Did you know that a whole life insurance policy can actually help you make money? It’s true—and it’s a strategy sometimes used by those with higher incomes and net worths.
For those seeking life insurance coverage, a term life insurance policy is typically the more affordable and simpler choice. Both Sam and I opted for matching 20-year term life insurance policies through Policygenius two years after our daughter was born. If we were younger, we would have considered a whole life policy.
However, if you’re a high-income earner searching for ways to grow your wealth beyond traditional investment accounts, whole life insurance is worth considering. Once you’ve built a solid financial foundation and are already maxing out your 401(k), IRAs, and other tax-advantaged accounts, whole life insurance could be another tax-efficient way to make money and diversify your investments.
Difference Between Whole Life Insurance And Term Life Insurance
Before we dive in, let’s quickly clarify the difference between a whole life insurance policy and a term life insurance policy.
A whole life insurance policy is like owning a home with a mortgage. It often costs more upfront compared to renting, but over time, you build equity—known as “cash value” in the context of whole life insurance.
Term life insurance, on the other hand, is like renting a home. It’s typically less expensive and gets you want you want, namely shelter. But you don’t accumulate any equity. Once the term expires, you’re left without coverage unless you renew, much like moving out when a lease ends.
After 20+ years of owning a home, you’ve built tremendous equity, which can be accessed through a loan or by selling the property. But after 20 years of renting, you’re left with no equity—just the memories of living there.
Critics of whole life insurance argue that people can save and invest the cost difference to achieve higher returns, which is true in theory. However, the reality is that few individuals consistently save and invest the difference over many years. Forced savings is a powerful wealth-builder, and one of the reasons why the median net worth of homeowners is 25-40X greater than the median net worth of renters.
Whole life insurance provides lifelong insurance coverage and the added benefit of growing cash value. The policy holder can borrow against their cash value, withdraw cash (although it may reduce the death benefit), and use it to fund premiums in later years. The holder can’t take the cash value with them when they die nor do their beneficiaries get the cash value. But holders get peace of mind and liquidity while they are living.
Ways to Earn Money with Whole Life Insurance
Let’s dive into seven ways you can actually make money with a whole life insurance policy.
1. Buy Early for Maximum Growth
Whole life insurance works best as a savings and investing vehicle over the long-term. After all, the “whole” in whole life insurance is for your whole life. If you’re already in your mid-40s or older, it may be too expensive and you may not have enough time to build up your cash value.
These policies take time to build significant cash value—often years, if not decades. That means the sooner you buy, the more time your policy has to grow and accumulate value. The younger you are when you purchase a whole life policy, the more opportunity it has to increase in cash value and the cheaper it is. Ideally, the best age to get life insurance is about age 30. It’s still highly affordable then, and after age 30, life tends to get a lot more complicated.
Some whole life policies offer an indexed feature where cash value growth is linked to a financial index, like the S&P 500, without being directly invested in the market. Like some structured notes, this whole life policy offers upside potential with downside protection (e.g., growth capped at 8%, but losses are limited to 0%).
Take a look at this chart to see how both the cash value and death benefit can grow over time.
Example Of How To Make Money From A Whole Life Insurance Policy
Scenario: At age 30, you purchase a $1 million whole life insurance policy with annual premiums of $10,000. The annual premium is likely $9,000 more than a term life insurance premium policy.
Cash Value Growth: After 20 years, you’ve paid $200,000 in premiums. Assuming a 5% annual return (through cash value accumulation and dividends in a mutual company policy), the policy's cash value grows to approximately $270,000.
Financial Outcome:
- You've gained $70,000 in cash value, a 35% increase over premiums paid.
- You can borrow against the $270,000 tax-free for investments or expenses, maintaining the policy and its benefits.
- The death benefit may also increase over time if dividends by the insurance company are paid and rolled in.
2. Choose a Whole Life Policy with Higher Dividends
If you're looking to accelerate the cash value growth of a whole life insurance policy, opting for one with higher dividends is key. Maybe you can also lock in a higher guaranteed interest component, which is more commonly offered during a higher interest rate environment.
