How to Use Life Insurance as an Investment

Permanent life insurance cash value grows as you pay premiums consistently over many years, with interest or investment returns compounding inside the account. The longer you hold the policy, the more cash value builds up.

If your insurer is a mutual life insurance company, which is owned by policyholders rather than shareholders, it may pay annual dividends. Directing those dividends toward paid-up additions (PUAs), rather than taking them as cash, buys additional death benefit and cash value, compounding growth faster. Accelerated premium payment options, such as a 20-pay structure, can also build cash value more quickly but require higher premiums in the near term.

Once sufficient cash value builds up in a permanent life insurance policy, you can borrow against it without a credit check or a formal approval process. The insurer uses your cash value as collateral, and policy loan proceeds aren't taxed as income, making them a tax-efficient way to access funds.

Interest accrues on policy loans. If the outstanding loan balance exceeds the cash value, the policy lapses, and the full loan amount becomes taxable income. At a minimum, pay the annual interest to prevent this. Any unpaid loan balance at death is deducted from the death benefit.

Policy loan interest rates are typically competitive with other secured loans but vary by insurer and policy type.

Withdraw funds from your permanent life insurance cash value up to the amount of premiums you've paid in (called the policy basis) at any time and for any purpose, with no income tax owed. Withdrawals beyond the basis may be subject to income tax on the gain.

Withdrawals permanently reduce the death benefit by the withdrawn amount. Unlike a policy loan, you can't repay a withdrawal to restore coverage.

Cash value withdrawals and policy loans from a permanent life insurance policy can cover retirement expenses in a way that resembles drawing from a savings account. Unlike a traditional IRA or 401(k), permanent life insurance has no required minimum distributions and no age-based early withdrawal penalties.

This strategy works best for people who started early and allowed cash value to grow over many years. The tax advantages, such as tax-deferred growth, tax-free loans, and tax-free withdrawals up to the policy basis, become more valuable the longer the policy has been in force.

Pledge your permanent life insurance cash value as collateral to secure an outside loan from a bank or lender. The policy stays in force during this arrangement, and the death benefit remains intact as long as you repay the outside loan. Using the policy as collateral avoids triggering taxes that a direct withdrawal of gains might cause.

Whole life insurance offers fixed premiums, a guaranteed death benefit, and cash value that grows at a fixed rate the insurer sets. Because the growth rate doesn't change with market conditions, whole life is the most conservative of the permanent policy types for building cash value.

Whole life policies from mutual insurers pay annual dividends. Using dividends to buy paid-up additions (PUAs) accelerates cash value growth beyond the base rate. Dividends aren't guaranteed.

Universal life insurance offers flexible premiums and an adjustable death benefit. Cash value earns interest based on a rate the insurer declares, which can change over time.

Most universal life policies set a minimum interest rate floor, providing some downside protection. If you underfund a universal life policy (paying lower premiums than required to sustain the death benefit), the cash value may decrease and the policy could lapse. This is a key risk that whole life policies don't carry in the same way.

Indexed universal life (IUL) insurance ties cash value growth to the performance of a stock index, such as the S&P 500, rather than investing directly in the market. IUL policies often include a floor (commonly 0%). The cash value won't decrease when the index drops, along with a cap that limits how much you earn when the index performs well.

Variable universal life (VUL) insurance combines the premium and death benefit flexibility of universal life with the investment subaccount options of variable life. You control how cash value is invested across investment options within your policy (subaccounts) and can adjust coverage and premium levels within policy limits. VUL policies carry market risk. The cash value can decrease if subaccounts perform poorly.