Acquiring an insurance policy is not typically considered a money-making endeavor, but under the right circumstances that is exactly what a whole life policy can be. There seems to be a real lack of understanding as to how exactly these policies work and what the real benefits are.
A typical whole life policy does not have a large payout. Upon your death, you would typically be looking at a payout of $50,000 to $100,000. There is no doubt that most people who take out this policy at a young age will contribute more money to this policy than they will receive in the event of their death. That's where the misconceptions begin. A whole life policy is not best used as insurance but as a strong long-term investment.
A whole life policy is more closely related to an annuity then an insurance policy. A portion of all the money you contribute to this policy is set aside as cash. If you contribute more than your policy requires, that money will grow faster, and indeed once the fifty or hundred thousand dollars have been contributed any additional money contributed goes into that cash value account. The power in this comes from the return on investment. These accounts can make as much as an 8% interest on that accrued value. This interest accrual is written into your contract and is a guaranteed return on your investment. These kind of interest rates are unheard of in other forms of investment.
The number of dollars contributed to the payout value of the policy will be returned to your family in the event of your death, leaving you truly with a net zero loss, but the additional accrued cash value can be many times the payout by the time the policy has matured, gaining that 8% return. With enough contributed to that fund, the money you gain in interest can easily cover the costs of the whole life policy and provide you with a large amount of money as you enter retirement.
The key to this type of investment is to get in on the ground floor. The earlier in your life you can get this policy, and the more you can contribute, the more you are going to see a return on that investment. A young professional may see the costs of this policy and weigh it against the payout at the end of life and determine it is not the right move, but they are not taking into account the properties this policy shares with an annuity.
One of the best ways to set your children up for success is to take out a whole life for them at a very young age and contribute on their behalf until they can take the payments up for themselves. At a young age, the required monthly contribution can be a tiny amount, but over the entirety of their life, the cash accrual in this account can be tremendous, all the while making that interest. At interest rates like that, every ten years you have doubled the amount of cash value this policy. Once the full payout has been contributed to the insurance, everything you place into this policy goes to the cash accrual and, if you contribute the right amount, you can make many times more than this policy has ever cost you.
Now this money is yours for the duration of the policy, and the cash value accrued can be removed from this investment at any time. It is all contributed after tax, so as you enter retirement and decide to remove these funds, it is not income, and no taxes are owed. That being said, if you don't find yourself in need, allowing this policy to continue to accrue that interest can be a wonderful gift and safety net, setting your family up for life.