The best way to achieve this is by choosing a mutually traded insurance company. These companies are structured differently than publicly traded insurers. While stockholder-owned companies prioritize their investors, mutual companies are owned by the policyholders. This means you stand to benefit the most.
With a mutual insurance company, the growth of the company itself, along with its competitive dividend rates, helps drive up the cash value of your policy over time. Thanks to the power of compound interest, these high dividends can significantly increase your return, giving you more financial leverage as the years go on. Some examples of mutual companies include Northwestern Mutual, MassMutual, New York Life, Principal Life Insurance, and Guardian Life.
Example Of How To Make Money With A Whole Life Policy: Leveraging Dividends
Scenario: You purchase a $500,000 whole life policy at age 40 from a mutual insurance company with an annual premium of $7,500.
Dividends: The policy pays annual dividends averaging 4%. After 25 years, you've paid $187,500 in premiums.
Financial Outcome:
- The policy's cash value grows to about $250,000, fueled by dividends and compound interest.
- Over 25 years, the dividends alone have added around $62,500 to your policy’s value.
- You can access the cash value through loans or withdrawals, while the death benefit remains intact (less any outstanding loans).
3. Borrow Against Your Policy Instead of Cashing Out
Once a whole life insurance policy has built up significant cash value, it might be tempting to cash out. But think carefully before you make that move. Canceling your policy can trigger taxes on the amount you withdraw, significantly reducing the gains you’ve earned over the years. Then, of course, is the loss of life insurance coverage and the death benefit to your beneficiaries.
Once your cash value has grown enough, you can take a loan against it instead of cashing out if you need funds. This allows you to access cash, without losing the policy or facing tax penalties. Plus, you can replenish the loan later when it’s more convenient for you. This is called the Infinite Banking concept.
Infinite Banking Concept
This strategy uses the whole life policy as a personal financing system:
• Borrow from the policy to fund investments.
• Repay yourself with interest, effectively keeping your money “in-house” while growing the cash value.
Common Uses:
• Tax-advantaged growth while recycling capital.
Keep in mind, however, that if you do take out a loan, it will accrue interest. If you decide not to pay it back, the amount you owe, plus any interest, will be deducted from your death benefit when the policy is paid out to your beneficiaries.
Borrowing from your policy can be a smart move if you use the cash in a way that earns more than the loan’s interest rate. For example, you could conceivably invest the money in the stock market or in a private real estate that could generate much more than the interest cost overtime. Of course, you could also lose money as well so be careful. It’s important to consider the long-term impact on your policy’s value.
4. Watch Out For Tax Traps
The cash value of a whole life insurance policy grows tax-deferred, but there are tax traps you need to avoid. If your policy is overfunded and fails the 7-pay test (see below), it could become a Modified Endowment Contract (MEC). Once classified as an MEC, any withdrawals will be taxed as ordinary income—and if you're under 59 ½, you'll also face a 10% penalty. What’s more, once a policy becomes an MEC, its status can never be reversed.
To avoid these tax pitfalls, don’t rush to overfund your policy in an effort to speed up cash value growth. With whole life insurance, slow and steady is the key to maximizing benefits.
If used properly, a whole life policy can grow cash value without triggering taxes, allowing you to fully take advantage of its living benefits.
What is the 7-pay Test?
The 7-pay test is a key IRS rule used to determine whether a whole life insurance policy has become a Modified Endowment Contract (MEC). It essentially limits how much you can contribute to a policy in the first seven years in order for it to still be considered a “life insurance” policy for tax purposes, rather than a “investment” or “savings” vehicle.
Here's how it works:
- The IRS sets a maximum amount you can contribute to the policy in the first seven years, based on the death benefit of the policy. This is the 7-pay premium, or the “7-pay limit.”
- If the premiums you pay during this period exceed this limit, the policy fails the 7-pay test and is classified as a Modified Endowment Contract (MEC).
- A policy that fails the test is no longer treated as a life insurance policy for tax purposes. Instead, it’s treated as an investment or savings vehicle, which triggers different tax rules.
What happens if the policy becomes an MEC?
- Taxation of withdrawals: Any withdrawals or loans taken from the policy are taxed as ordinary income (not capital gains).
