How to Use Life Insurance to Build Wealth in 2026

Learn how to use life insurance to build wealth through cash value growth, tax advantages and long-term financial planning strategies in 2026.

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How to Use Life Insurance to Build Wealth in 2026

Written by Patrick Bryant

Updated: May 13, 2026

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Key Takeaways

Permanent life insurance, including whole life, universal life, and indexed universal life, builds cash value that can grow tax-deferred, while term life builds no cash value at all.

Policyholders with participating whole life policies may earn annual dividends. Some insurers have paid dividends continuously for more than 100 years, but dividends are never guaranteed.

Cash value growth is slow in early policy years, because most of the premium covers the cost of insurance. It can take 10 or more years before your policy's surrender value noticeably exceeds premiums paid.

Life insurance wealth strategies work best alongside, not instead of, tax-advantaged retirement accounts. Maxing out a 401(k) or IRA first is the standard financial planning recommendation before using life insurance for investment purposes.

Which Life Insurance Policies Actually Build Wealth?

Permanent life insurance builds wealth through a mechanism called cash value, a tax-deferred savings component that accumulates inside whole life, universal life and indexed universal life (IUL) policies as premiums are paid over time.

This strategy is best suited for higher earners who've already maximized tax-advantaged retirement accounts, individuals with estate planning needs and business owners who need funded buy-sell agreements or key person coverage. It's less effective for people who may surrender the policy early, since cash value during the first decade often doesn't exceed the total premiums paid. It's also not a good fit for people who need liquidity before the policy has time to accumulate value.

Whole Life Insurance

Whole life insurance provides a guaranteed death benefit and builds cash value at a fixed, contractually guaranteed rate set by the insurer. Premiums remain level for your entire life. Participating whole life policies issued by mutual insurers may also pay annual dividends, which you can take as cash, use to reduce premiums, leave on deposit to earn interest or apply toward paid-up additions. Paid-up additions increase both the policy’s cash value and death benefit over time without requiring additional underwriting.

Whole life insurance is the most expensive type of life insurance in our analysis. A healthy 40-year-old man pays an average of $574 monthly for a $500,000 policy, but your rate is locked in for the rest of your life. These policies are best suited for people with long time horizons and stable cash flow.

Universal Life Insurance

Universal life insurance offers more flexibility than whole life insurance. You can adjust premium payments and death benefit amounts within certain policy limits, while cash value earns interest based on market benchmarks or a declared minimum rate.

The trade-off is that underfunding your policy by paying less than the amount needed to cover the cost of insurance can eventually cause the policy to lapse, eliminating both the death benefit and accumulated cash value. Universal life insurance is best suited for people who want flexible coverage and are willing to actively monitor their policy over time.

Indexed and Variable Universal Life Insurance

Indexed universal life (IUL) and variable universal life (VUL) insurance tie cash value growth to market performance. IUL policies link returns to market indexes and include a floor that protects against losses during market downturns, though gains are usually capped as well. VUL policies invest cash value in sub-accounts similar to mutual funds, offering greater growth potential but exposing you to full market risk, including possible losses.

Both policy types come with higher costs than standard universal life insurance, and projected returns depend heavily on market performance assumptions that may not materialize. These products are best suited for people who understand investment risk and have a long enough time horizon to manage market volatility.

How Does Cash Value in Life Insurance Grow?

Whole life, universal life and indexed universal life (IUL) policies all build cash value, but each uses a different growth structure. In every case, a portion of the premium beyond the cost of insurance is placed into a separate cash value account that grows on a tax-deferred basis.

Whole life policies grow at a guaranteed rate set by the insurer, while universal life policies credit interest based on a declared rate tied to market benchmarks. IUL and variable universal life (VUL) policies link growth to market indexes or investment sub-accounts, meaning returns can fluctuate and aren't guaranteed.

You can borrow against accumulated cash value without triggering taxes, but unpaid loans reduce the death benefit and continue to accrue interest until repaid. If the insured dies with an outstanding loan balance, beneficiaries receive the death benefit minus the amount owed.

