The stock market and permanent whole life insurance policies are two places to invest your money for growth. The cash value account of a whole life policy and a stock market account can potentially build your savings by significantly more each year than a regular bank account can. A few significant differences between these two account types should be considered before you decide where to put your money.
Rate of Return
The stock market has a higher annual rate of return than permanent life insurance. According to the Federal Reserve, the average rate of return of the S&P 500 was about 10 percent per year from 1962 to 2012. This is the highest rate of return of any asset class. The annual return of permanent life insurance ranges from 3 to 5 percent a year. Your rate of return depends on the terms of your insurance plus how long you own your policy; the longer you own your policy, the higher your annual rate of return.
While the stock market has a higher return than permanent life insurance, it is also a riskier investment. The annual return of the stock market changes each year, and you could lose money in some years. In addition, you need to choose which stocks to buy for your portfolio, and if you choose badly, you could also lose money. The return on permanent whole life insurance is guaranteed by the insurance company. If the market does badly, the insurance company still pays you your annual return out of its cash reserves. Not only can you not lose money with permanent life insurance, but you also will never have years in which you don't earn money. In exchange, when the market does well, the insurance company keeps the excess gains for itself.
When you buy permanent life insurance, you get an investment account combined with a life insurance policy. If you die while owning this policy, your heirs will receive extra money as a death benefit. This feature is an advantage and disadvantage. It's good if you want life insurance coverage on top of your investment. However, part of your investment return each year goes toward paying for the life insurance. If you don't need insurance coverage, this is an unnecessary drain on your return. When you invest in the stock market, all you have is an investment account. If you die while investing, your heirs will only get the money in your stocks.
Permanent life insurance delays taxes on your investment gains. As long as you keep your money invested in the policy, you don't need to pay taxes on your gains. You only owe income tax when you withdraw the money. The taxation of stock market investments depends on which account you use. If you invest in a retirement account like a 401(k) or traditional individual retirement account, you also delay taxes until you take money out. If you invest in a regular brokerage account, you'll owe taxes on your gains each year.
Dylan Armstrong specializes in insurance, investing and retirement planning. He has also worked as a life and health insurance salesman and holds a Bachelor of Science in finance from Boston College.