One type of commonly recommended insurance only makes sense for the rich

Wealthy suitMark Metcalfe / Stringer / Getty ImagesWhole life insurance accrues cash value … but only if you can pay the expensive premiums.

One strategy wealthy taxpayers use to save money on taxes is purchasing whole-life insurance.

This is an insurance policy which lasts, as the name says, for the policyholder’s whole life.

It also has an investment component that allows its value to grow tax-deferred, and you can withdraw that cash value before death, if needed.

Steven M. Piascik, CPA, MT, and founder and president of boutique CPA firm PIASCIK, likes the product for high-net-worth individuals because it provides tax-free income.

“Whole-life insurance is at the forefront very expensive, but after 10 years, if you set it up right, the cash value it builds is more than you’ve paid for it,” he says. “If you’re paying a premium of $100,000 over 10 years, after 10 years you have value of $110,000. You’re going to use this money in retirement — but if you die before then, it’s a great hedge.”

It sounds like a no-brainer, but in fact, most financial planners and experts don’t recommend whole-life insurance for clients of typical income. Part of the reason why comes down to what Piascik told Business Insider: It’s expensive.

“If you’re of average income, you’re not going to want to pay upfront,” Piascik says, “and I don’t blame you at all.”

Instead, many experts prefer term-life insurance, which does not have an investment component and covers a policyholder for a set amount of time — for instance, 30 years until their dependent children are grown and self-supporting.

Term-life insurance is usually also more affordable. Automated investing platform Wealthfront used numbers from insurance provider MetLife to determine that a 30-year-old male could pay $672 a year for 20 years of term life insurance … and $8,320 a year for whole life insurance. (Bear in mind that while the price difference here is staggering, insurance quotes are vary by policyholder and it’s unlikely that these specific numbers would apply to everyone.)

You could argue that the latter is projected to accumulate significant cash value, while the former only covers a person at their death. However, you can’t see an impressive return on whole-life insurance 30 years from now if you don’t have the cash to fund it today.

Everyone’s situation and insurance needs — not to mention their price quotes — are different, but for all the times whole-life insurance is touted as an investment, it’s missing an important caveat: It’s usually a better investment for the rich.

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