CASH VALUE EXAMPLE

A 35-year-old woman who purchases a $500,000 whole life policy with premiums of $460 per month can build significant cash value over time as the policy matures and the insurer’s costs are covered. By year 10, the policy could accumulate tens of thousands of dollars in cash value, with more growth possible by year 20 depending on dividend performance and the policy structure.

Actual cash value growth varies based on the insurer, dividend scale, fees and how the policy is designed, so these figures should be viewed as illustrative rather than guaranteed.

5 Strategies for Using Life Insurance to Build Wealth

Life insurance wealth strategies range from tax-free borrowing against accumulated cash value to estate planning tools that can transfer seven figures to heirs without a probate fight. These are the five most effective approaches.

1
Borrow Against Your Cash Value With a Policy Loan
You can borrow against accumulated cash value at any time without a credit check or tax consequence, because a policy loan isn't classified as taxable income. Loan rates are usually 5% to 8% annually depending on the insurer, and repayment is optional. Unpaid interest compounds and reduces the death benefit if the loan is never repaid.

Policy loans are most useful as a short-term liquidity tool or bridge financing strategy for business owners and high-income earners who want access to capital without triggering capital gains.
2
Earn Dividends on a Participating Whole Life Policy
Mutual insurers like Guardian, MassMutual and Penn Mutual may pay annual dividends when the insurer’s financial performance exceeds its actuarial expectations. You can take dividends as cash, use them to reduce premiums, leave them on deposit to earn interest or apply them toward paid-up additions that permanently increase both cash value and the death benefit without additional underwriting.

Although dividend payments aren't guaranteed, several major mutual insurers have paid them continuously for more than 100 years.
3
Use Cash Value as Tax-Advantaged Retirement Income
Once a permanent life insurance policy has accumulated substantial cash value, you may be able to access funds in retirement through policy loans and withdrawals up to the policy’s cost basis without triggering income tax. This approach, often referred to as a life insurance retirement plan (LIRP), is most effective for high earners who've already maxed out traditional retirement accounts such as a 401(k) and Roth IRA, which offer lower fees and more transparent return expectations for most investors.

In addition to providing potential retirement income, your policy’s death benefit passes income tax-free to beneficiaries, allowing the strategy to serve both retirement and estate planning goals. However, withdrawals above your policy’s cost basis are taxable, and surrendering the policy can trigger taxes on any gains.
4
Minimize Estate Taxes With an Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) holds a life insurance policy outside the taxable estate, allowing the death benefit to pass to your heirs free of both income and estate taxes. The policyholder can't own the trust directly. Instead, a trustee manages the policy and distributes proceeds according to the trust’s terms.

ILITs are most commonly used by high-net-worth families, business owners with large buyout obligations and people who expect their estate to exceed federal exemption limits. Establishing an ILIT requires an estate planning attorney and can involve significant legal and administrative costs.
5
Fund a Buy-Sell Agreement or Business Succession Plan
Business owners with partners often use permanent life insurance to fund a buy-sell agreement, a legally binding contract that requires surviving partners to purchase a deceased partner’s ownership stake using the policy’s death benefit. This arrangement helps prevent heirs from inheriting part of the business or forcing an unwanted sale or dissolution.

Whole life and universal life insurance are both commonly used for this strategy. Depending on how the agreement is structured, the policy may be owned by the business itself or by the individual partners. Funding a buy-sell agreement with life insurance provides a reliable source of liquidity that alternatives such as installment payments or business reserves may not be able to guarantee.

What Are the Tax Advantages of Life Insurance for Wealth Building?

Life insurance offers four core tax advantages for wealth building, along with key limits that can reduce or eliminate those benefits.

Tax Advantages

Tax-deferred cash value growth: No annual taxes are owed on gains inside the policy.
Tax-free policy loans: Borrowing against cash value isn't classified as taxable income, so it doesn't create a tax liability.
Income-tax-free death benefit: The death benefit passes to beneficiaries income-tax-free under IRC Section 101(a).
Estate tax removal via ILIT: Placing a policy inside an irrevocable life insurance trust removes the death benefit from the taxable estate entirely, shielding it from federal estate taxes.

