If you spend any time looking around this site, you'll find plenty of content detailing the various features of whole life insurance. We've detailed at length the use of whole life insurance specifically for its ability to accumulate cash value that the policyholder can use while he/she is alive.
But we do not refer to whole life insurance as an investment. This causes some confusion among people (both professionals and consumers) so today I want to take some time to explain why we don't often refer to whole life insurance as such, but you can choose to think of it in whatever way works for you.
Investment…a Tricky Word
Most people view the word investment without much concern for its many implications. We often refer to “investing in a new pair of shoes” or “making an investment in ourselves” when spending money on some sort of self-improvement item.
But for trained and licensed professionals in the financial services industry, the term investment comes with a lot of implication and responsibility that often sets off an array of worries about compliant behavior. Technically speaking “investments” are financial products regulated by Self Regulating Organizations (chief among them the Financial Industries Regulatory Authority, or FINRA) and litigated for serious wrongdoing by the Securities and Exchange Commission (SEC).
Further, these products must make regulatory filings with the SEC to ensure disclosure of practices to protect everyday investors from harm due to concealed questionable business practices. The logic goes something like if you want the public's money, you have to transparently tell the public what you are doing potentially with its money.
The subtle, but important, implication to all of this is that we have financial products that do not operate under the regulatory purview of the above-mentioned bodies nor do they make public disclosures to them (though they do make public disclosures to other regulatory bodies). There's an array of financial products that fall under this category, but the specific one we want to focus on today is life insurance.
Fixed Life Insurance is Not an Investment
I'm being careful about the wording here as I want to clearly identify fixed life insurance to separate it from “variable” life insurance. I will address variable life insurance before I'm done today, but at this point let's set that aside until later.
Technically speaking, fixed life insurance contracts are not investments in the eyes of investment industry regulators because fixed life insurance contracts do not fit the definition of an investment contract. As such, fixed life insurance contracts are not subject to FINRA regulation nor SEC filing and litigation.
Instead, fixed life insurance contracts file with each state's Department of Insurance (DOI) where they also fall under regulatory review. So the state DOI regulates the sale of life insurance in much the same way FINRA regulates the sale of investment contracts. The chief difference here is that FINRA is a national regulatory (i.e. doesn't matter if you are in Illinois or Maryland FINRA is the same regulatory body) and state DOI's operate at each individual state level (i.e. if you live and bought your life insurance policy in Tennessee, the Tennessee DOI is the regulator).
While it may seem a minor issue of semantics, I assure you that within the financial services industry using the term investment loosely and applying it to financial products that don't fit into the regulatory domain of FINRA and/or the SEC is highly discouraged.
But for those who look at the term “investment” and think of it in terms of a place to put money with the hopes of growing that money into a larger amount, does that mean we can't think of whole life insurance the same way? No not at all.
Whole life insurance can certainly be a place you choose to save money with the intention of it growing into some amount larger than the premiums you paid. Some people might explain this process as an investment. In a colloquial sense, there's nothing inherently incorrect about this. We choose to shy away from this sort of phrasing because we worked in the investment industry where there was a very clear figurative wall separating fixed insurance contracts and investments.
Is it Wrong to Refer to Whole Life Insurance as an Investment?
One who might use whole life insurance to accumulate cash values for retirement income, to pay for college, or just general savings might refer to “investing in whole life insurance” to get the point across. Are they wrong to do this? Technically there are regulatory bodies that would frown upon this sort of method to articulate the point.
But I am empathetic to their frustration upon learning they shouldn't refer to life insurance in such terms. We after all invest in real estate, which is also not regulated by the SEC or FINRA–unless of course you are investing in real estate through a Real Estate Investment Trust.
So Can You use Whole Life Insurance as an Investment?
In the non regulatory technical sense of the word investment, yes. If you mean to buy whole life insurance (or even universal life insurance) with a specific plan to accumulate cash value that you will one day use for some purpose.
Just be aware that certain regulators dislike this terminology to explain fixed life insurance contracts. And the insurance industry itself has no problem officially distancing itself from using the term investment. It believes that espousing this phrase potentially lays the groundwork to re-write the rules and subject fixed insurance contract to additional regulatory scrutiny from those who have official responsibility to regulate “investments.”
What about Variable Life Insurance?
Variable life insurance contracts do meet the definition of investment and do fall under regulatory authority of FINRA and the SEC. The reason for this is the use of securities-linked accounts (i.e. insurance sponsored mutual funds) that place policyholder money in these assets. These products are therefore investments and one can freely suggest you invest in them without much concern.
Why the difference? It's entirely based on where the money goes. For fixed insurance contracts, all the money sits with the insurer inside the General Account. Returns on cash value are entirely dependent on the insurer's investment return and profitability. Variable insurance contracts instead place the money in insurance company sponsored mutual funds where the return on cash is subject to the appreciation (or decline) in value of the underlying assets. Functionally, there isn't a difference with respect to life insurance beyond that. It's still life insurance. There is still a death benefit. The insurance company still collects fees against the policy. The insured still needs to qualify medically for the life insurance. The policyholder still has access to cash value in the same fashion (e.g. withdrawals or loans).
So you can use both variable life insurance and fixed life insurance to accumulate cash value for any number of reasons you might want to accumulate cash value. It could be for retirement, paying for college, having the money to buy a car, etc.
But we will continue to avoid directly calling fixed life insurance an investment because of our interpretation of regulations in place. Some might not hold the same view on life insurance as us and may apply the term investment to fixed insurance contracts. We aren't here to declare this practice misleading, wrong, or otherwise illegal. It's just not something we are going to do.