Life Insurance & Annuities Forum

Dec. 13, 2007

A friend of mine was told by an agent that he should stop participating in his 401(k) (employer 3 percent match) and purchase a whole life policy to use for his retirement. I told him no way. Can you tell me why or why not to do this?

Robert, Tennessee

Dear Robert,

Experts generally advise that life insurance should not be viewed as an investment, and in many states selling it under the guise of an investment is illegal.

Although a whole life insurance policy accumulates cash value that grows over time, the cash value is not a traditional investment. That's because the only way you can access this money is through a partial withdrawal or a loan against the cash value, and there can be penalties for doing both.

If you take out a loan against your policy, the insurer charges you interest, usually at 7 to 8 percent. If you don't pay it back, the money you owe, plus interest, will be deducted from your death benefit when you die. Thus, your beneficiaries would lose out.

If you take out a partial withdrawal, your death benefit will be reduced. Exactly how much varies by policy, but in most cases, it would be reduced on a dollar-for-dollar basis. For example, if you had a policy with a $100,000 death benefit with $20,000 worth of cash value built up, and you withdrew $10,000 of cash value, your death benefit would be $90,000. However, there are some insurers that will reduce it even more.

For more on cash value and the different types of life insurance, read Cash value in life insurance: What's it worth to you?

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Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.