Life Insurance vs Savings Account: Which Makes the Most Sense?

When you want to plan for the future, set aside some kind of resource after you’re gone, and give yourself the peace of mind that your family will be cared for. You have a lot of different options.

Given who we are, the first option on the list is life insurance.  A good life insurance policy will give you peace of mind for just a few pounds a month. If you pass, it can ensure that your family gets at least a few tens or hundreds of thousands to use to pay off your funeral expenses, any lingering debts, and their financial obligations for some time to come.

But there are other options if you have a little money to spend… or save.  Putting money in an investment account or pension is one option we’ve discussed before.  Another option is the humble savings account.

It might not seem like life insurance and a savings account are all that comparable.  One is a product, after all, and the other is, in some ways, the lack of a product; by not spending money and saving it instead, you can grow that money via interest, and it will be part of your estate when you pass.

So, the question is, which makes more sense?  A savings account or a life insurance policy?  Let’s discuss the subject.

What Kind of Life Insurance?

The first important point of discussion is what kind of life insurance cover we’re talking about.

Term life insurance is insurance cover that lasts for a fixed amount of time.  You apply, you’re evaluated and offered a rate based on factors like the amount of death benefit you’re seeking and the current state of your health.  If you pass during that time, your payment, when claimed, goes to your beneficiary.  

If, however, you outlive the term, you’re left with essentially nothing.  The payments you put into it have simply gone to the insurance provider, and you’re older and likely in worse health, so getting a new policy will be more expensive.

Term life insurance isn’t really comparable to a savings account.  It’s simply an insurance product; you’re purchasing time-bound peace of mind.  

If you outlive your coverage, it can feel bad, but you did live for however many decades with the knowledge that your family would be covered if you passed, and that’s not something that should be minimised or overlooked. But you can’t resell that peace of mind, so comparing it to a savings account isn’t viable.

The alternative is whole life insurance.  Whole life insurance is a different kind of cover.  Instead of being time-bound, it lasts for as long as you’re alive and keep paying the premiums.  As such, the payout is guaranteed.

Your insurer isn’t really doing a risk/reward calculation about whether or not you’ll pass during a term since, by definition, you will.

As such, whole life insurance tends to have two significant differences from term life insurance.  It’s more expensive, for one thing.  Term life insurance policies are often in the range of £10 to £30 per month, or around £5-10 per £100,000 of cover.

Meanwhile, whole life cover is usually 10x that; it’s not uncommon for a healthy middle-aged non-smoker to see payments of £100 per month for £100,000 of cover.

The second difference is that much of that money sticks around and is retained as part of the policy’s “cash value” for you.  As such, whole life insurance functions as a combination of life insurance cover and investment account.  

That cash value you pay in can eventually be used for purposes like:

• Purchasing additional riders for the policy to cover certain end-of-life or late-life features.  These are called PUAs or Paid-Up Additions.
• Taking temporary loans for financial hardship (that are then repaid into the policy.)
• Taking regular disbursements in your later years to supplement retirement income.

And, when you pass, you get the insurance policy’s payout plus the accumulated cash value paid as the death benefit to your beneficiary.

As you might assume, since this post is about comparing life insurance to a savings account, we’re primarily discussing whole life cover here today.  If you’re more interested in term life cover, we have many resources and guides in our blog, or you can reach out and discuss the topic directly with one of our agents.

Further, if you’re unsure about the kind of cover you want and are interested in comparing the two, we have a guide for that: our Whole vs Term Life Insurance Guide.

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What Kind of Savings Account?

The second question you need to answer before comparing the two kinds of resources is this: what kind of savings account are you talking about?

For this guide, we’re primarily going to discuss standard savings accounts, the kind you can open with your bank and put money into, take money from with no penalties, and earn interest over time.

There are many different kinds of investment accounts out there, from pensions and SIPPs to ISAs to REITs.  You can certainly read more about all of these from resources like this, from your financial provider, or from talking to a financial advisor.  They all have different mechanics, terms, and pros and cons.

A standard savings account, or Individual Savings Account, is one of the more popular kinds of savings accounts here in the UK. They have caps on contributions – for example, you can invest up to £20,000 in 2023-2024 without taxes on the interest and gains earned by the ISA.  

There are also banking accounts that offer interest and growth on the money you contribute. Our interest today is primarily in comparing these kinds of financial products with the cash value portion of a life insurance policy.

What Kind of Growth Can You Expect?

Your money should work for you.  Instead of spending spare cash on depreciating assets, it can be a very valuable decision to put that money somewhere that it can grow until you’ve reached an age milestone like retirement and want to use it to improve your quality of life.