Key Limits

Modified endowment contract (MEC) status: A policy becomes a MEC when it's overfunded past IRS limits, which eliminates tax-free loan treatment and subjects withdrawals to income tax plus a 10% penalty before age 59½.
Surrender taxation: Surrendering a policy triggers income tax on all gains above the cost basis.
Three-year ILIT rule: The insured must survive at least three years after transferring an existing policy into an ILIT. A transfer within three years of death pulls the proceeds back into the taxable estate.

Is Life Insurance a Good Investment?

Life insurance isn't the strongest standalone investment, but it serves a purpose traditional investments can't: replacing lost income for the people who depend on you financially. Term life insurance is the most cost-effective option when your primary goal is financial protection.

Whole life and universal life policies build cash value over time, but their long-term returns are often lower than what many investors achieve through retirement accounts or diversified index fund investing. Because of this, financial advisors frequently recommend buying term coverage and investing the difference in premiums separately.

For higher earners who've already maximized tax-advantaged retirement accounts, however, the tax-deferred growth and estate planning benefits of permanent life insurance make it worth considering. The right approach depends on your income, financial obligations and long-term goals.

Who Should Use Life Insurance to Build Wealth?

Life insurance works as a wealth-building tool for some buyers and not others. Four profiles benefit most; three should skip the strategy.

Who Should Consider It

High earners: Household incomes above $200,000 who've maxed tax-advantaged retirement accounts gain access to additional tax-deferred growth.
Business owners with partners: Funded buy-sell agreements or key person coverage can be structured with certainty through a life insurance policy.
Large estate holders: An ILIT-held policy moves assets outside the taxable estate.
Parents or grandparents of young children: Buying a permanent policy early locks in the lowest possible rates and allows decades of compounding before the insured needs the coverage.

Who Shouldn't Use This Strategy

Cost-focused buyers: Anyone who needs maximum death benefit at minimum cost should buy a term policy. Whole life premiums for the same face amount run 13 to 17 times higher.
Buyers who haven't maxed retirement accounts: A 401(k) offers employer matching and lower-cost tax deferral that life insurance can't replicate.
Anyone likely to surrender within 10 years: Surrendering early almost always returns less than your total premiums paid.

Frequently Asked Questions

Can you really build wealth with life insurance?

Yes, but only with permanent policies like whole life, universal life and indexed universal life that accumulate cash value over time. Term life insurance provides no cash value and can't be used as a wealth-building tool.

What type of life insurance is best for building wealth?

Whole life insurance from a mutual insurer offers the most predictable wealth-building path because of its guaranteed cash value growth and potential for dividends. Indexed universal life can produce higher returns in strong markets but carries more risk and complexity.

How long does it take to build cash value in life insurance?

Cash value growth is slow in the first several years because most of the premium covers the cost of insurance and insurer expenses. Most whole life policies take 10 or more years before the surrender value meaningfully exceeds total premiums paid, and the policy breaks even on a cash-in versus cash-out basis somewhere between years 15 and 20.

Can life insurance replace a 401(k) or IRA for retirement savings?

Life insurance shouldn't replace a 401(k) or IRA for most people, because those accounts offer lower fees, clearer investment options and in the case of a 401(k), employer matching that provides an immediate return. Life insurance works as a supplemental retirement strategy only after tax-advantaged accounts have been fully funded.

About Patrick Bryant

Patrick Bryant is the Vertical Lead for Life and Health Insurance at MoneyGeek, where he researches insurance products, writes consumer guides and maintains the scoring methodologies behind our provider comparisons. He analyzed more than 50 life insurance carriers across multiple policy types, collecting thousands of quotes nationwide to evaluate rates, coverage options and underwriting factors. His methodologies are reviewed quarterly to reflect current market conditions and carrier data.

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