Personal Finance

Are Whole Life Insurance Rates Worth the Tax Advantage?

By Maxime Rieman for NerdWallet

You may know that life insurance is an invaluable tool in making sure that your spouse and children are taken care of in case tragedy strikes.

What you may not know is that one type of life insurance – whole life insurance – doubles as a kind of savings account. Better yet, the money that accumulates in that account is tax-deferrable.

Here’s a closer look at how that additional feature works.

How it works

When you sign up for whole life insurance, you’re agreeing to pay fixed monthly or annual premiums. Part of what you pay your insurer goes into a savings account of sorts, which accrues interest over time. The cash that builds up in this account isn’t counted as part of your income, meaning it won’t be subject to income tax. In fact, this money can’t be taxed as long as it remains a part of your whole life insurance policy. You might, however, be taxed if you withdraw the cash value before you die, similar to how money from a 401(k) plan gets taxed once it gets withdrawn from the account.


A tax-deferred cash buildup in a whole life insurance plan can be a great asset down the line. Generally speaking, dividends aren’t taxable as long as they don’t exceed the premium you’ve paid on the policy.

Although financial experts warn that you may not generate gains during your policy’s first few years, you should expect solid returns down the road.

“If you were to look at a plain, vanilla whole-life policy illustration, you will see that in the first three years, you generate virtually no cash value,” says Roger Gainer, a financial advisor.

That said, Gainer asserts that “most policies will earn 4% to 7% returns” during the plan’s remaining years.

While this fund grows, you can even take loans from your account (often called “policy loans”), which typically don’t have to be repaid before you die and carry lower interest rates than loans offered by banks. Remember, though, that any outstanding loans will be deducted from the death benefit.

Lastly, beneficiaries (i.e., your spouse and children) typically don’t pay federal income taxes on death benefits. As such, a $250,000 whole life insurance policy actually pays beneficiaries that exact amount.


Unfortunately, whole life insurance plans can be jaw-droppingly expensive. Annual premiums on term insurance – a type of policy that insures people for a specific period of time (generally between 10 and 30 years) – can be as cheap as $428 per year for a 35-year-old non-smoker. But you could spend up to $3,751 per year on a premium for a whole life insurance plan.

As such, some financial experts argue that you can get the same tax advantages without having to pay these massive premium costs by using retirement accounts like 401(k) plans and IRAs.

“I wouldn’t buy any type of cash-value life insurance only for the tax advantages,” says Brian Frederick, a financial advisor. “You can get the tax advantages simpler and cheaper by using retirement accounts such as IRAs, Roth IRAs, and 401(k) [plans].”

However, if you’re thinking about starting a family and are deliberating between term and whole life insurance, the tax advantages may be a good reason to opt for the latter.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.