After Jerome Powell announced the third rate cute of the year at the Federal Reserve's December meeting, dropping federal interest rates to 3.50%-3.75%, many Americans are figuring out how to best take advantage of lower interest debt while maximizing their dwindling yield on high-yield savings accounts and CDs.
One financial move you might not realize you should make before rates drop any further is buying whole life insurance.
An insurance policy and savings account wrapped up in one, whole life insurance can play a key role in protecting your financial future. And now is one of the best times to get a policy as insurance companies tend to offer lower premiums or better cash value growth on whole life insurance policies when interest rates are higher.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That means shopping for a whole life insurance policy now could be your chance to lock in a low premium for the life of the policy or lock in an above-average fixed interest rate to provide guaranteed growth of your cash value.
How federal interest rates affect whole life insurance
For participating whole life insurance policies — where the life insurance company pays you a share of its profits in the form of dividends — the current higher federal interest rates can translate to higher dividends as the company's underlying investments, like higher bond yields.
For non-participating whole life insurance policies — where the company doesn't pay dividends, but offers you a guaranteed interest rate — the impact depends on how your policy works.
If you have a variable (or non-guaranteed) interest rate, for example, your earnings tend to go up when the company's investments go up because the insurer can afford to pay higher rates. And if you get a whole life insurance policy with a fixed rate now, you may be able to lock in today's above-average rates for the life of the policy.
Another indirect benefit of the current market is the chance to lock in a lower premium. When costs rise, consumers are less likely to buy life insurance, and existing policyholders may even surrender their policies because they no longer want to pay the premium. As a result, insurance companies are more likely to offer lower premiums and other incentives to win you over.
If you opt for a policy with a fixed premium, you can lock in that cheaper premium for life. Just make sure to shop around and factor in the benefits and growth potential as well as the premium when comparing different whole life insurance policies.
The benefits of whole life insurance as a low risk investment
While whole life insurance policies are typically the most expensive type of life insurance, that higher premium can be worth the price for investors who want a lower-risk place to put their money during market volatility.
That's because the cash value of your policy is guaranteed. Instead of fluctuating, like your stock portfolio does, cash value in whole life insurance works more like a savings account. Any interest you've earned so far is yours once it's credited to your account.
Those earnings are also tax-deferred. Like a traditional IRA, you don't pay taxes on your earnings until you start making withdrawals. Even then, you only pay taxes once you've withdrawn more than you initially paid in via your premiums.
These tax benefits also make it a useful addition to your larger retirement portfolio. If you've already maxed out your 401(k) and hit your IRA contribution limit for the year, whole life insurance gives you another tax-deferred place to save up for retirement.
Meanwhile, in an emergency, borrowing against your life insurance is typically much more cost-effective than other retirement accounts. While taking out a loan against the cash value of your policy does carry an interest rate, it's often cheaper than the penalties that come with making early withdrawals from your IRA or 401(k).
Plus, as a loan rather than a withdrawal, the actual cash value of your policy is untouched, so you can continue earning interest on your full cash value while you pay back your loan.
Whole life insurance isn't a substitute for other investments
Whole life insurance has plenty of benefits that make it a valuable asset for risk-averse investors or retirement portfolios. However, it is still one of the most expensive types of life insurance you can buy. And the returns are typically lower than the returns you'd get from other investments.
So, you still want a healthy mix of assets in your portfolio to make sure you're getting the maximum growth potential for your level of risk tolerance.
But when used as a low-risk hedge against market volatility or another way to build tax-deferred wealth for retirement, whole life insurance can be a valuable asset, and right now happens to be one of the better times to get a new policy.
If you're not sure whether or not a whole life insurance policy is the right fit for your portfolio, talk to a financial adviser about your financial goals and concerns to figure out the best strategy for you.
Related content
-
I'm retired with $2.2 million saved and work 2 retail shifts for fun. My young colleague just got her hours cut. Should I quit so she can have my shifts?We asked certified financial planners for advice.
-
Could an Annuity Be Your Retirement Safety Net?More people are considering annuities to achieve tax-deferred growth and guaranteed income, but deciding if they are right for you depends on these key factors.
-
Older Taxpayers: Don't Miss This Hefty (Temporary) Tax BreakIf you're age 65 or older, you can claim a "bonus" tax deduction of up to $6,000 through 2028 that can be stacked on top of other deductions.
-
CD vs. Money Market: Where to Put Your Year-End Bonus NowFalling interest rates have savers wondering where to park cash. Here's how much $10,000 earns in today's best CDs versus leading money market accounts.
-
Meet the World's Unluckiest — Not to Mention Entitled — Porch PirateThis teen swiped a booby-trapped package that showered him with glitter, and then he hurt his wrist while fleeing. This is why no lawyer will represent him.
-
Smart Business: How Community Engagement Can Help Fuel GrowthAs a financial professional, you can strengthen your brand while making a difference in your community. See how these pros turned community spirit into growth.
-
Smart Money Moves Savers Should Make in 2026These steps will get you on the road to achieving your 2026 savings goals.
-
How Much Would a $50,000 HELOC Cost Per Month?Thinking about tapping your home’s equity? Here’s what a $50,000 HELOC might cost you each month based on current rates.
-
My First $1 Million: Self-Employed Trader, 50, San FranciscoEver wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
Waiting for Retirement to Give to Charity? Here Are 3 Reasons to Do It Now, From a Financial PlannerYou could wait until retirement, but making charitable giving part of your financial plan now could be far more beneficial for you and the causes you support.
-
Are You Ghosting Your Finances? What to Do About Your Money StressAvoidance can make things worse. You can change your habits by starting small, talking with a family member or friend and being consistent and persistent.
