Life insurance as an investment involves complex financial decisions. This information is educational only and shouldn't replace personalized advice from licensed financial and insurance professionals.
How to Use Life Insurance as an Investment
Life insurance is an investment if you use it for cash value growth, policy loans, withdrawals, retirement income, collateral borrowing and cash surrender.
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Updated: September 13, 2026
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Key Takeaways
Only permanent life insurance policies are used for investment purposes. These include whole life, universal life, variable life, variable universal life, and indexed universal life.
Each life insurance investment strategy has different tax implications, costs, and effects on your death benefit.
Life insurance as an investment works best as a complement to other savings vehicles for people who need lifelong coverage and have already maxed out tax-advantaged retirement accounts.
Can You Use Life Insurance as an Investment?
Life insurance can function as an investment tool, but only with permanent life insurance policies. With term life insurance, you pay premiums for a set period (commonly 10, 20 or 30 years), and coverage ends when the term expires. Term life has no cash value, no savings component, and nothing to borrow against.
Permanent life insurance works differently. A portion of each premium goes into a cash value account that grows tax-deferred over time. Whole life, universal life, variable life, variable universal life and indexed universal life all build cash value, though the rate and method of growth differ by policy type.
CASH VALUE VS. DEATH BENEFIT
Cash value is a separate component within permanent life insurance. It's the savings portion of the policy. Beneficiaries typically receive only the stated death benefit amount. If you die with an outstanding policy loan, the unpaid balance plus interest is deducted from the payout.
Unused cash value doesn't automatically pass to heirs. In most policies, it isn't paid out to beneficiaries. Some policies offer an increasing death benefit option, which allows the total payout to rise as the cash value grows. This structure increases the cost of coverage.
How Does Life Insurance Work as an Investment?
Permanent life insurance offers several ways to access or use cash value during your lifetime. Here's how each method affects your taxes and costs differently.
Build Cash Value Over Time
Paying premiums consistently over many years grows permanent life insurance cash value, with interest or investment returns compounding inside the account the whole time. Cash value keeps building the longer the policy stays in force.
Mutual life insurance companies, owned by policyholders rather than shareholders, may pay annual dividends to their insureds. Directing those dividends toward paid-up additions (PUAs) instead of taking them as cash buys additional death benefit and cash value, and growth compounds faster as a result.
Accelerated premium payment options, such as a 20-pay structure, can also build cash value more quickly, at the cost of higher premiums in the near term.
Take Out a Policy Loan
Sufficient cash value in a permanent life insurance policy opens the door to borrowing against it, with no credit check or formal approval process required. Your own cash value serves as collateral for the insurer, and because policy loan proceeds aren't taxed as income, accessing funds this way comes with a tax advantage.
Policy loans accrue interest, and if the outstanding balance ever exceeds the cash value, the policy lapses, turning the full loan amount into taxable income. Paying at least the annual interest prevents that outcome. Any unpaid loan balance at death gets deducted from the death benefit.
Compared with other secured loans, policy loan interest rates tend to be competitive, but the exact rate varies by insurer and policy type.
Make a Withdrawal
Funds can be withdrawn from the permanent life insurance cash value at any time and for any purpose with no income tax owed. These funds, called the policy basis, can be as much as up to the amount of premiums paid in. Income tax on the gain may apply to withdrawals beyond that basis.
The death benefit drops permanently by the withdrawn amount with any withdrawal. A policy loan can be repaid to restore coverage; a withdrawal cannot.
Supplement Retirement Income
Cash value withdrawals and policy loans from a permanent life insurance policy can cover retirement expenses much like drawing from a savings account would. No required minimum distributions and no age-based early withdrawal penalties apply here, unlike with a traditional IRA or 401(k).
People who started early and gave cash value many years to grow get the most out of this strategy. Tax-deferred growth, tax-free loans and tax-free withdrawals up to the policy basis all grow more valuable the longer a policy stays in force.
Use the Policy as Collateral
Securing an outside loan from a bank or lender is possible by pledging permanent life insurance cash value as collateral. The policy stays in force throughout this arrangement, and the death benefit stays intact as long as the outside loan gets repaid. Taxes that a direct withdrawal of gains might trigger get avoided this way.
Surrender the Policy for Cash
Surrendering a permanent life insurance policy cancels it entirely in exchange for the net cash surrender value. Surrender charges may apply, especially in the earlier years of the policy, on a schedule that varies by insurer and policy type.
Ordinary income tax applies to any gains above the premium basis in the year they're received.
Coverage ends permanently once a policy gets surrendered. No death benefit goes to beneficiaries, and reinstating the policy afterward isn't possible. Alternatives like a policy loan or reduced paid-up life insurance deserve a look before surrendering.
