Life insurance is an essential part of a sound financial plan—but using it as an investment? Not so much. While permanent life insurance policies like whole life or universal life are sometimes marketed as dual-purpose tools that provide both protection and investment growth, they’re often a poor choice for most people. Here’s why using life insurance as an investment is usually a bad idea.

1. 

High Fees and Commissions

One of the biggest drawbacks of using life insurance as an investment is the cost. Permanent policies come with high fees, administrative charges, and sales commissions. A significant portion of your premium in the early years goes to pay these costs, not to build cash value.

• Upfront commissions can be as high as 60-90% of the first year’s premium.
• Ongoing management fees eat into your returns every year.

In comparison, low-cost index funds or IRAs have minimal fees and leave more of your money invested and growing.

2. 

Slow Cash Value Growth

The investment component of permanent life insurance—called cash value—grows slowly, especially in the early years. It can take 10 years or more just to break even on what you’ve paid into the policy. If you cancel the policy early, you may receive little or nothing back.

In contrast, traditional investment vehicles like a Roth IRA or 401(k) offer faster and higher long-term growth potential, especially when you take advantage of compound interest and tax-deferred or tax-free growth.

3. 

Lack of Flexibility

Life insurance policies come with restrictions:

• You can’t easily access your money without fees, taxes, or loans.
• If you take out a loan against your policy and don’t repay it, your death benefit can be reduced or the policy may lapse.
• Surrendering the policy early can result in surrender charges and tax penalties.

Investments in brokerage or retirement accounts, on the other hand, offer far more flexibility and liquidity.

4. 

Overpromised, Underdelivered

Many insurance agents highlight the “guaranteed” returns and tax advantages of cash value life insurance. But the fine print often tells a different story:

• Returns are lower than expected—often less than 5%, and that’s before fees.
• Projections are based on assumptions, not guarantees.
• “Tax-free” benefits only apply under very specific conditions and may require loans rather than direct withdrawals.

If an investment sounds too good to be true, it probably is—especially when it’s wrapped in an insurance product.

5. 

Better Options Exist

Unless you’ve already maxed out all other tax-advantaged investment vehicles (like Roth IRAs, 401(k)s, HSAs), using life insurance as an investment simply doesn’t make sense.

• Roth IRAs offer tax-free growth and withdrawals in retirement.
• Employer retirement plans often come with matching contributions—free money.
• Brokerage accounts offer total flexibility and low fees.

For the average person, these options are better suited for growing wealth and preparing for retirement.

When Life Insurance Makes Sense (and When It Doesn’t)

To be clear: Life insurance is crucial if someone depends on your income. Term life insurance provides affordable coverage and does exactly what it should—protects your family financially if you die unexpectedly. It’s cheap, straightforward, and effective.

But using life insurance to grow wealth is like using a Swiss Army knife to cook a gourmet meal: technically possible, but inefficient and overly complicated.

Bottom Line

If your goal is protection, get term life insurance. If your goal is growth, invest through retirement accounts and diversified portfolios. Blending the two usually means overpaying for underwhelming results.

Life insurance is not an investment. It’s protection. Don’t let clever marketing convince you otherwise.