash value over the policyholder’s lifetime. The primary difference, however, is that universal life policies come with flexible premiums and death benefits—as well as the option to participate in the stock market. 

With this type of policy, you are not limited to a monthly premium payment. You can change how much and how often you pay towards the policy (though underpayment can lead to a lapse in coverage). You typically have the option to increase or decrease the death benefit as well, though certain requirements will apply when doing so.

Investing with Universal Life Insurance

Unlike the conservative fixed rate offering found in whole life policies, universal life policies allow investors to participate in the stock market through their policy’s cash value. 

An indexed universal life (IUL) policy enables the cash value of the policy to grow based on the performance of a specific index (such as the S&P 500). The insurance company will invest in funds or other assets that mirror index performance on your behalf. 

Generally, IUL policies come with some form of investor protection. A “floor,” for example, limits how much downside your cash becomes exposed to. Even if the index drops, your losses will be limited. On the flip side, a “cap” limits how much upside you’re able to capture as well. If the index experiences 13% growth but your funds are capped at 10%, you’ll only benefit up to that 10% growth cap. 

A variable universal life (VUL) policy enables the cash value to be invested as well, though you have control over what assets or subaccounts your funds become invested in. A VUL may not provide the same investor protections as an IUL, meaning your assets (and potentially the death benefit) could experience major loss should the markets drop. The opposite is true as well, meaning a VUL offers greater potential for capturing growth. Generally speaking, however, this type of policy may be more appropriate for someone with advanced knowledge or interest in investing—which not all policyholders may have.  

Final Verdict? 

Life insurance is really designed to be a tool for mitigating risk—more specifically, the risk of death.

Yes, you could use your life insurance policy as an investment tool and build up a cash value to leverage in retirement or borrow against for major purchases. Just keep in mind, obtaining a policy for investing purposes requires some careful consideration.

Whole life insurance is a relatively conservative investment option, for example. While you may have the option to increase the cash value through dividends or PUAs, the earnings are generally limited to a fixed interest rate. Though, keep in mind that there’s a tax advantage. Earnings in the account are tax-deferred, meaning you won’t be required to pay taxes until withdrawals are made.

A universal life insurance policy enables investors to participate in the stock market while maintaining a death benefit, but there may be growth limitations and high fees to consider. However, for conservative investors, the guaranteed protections that come with some types of universal life insurance may be appealing.

Is Your Life Insurance Policy an Investment Vehicle?

If you have a term policy, no—your insurance policy is not an investment vehicle. If you own a whole life or universal life policy, however, then the answer is yes. The cash value of your policy can grow over time, either through fixed interest rates, market participation, or some combination of both (as may be the case with IULs).

A life insurance policy, however, is certainly a more expensive option than using a traditional brokerage account or retirement savings plan. If your primary goal is to build wealth (as opposed to leaving a guaranteed payout for your heirs), there are other likely more cost-effective options on the table.

However, everyone’s financial situation is different, and many policyholders appreciate the stability and security a guaranteed cash value offers. If you’re able to balance the protection and stability of your permanent life insurance policy with other opportunities for growth, it could make sense to incorporate this tax-effective wealth transfer tool into your portfolio. You may find it helpful to speak with a financial advisor to learn more about your options.

 

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