Five Costly Mistakes to Avoid When Combining Life Insurance with Investments
For decades, the financial industry has promoted the idea of pairing life insurance with investments: get protection and build wealth at the same time. In practice, this strategy often disappoints when misunderstood or mismanaged. These are the five mistakes that tend to cost people the most.
1. Treating Life Insurance as the Primary Investment
Life insurance was never meant to be your main investment engine. The cash value in whole life policies grows at a modest pace, with most new contracts guaranteeing about 2–3% annually. Independent reviews suggest long-term returns typically fall in the 1–3.5% range, depending on funding and dividends . That’s often below inflation and well under what a diversified portfolio of equities and bonds can deliver. (Source: MassMutual, NerdWallet)
As Investopedia notes, “buy term and invest the difference” usually outperforms whole life for long-term growth. When a policy is treated as a retirement portfolio, decades of underperformance are compounded by policy expenses, fees, and loan costs. (Source: Investopedia)
Better approach: Use insurance as it's designed to be: protection and guarantees. Let retirement accounts, equities, and bonds carry the burden of growth.
2. Skipping a Clear Funding Strategy
Policies don’t run themselves. Premiums, loans, and repayments need deliberate planning. Too many people underfund policies or borrow against them carelessly. The result is weakened growth, reduced death benefits, or even policy lapse.
Better approach: Have a funding plan before you start. Decide how much you’ll contribute, when you might borrow, and how you’ll repay. Without discipline, the policy turns from asset to liability.
3. Ignoring the Cost of Ownership
Permanent life insurance policies carry inherent costs, such as mortality charges, admin fees, and policy expenses, that reduce cash value growth. These costs are factored into dividend-setting policies, creating a built-in performance drag. Loans and tax implications push net returns even lower. Actuarial standards (ASOP 15) explicitly require expenses to be accounted for in dividend formulations. (Source: Actuarial Standards Board)
Better approach: Always evaluate using the internal rate of return (IRR) after fees. Compare that adjusted figure with other investment alternatives before locking in.
4. Overloading Risk Instead of Managing It
Borrowing heavily from a policy while expecting it to keep strong protection is dangerous. Loans reduce death benefits and can spiral if not repaid. At the same time, investments outside the policy might underperform, leaving you exposed on both ends.
Better approach: Keep the roles separate. Insurance protects, investments grow. When each tool sticks to its lane, your financial plan stays balanced.
5. Neglecting Holistic Planning
No two financial lives are the same, yet many people buy complex hybrid products off a sales pitch. That’s how coverage gaps, tax inefficiencies, and underfunded retirements happen.
Better approach: Integrate insurance and investments into your overall plan (income, debt, taxes, retirement, and legacy). Without context, the “combo insurance-investment strategies” rarely work.
The Smarter Path Ahead
Life insurance and investments both have value. But blending them without care often creates more problems than solutions. Avoid these five mistakes, and you’ll see each tool for what it is: complementary, not interchangeable. Insurance provides security and guarantees. Investments provide growth and opportunity. Together, when used wisely, they can support a more sustainable financial future.
Ready to make sure your plan is built the right way? SLD Solutions can help you design a strategy grounded in clarity, balance, and long-term results.