So, a good question to ask is how much your money will grow over time.  Let’s compare a few options, then.

Note: Before we dig too deep, it’s worth giving you a word of caution.  I will cite some example numbers and percentages here to compare different kinds of financial products.  However, there are two cautions.  First, we’re insurance experts, not portfolio managers or financial advisors.  

The financial world is immensely complex, and there are hundreds if not thousands of different financial products you may be able to access; we’re simply picking some of the most common to illustrate points of comparison. The second caution is that all of these numbers are subject to change.  

Financial providers change interest rates, the rate of inflation changes, and even contribution caps change over time.  

Always check to verify the information for any given account you’re investigating, and do the research yourself or with the assistance of a financial advisor.  Consider the information we present here as an illustrative example and not necessarily reflective of the reality of your situation.

First up, you have your average “instant access” savings account.  These kinds of accounts are the easiest to obtain, the easiest to put money into, and the easiest to use.  

You have no restrictions on putting money into or pulling money out of them.  The money left in them will be compounded by interest over time.  The interest rate for these kinds of accounts is, on average, around 2.77% as of this writing.  Certain other types of variable-rate ISAs are similar, around 2.68%.

For a fixed-rate ISA, you’re going to get a better rate, but you’ll be more locked in.  A fixed-rate one-year ISA averages around 4.5% right now

Some banks and financial providers in the UK also provide better interest rates on certain kinds of accounts.  Some higher-yield or higher-interest savings vehicles float around the 4.5% to 5.5% range, depending on the terms and the type of account.  You can explore this in greater detail here.

Certain privileged customers and certain limited financial vehicles can offer even better interest rates.  A handful of providers are even offering as much as 7% interest on their accounts, at least for a year.  

These often have a maximum amount you can contribute each month, limiting the potential growth. However, it’s still better than a comparable amount of money in a lower-interest account.

One thing to note before going too much further is inflation.  Any place you put your money that doesn’t grow, at least at the rate of inflation, is, technically speaking, “losing” money; the base number will grow, but the comparative spending power is lower, so the money doesn’t go as far as you might otherwise expect.

Right now, the UK’s inflation rates are in the 3% to 3.5% range.  That means some basic instant-access savings accounts don’t beat inflation, but many standard accounts do.

Comparing Whole Life Interest and Growth

It’s difficult to compare whole life cover cash value and interest rates with savings accounts because the death benefits complicate matters.  A death benefit can be a significant amount of money added to the final payout from the account; even a basic £100,000 policy can be a significant amount of money.

At the same time, that death benefit isn’t part of the cash value of the account. Isn’t there a boost in the value or a growing interest in the account?

Whole life cover often works on a sort of investment system.  The growth rate of the policy is set to ensure that the total cash value of the account is equal to the face value of the policy by the time you would reach a certain age, which is usually either at 100 or 121.  

The growth is essentially capped and won’t exceed the face value of the policy, which means there’s an upper bound to the value you can get out of the policy.  At the same time, though, the death benefit adds to the policy, so the end result might be a more significant growth than the same amount of money put into a standard savings vehicle.

Which is Better: Insurance or Savings?

Unfortunately, it’s very difficult to make a single simple judgment due to factors like compounding interest and changing interest rates.  

Instead, consider individual factors:

• How long will you be saving?  If you’re making this decision in your late 20s or 30s, you have a much different roadmap ahead of you than if you’re making this decision in your 50s or 60s.  
• How large is your insurance cover?  A large enough policy can make it much more valuable than even long-term savings; conversely, a lower cover might not be as valuable if you have many investments.
• Taxes.  There’s a lot to consider with taxes, including tax-advantaged or tax-deferred contributions and interest in your life insurance policy.

In general, there’s a tipping point.  Your whole life can be better when you have barely any money to put towards savings, where even compounding interest has limited time and funds to use to grow.  For middle-income and upper-middle incomes, savings can be more beneficial, and life insurance coverage can be less worthwhile.  

Then, towards higher incomes or when you’re in the top 5% of the UK’s earners, using a whole life policy as part of your estate planning while also fully funding various limited investment plans and putting the rest into other growth vehicles can be a simple matter, of course.

We can’t decide for you what your best option is.  What we can do, though, is make sure you have the best options available to you. 

When you fill out our simple form, we get you quotes from all of the best insurance providers in the UK. You can use those quotes to make your evaluations. Let us help you make the best possible decisions for your future and your family’s future.