TL;DR: You're being sold a bill of goods.
What Whole Life Insurance Is
A Whole Life insurance policy is made of three components, which you'll pay for:
- A life insurance policy
- An investment (The part that actually has the "inflation protected" money)
- The cost of running the life insurance policy
- Most of the fees of whole life insurance are deliberately hidden. They'll happily tell you what your monthly premium is, and what your current investment account balance is, but finding the details of costs is difficult. This is not in your favor.
Every month, you'll pay the same amount (called a premium). Some part of that money will disappear, to fund the "life insurance" and "cost of running the company" parts - if you die that month, your beneficiaries will be paid. The rest of the money becomes part of the investment.
Here's a year-by-year example, assuming that 50% of your premium goes towards the life insurance and other costs, 50% goes towards the investment, and the investment pays a guaranteed 4% annual return (compounded annually, for simplicity):
- Year 1: You pay $1000 in premiums. Your investment is worth $520 at the end of the year.
- Year 2: You pay $1000 in premiums. Your investment is worth $1060.80 at the end of the year.
- Year 3: You pay $1000 in premiums. Your investment is worth $1623.23 at the end of the year.
As you can see, this is not putting your cash in an inflation-protected savings vehicle; instead, you're losing half of what you pay to cover the cost of the insurance. If you want insurance, that's one thing, but if you don't want insurance, then you're paying for something you don't want.
There's one further disadvantage to whole life insurance: when you die, it always pays out exactly the same amount. If it's worth $100K, then on your death, your beneficiary will get $100K. If you die the day after you buy the policy, then the "investment" is worth $0, and the insurance company pays $100K. But if you die after 30 years of paying premiums, then the "investment" is worth, say, $90K, and the insurance company pays $10K, for a total payment of $100K to your beneficiary. If you want life insurance for the death benefit, then whole life insurance is the most expensive way to do it.
Other Options to Save Money
Compare that to putting your money in a savings account, with a 1% interest rate (which is typical in 2016), again compounded annually:
- Year 1: You put $1000 in your savings account. It will have $1010 in it at the end of the year.
- Year 2: You put $1000 in your savings account. It will have $2030.10 in it at the end of the year.
- Year 3: You put $1000 in your savings account. It will have $3060.40 in it at the end of the year.
The interest you get isn't enough to keep up with inflation (which is 3% lately), but at least you get to keep all of the money you put in.
(Certificates of deposit earn a bit more - 1.25% to 1.5% or so - but you can't touch the money without taking penalties, which doesn't meet your requirement of it being an "emergency fund".)
These aren't an ideal emergency fund, since the value goes up and down with the stock market, but since they're diversified, they won't lose a lot of money. The total stock market has increased an average of 7% per year, so for most years, this investment will outperform inflation by a nice margin.
Or you can go for a bond index fund; these won't make you as much money, but they'll lose even less money in a very bad year. A bond index fund is pretty close to "inflation protected", but it's still not guaranteed.
Term Life Insurance
If you actually want life insurance, purchase term life insurance - for a period of X years, you pay $Y per month, and your beneficiary receives $Z if you die during those X years. This is always cheaper than whole life insurance for the same period, so much so that if you look at the cost difference between whole life insurance and term insurance, and put that money into any reasonable investment, you'll eventually have as much money in the investment as the whole life insurance's death benefit.