Tax Advantages of Life Insurance as an Investment
Permanent life insurance offers four main tax advantages:
- Cash value grows tax-deferred, so no annual taxes on gains while they stay inside the policy.
- Withdrawals up to the policy basis are tax-free.
- Policy loans aren't taxable income.
- The death benefit paid to beneficiaries is generally income tax-free.
Estate taxes may apply to high-value policies. Employer-owned policies and modified endowment contracts (MECs) are subject to different rules. For a full breakdown, read Is Life Insurance Taxable?
Tax treatment and insurance regulations vary by state. Talk to a local professional familiar with your state's rules.
Types of Life Insurance to Use as an Investment
Several types of permanent life insurance build cash value. The right policy depends on your risk tolerance, premium flexibility and long-term financial goals. All five types below qualify, but they differ in how cash value grows and how much market risk you take on.
Whole Life InsuranceWhole 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 InsuranceUniversal 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 InsuranceIndexed 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 InsuranceVariable 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.
Variable Life InsuranceVariable life insurance has fixed premiums and a guaranteed death benefit floor, but cash value fluctuates based on the performance of investment subaccounts you choose. You can allocate cash value across stocks, bonds and other investment options. Strong market performance builds cash value, while poor performance reduces it. You must buy variable life policies through a licensed broker-dealer and must review all prospectus materials before buying.
Variable life insurance products are securities and require a prospectus. Past performance doesn't guarantee future results, and you may lose principal value.
Who Should Consider Life Insurance as an Investment?
Using life insurance as an investment makes the most sense for a specific group of people. It isn't a substitute for foundational savings vehicles, but it can add value in the right situations.
Permanent life insurance as a financial tool fits best for people who have already maxed out other tax-advantaged accounts (401(k), IRA, and Roth IRA) and want additional tax-deferred growth. It also works well for those who need permanent life insurance coverage anyway and want to build cash value at the same time, rather than paying for coverage with no cash value accumulation benefit.
People with high net worth sometimes use permanent life insurance for estate planning, including to provide liquidity for estate tax obligations. Parents of dependents with special needs who require lifelong financial support are also strong candidates.
When Life Insurance Isn't the Right Investment
Permanent life insurance isn't the right investment tool for everyone. If you don't need the life insurance component, standalone investment vehicles offer better long-term growth without the added cost of coverage.
You also need time for the cash value to grow. Buyers who start later in life don't get the same compounding benefit as those who start in their 30s or 40s. And if you can't consistently afford the higher premiums permanent policies require, a lapse could eliminate years of accumulated value.
If you haven't maxed out your 401(k), IRA or Roth IRA contributions, most financial planners say to do that first. The "buy term and invest the difference" strategy (buying cheaper term coverage and putting the premium savings into market accounts) is a legitimate alternative worth discussing with a financial advisor.
Is Life Insurance a Good Investment for You?
Permanent life insurance works best alongside other investments, not instead of them. The tax advantages are real, and the cash value can serve as a flexible retirement resource for policyholders who start early and keep the policy in force. Talk to a financial advisor about whether life insurance fits your broader financial plan.
Life Insurance as an Investment: FAQ
We've answered common questions about using life insurance as an investment.
You can lose money if your policy lapses, if you surrender during the surrender charge period, or, with variable policies, if subaccount investments decline. Whole life and fixed universal life protect cash value from market losses, but variable and indexed universal life policies carry more risk.
Cash value accumulation is slow in the early policy years because a larger share of each premium covers insurance costs and insurer fees. Growth builds up more over time. To speed up accumulation, use paid-up addition strategies and accelerated payment schedules.
Policy loans aren't taxable income as long as the policy stays in force. If the policy lapses with an outstanding loan, the loan balance becomes taxable income in the year of lapse. Surrendering a policy with an outstanding loan also triggers taxation on any gains above the policy basis.
In most permanent life insurance policies, unused cash value reverts to the insurer at death, and your beneficiaries receive only the death benefit. Some whole life policies offer riders that pay both the death benefit and accumulated cash value, but these riders increase premium costs.
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About Mark Fitzpatrick
Mark Fitzpatrick is a licensed Property and Casualty (P&C) Insurance Producer in Connecticut and MoneyGeek's resident expert in insurance and economics. In nearly a decade covering the insurance market at LendingTree and MoneyGeek, he's analyzed hundreds of carriers and millions of rates across auto, home, renters, health and life insurance.
His work has appeared in The Washington Post, The New York Times and NPR. He draws on independent cost and consumer experience data, and no insurance company partnerships affect his recommendations.
Mark studied at Boston College and later earned a master's in economics and international relations from Johns Hopkins University. He worked in financial risk management at State Street before joining MoneyGeek. He's also a five-time “Jeopardy!” champion.