- Early withdrawal penalties: If you're under age 59 ½, there’s also a 10% penalty on the taxable amount.
- Permanent status: Once a policy becomes a MEC, it cannot revert back to a regular life insurance policy, no matter how much time passes.
Manage your premiums carefully, especially in the early years, to avoid surpassing the 7-pay limit and accidentally converting your policy into an MEC.
5. Use the Benefit for Estate Taxes
One of the major advantages of whole life insurance is that it’s a permanent policy—meaning it never expires. Unlike term life insurance, which only lasts for a set period, a whole life policy guarantees a death benefit no matter when you pass, whether it's in 20, 50, or 80 years.
For wealthy policy holders, this can be especially valuable if you anticipate you or your heirs may face federal estate taxes. Currently, estates valued above $13.99 million per person (2025 estate tax limit for individuals) are subject to federal estate taxes of about 40%. For married couples, that threshold rises to $27.98 million. However, these lofty estate tax exemption levels are set to expire at the end of 2025 to roughly $6.8 million, adjusted for inflation, unless Congress takes action. There are also state specific estate tax exemptions to consider as well.
If your estate exceeds these thresholds at the time of your passing, your life insurance payout can be used to cover the estate taxes. This ensures the estate’s other assets (e.g., real estate, investments) don’t need to be sold.
Example: A $20 million estate owes $4 million in taxes. A $4 million death benefit from the whole life policy can cover this liability without liquidating family assets or your heirs having to pay out of pocket.
But to ensure this process goes smoothly, please create a death file and be sure to leave clear instructions with your attorney so your beneficiaries understand the purpose of the funds.
6. Reduce Your Taxable Estate with a Irrevocable Life Insurance Trust (ILIT)
A large life insurance payout can increase the value of your estate, potentially pushing it over federal limits and subjecting it to estate taxes.
To avoid this, you can reduce the taxable value of your estate by placing your life insurance policy in an irrevocable life insurance trust. This strategy allows the policy’s death benefit to be excluded from your estate’s valuation, ensuring that the money you leave to your family doesn’t inadvertently increase your taxable estate.
Keep in mind that transferring wealth through a trust comes with its own set of tax implications. It’s essential to work with an experienced estate planning attorney to set up the trust properly and avoid any unintended tax consequences.
7. Work with a Certified Financial Planner and Estate Planning Lawyer
Making money from your whole life insurance policy can be complicated. One wrong move and you could be liable for taxes or impede on your financial goals. That’s why you should talk to someone who can help you map out how to best utilize your policy. A well-executed policy leads to high returns and more money in the bank.
A certified financial planner can make sure you're maximizing your policy’s cash value. And they can do so without jeopardizing the reason you probably got a policy in the first place—to pay out to your family when you die.
An estate planning attorney can also handle the intricacies of properly mapping out your estate plan. They can ensure that your life insurance policy complements it. Estate planning attorneys are specialized in transferring your assets after you pass. They will guide you through the end-of-life planning process.
Whole Life Insurance Can Help You Build Wealth
After reading this post. I hope you can now better understand how a whole life insurance can make you money and protect your family. It’s complicated, which is one of the reasons why people don’t even bother to explore it, even though there are plenty of other reasons to get a whole life policy, e.g. you have disabled children. Term life insurance, although simpler and less expensive, doesn’t doesn't help the policy holder build wealth directly.
In retrospect, Sam and I probably should have considered whole life insurance policies in our late 20s or early 30s, given how our finances have turned out. By now, we could have built significant cash value with permanent life insurance coverage at a fixed low premium. We wouldn’t have had to stress about getting medical exams and hunting for new policies at higher rates. Nor would we have experienced a stressful liquidity crunch after purchasing our home.
The challenge, however, is the higher monthly premiums for a whole life policy. They are significantly more expensive than a term life policy that offers the same coverage for a much lower cost. When we're younger, it's hard enough to make ends meet, let alone think about how to protect our unborn children that may never come.
So, if you're still relatively early in your career and feel optimistic about your future and America's economic prospects, it’s worth looking into a whole life insurance policy. There’s no downside to comparing quotes to a term policy and planning out what your financial future might look like.
Readers, do you have a whole life insurance policy? At what age did you decide to purchase one? Have you taken the above seven steps to make money from your whole life insurance policy?
Shop Around For The Best Life Insurance Rates
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During the pandemic, I was able to secure double the amount of life insurance coverage for 30% less money through Policygenius. Sam was also able to get a matching term life insurance policy with the same duration and benefit. Having our life insurance needs squared away has brought us tremendous peace of mind, knowing that if anything were to happen to us, our two young children would be financially protected.
I have a whole life policy (actually four of them that I bought in increments) totaling about 865k.
I bought them around age 30. I’m 47now. It took quite a while to break even vs. purchasing term insurance, but they are starting to accumulate these last couple of years.
I’ve found them useful in two regards: (1) I borrowed against them when I did a full home remodel a few years back. It was much easier than getting a construction loan, (appraisal etc); (2) they’re a helpful mechanism to name beneficiaries outside of probate and spousal consent requirements (e.g., that may exist for life insurance purchased through an employer). I use them to provide for siblings, nieces/nephews, etc. At least for my family, this approach will minimize hard feelings and bickering.
In case helpful, here are the details of one of the policies:
My conclusion is that whole life has not been a great investment, but it’s good for diversifying (particularly now that I’m getting to the point of having significant assets in other “baskets.”) It also has some useful side features, such as “autopilot” savings and the other benefits noted above.
I have whole life insurance policies as part of my portfolio. Started out with term policies that could be converted to whole life. One of the advantages of taking this approach is getting the term policies when I was young, pass medical and much lower rates. Then I could choose to convert to whole life or let the term policies expire. Best part the conversion did not require a medical examination and then the rates were set. I chose multiple policies spaced out over two year intervals to give me flexibility and meet the needs of increasing protection requirements. What I found the primary reason for life insurance is to provide a security blanket for the time period needed to support those who depend on you, second it can be used as part of an overall portfolio risk mitigation, third estate planning, fourth tax advantaged.
I did not start with whole life policies because I just needed protection and wanted to invest in higher return instruments. In my case the whole life insurance policies are not an investment vehicle per say more the other attributes listed as part of my overall portfolio strategy.
I needed an investment plan early on that I could adjust based on the situation. I had to educate myself on all the different portfolio alternatives and run different scenarios. Having a diverse financial plan with flexibility and alternatives/options along the way has been my mantra.
I wish I would have had the ProjectLab tool to have helped me!
There is lot of confusion about whole life and infinite banking. Spent time on it along with interviewing multiple brokers who specialize in it.(lots of misinfo about it online from buy term and invest difference mindset)
For me its my bond equivalent portion of my Asset portfolio (grows currently 6% tax free) and so many benefits of it….tax free growth, asset protection, use it for long term care costs where the death benefit pays it off when you die, can pay off estate taxes tax free at death, instant liquidity if need cash for investment, dont have to deal with retirement plan rules/RMDs, etcetera….
So many people focus on term life which then expires well before you die(which is why its cheap) and costs fortune to renew when you are elderly.
Really important to use a broker that is really specialized in how to optimize them.
Thanks for sharing these insights. I always found whole life to be way over my head. Now I understand it much better. For now I have a simple term life policy, which should be sufficient for my needs.
When my then-wife and I were expecting our first child, I took out a large (for 1986) whole life insurance policy. The goal was to protect my wife and child in case something happened to me (of course), and if nothing happened, then we’d reach a point where the dividends paid for the policy in perpetuity and we could decide what to do with the policy later. Then life happened. We divorced and I had to pay half of the equivalent of the built-up cash value to my soon-to-be ex-wife. About ten years ago I used the cash value to purchase a single premium long term care policy. Since then inflation has robbed some of the value of the monthly benefit, but with Social Security and my retirement savings, I should be fine.
Oh my goodness how unexpected. Having to payout half of the built-up cash value equivalent in a divorce settlement is a very good risk to take into consideration before purchasing a whole life policy. I’m glad you were able to use the cash value to get a long term care policy. I wasn’t aware there are single premium LTC policies as monthly/annual premiums are most common. Good to know, thanks for sharing!
I have a whole-life policy that is paid annually for 10 years and you never pay again. I’ll have to look into the MEC, as I had not been aware until now, but I wonder if that is why a 5 year fully paid whole life was not available. Thanks for writing!
I got screwed by a 10 pay whole life insurance: stating 2012, paying $15k every year. I was promised a 7% annual dividend. After 10 years, my cash value barely touched $150k, with death benefits $350k. After 2 more years of 2% dividends I finally gave up and cancelled. The problem is: 1) they never honor the dividends they promised, 2) the same $15k every year invested in S&P with reinvestment would become $500k from 2012 to 2024. 3) if I simply buy a term life insurance I’d get $1m for less than $1k per year.
Sorry to hear about your experience. How frustrating that the actual dividend performance was so different from your expectations of a 7% annual dividend. Whole life is definitely very different from term life. Dividends in whole life insurance are not guaranteed because they’re based on the insurer’s performance and can vary over time. The death benefit and minimum cash value are guaranteed, but dividends are more unpredictable. Marketing materials and sales reps may show illustrations that assume a certain dividend rate to demonstrate how a policy could perform over time based on assumptions about future performance, but they may not materialize as expected. And that would be very frustrating and disappointing indeed.
Bingo, Eric. I am a Financial Advisor and very skeptical of most insurance products pretenting to be investments.
Yea I got a $500k universal life in 2010 with a 0-10% interest range (no compounding) which I realize now has taken the top off many big years and protected me on few. $360/mo so have paid almost 65k with a current value of $62k after fees. Def not been a smart investment but I have coverage and can borrow at 3.5%. I should borrow, that would make me feel better… :)
Another option is to use dividends to buy more insurance. Eventually, there will be enough dividends to pay the premiums.
Yes indeed, thanks Chuck.
I’m sure many here will chime in on why Whole Life isn’t a great investment, but I want to bring up a reason that is not (yet) thought about much. It’s also why annuities aren’t a great idea in the future.
Climate change.
Insurance companies face unprecedented payouts over the next few decades and it seems likely that they will all go bust well before this century ends if things continue. SwissRE wrote a white paper about this over a decade ago and the prognosis was grim then. Remember that the IPCC reports always lowball predictions and policy recommendations because they have to play politics to get their final reports approved.
The possibility that insurance companies won’t survive is the main threat to using them in building wealth.
These policies, like annuities, are not underwritten by property and casualty insurers; they are underwritten by life insurance companies. Climate change risks are not a significant issue for life insurers. There are also capital requirements to operate as a life insurance company, and state guarantees (akin to FDIC or SPIC coverage) up to a certain amount to protect investors from the failure of the insurance company.
Not to say there are no risks (no such thing as risk-free).
That’s a distinction without a difference, as most insurance companies do both, but I’ll play…
Living itself will be affected by climate change and this will adversely damage life insurers bottom line. Here’s just one example.
I wish I had a solution to what’s coming, but the only thing I know is that we will need to re-order everything about our systems connected to ageing, health care, etc. over the next few decades.
Infinite banking has been around for a long time, from what I know, one needs an insurance person well versed in how it works, not just an insurance company and not all offer this benefit.
Yeah it can certainly be complex and isn’t the right fit for everyone. But infinite banking can provide access to liquidity, a level of protection from market downturns, and tax deferred growth to those who choose to go this route.
After learning about infinite banking I bought a policy for my 3 young children. “funded” it for about 3 years than took a policy loan out. It was an easy enough process that I went all in on myself. Another 3 years later and I was diagnosed with an aggressive cancer went through chemo and am now in remission. I’m not so sure it is a good investment but I’m glad I got it as I am now uninsurable. I am in my mid 40’s and NEVER thought I would get sick. Always stayed in tip top shape, no smoking or alcohol, no fast food, no steroids/TRT/HGH nothing . Went to the gym religiously weight training plus cardio, muscular with a good 4 pack, 6 in good lighting.
Moral of the story if you have children or are planning on having children in the future best to have a whole life policy. When I was not sure I was going to survive I had some sense of relief that my wife would not have to get a job or marry for money while caring for the children.