Should I Buy Whole Life Insurance?

In the first post How Much Life Insurance Do I Need?, I worked with my insurance sales agent on how much life insurance my wife and I need. One of his suggestions is to buy a minimal amount of whole life insurance so that we have a little something to take care of our final expenses. The plan he suggested is the one that we would pay until we turn 65.

These are the whole life premiums I shared:

Description My Policy Her Policy
$50,000 whole life – pay to 65, standard
(there’s no elite option)
$65.16 $41.27
$100,000 whole life – pay to 65, elite
(minimum coverage to qualify for elite)
$115.00 $67.95

Whole Life Insurance versus Investing the Premium

So, I did a little analysis on the numbers, and here’s what I’ve found.

Note: To keep it simple, my calculation assumes 8% investment growth rate (CAGR), no yearly capital gains, no fee, and invested at the beginning of each year instead of monthly.

Description My Policy Her Policy
Lifetime premium paid (note, I’d have to pay for 30 years and my wife for 37) $24,240 $18,324
Years to reach $50,000 23 28
Years to reach $56,500 (since insurance payout is non-taxable, we actually need $56,500 to get about $50,000) 24 29
Investment value at 65 $104,162 $108,614
Investment value at 75 $224,879 $234,490
Investment value at 85 $485,496 $506,245

What does this all means?

Insurance sales agents often cite the fact that we are getting more than what we’d have paid — i.e., for $50,000 coverage, the total payment only adds up to $24,000 (for me) and $18,000 (for her). For these small sums, we are getting lifetime coverage of $50,000 each. So, we are getting a really good deal right? Well, not so fast.

I’d have a $50,000 portfolio in 23 years and my wife in 28 years if I invest our premium payments in an investment vehicle that returns on average 8% per year (i.e., the stock market). To account for the fact that our investment would be taxed, while the insurance payout wouldn’t be, we only have to invest about 1% more per year to accommodate that.

Now, this is where it gets really interesting.

  • If we invest the premiums instead of using it to buy the policies, we should have more than $100,000 each
  • If we stop adding new money once we turn 65, and keep investing what we have:
    • By 75, we each should have more than $200,000
    • By 85, we each should have more than $475,000

Wow, that’s a huge difference!

For the Skeptics

Here’s the same table at 5% growth rate.

Description My Policy Her Policy
Investment value at 65 $58,096 $52,847
Investment value at 75 $94,632 $86,082
Investment value at 85 $154,145 $140,218

What about cash value growth?

Some people will argue that I left out the cash value/death benefit growth feature of the whole life insurance. There are different variations and different companies offer different rates, but the average growth rate is typically in the 1-4% range after a few years into the policy.

At 65, it looks like the two options are about breaking even. However, your investment will continue to grow at the same pace even if you don’t put another dollar into it. With your insurance policy, you have a choice of either continuing to pay the premium to maintain the growth, or sacrifice the growth so that you can stop paying the premium.

The Verdict

So it doesn’t look like buying whole life insurance is the right thing for us; especially when we are fully capable of saving $50,000 without the help of a whole life policy. We could buy a 20-year, or a 30-year term life insurance for the coverage that we need to cover each other and our child(ren). If we are disciplined, we can invest the difference and come out ahead of the curve.

To be clear, this doesn’t mean whole life insurance is not a viable option. For us, we simply chose to separate the insurance from the saving/investing components.

In the third part, I will walk you through my analysis of term life insurance and share my decision with you.

Other articles in this series:

Here are some other good articles about whole life insurance:

Get your life insurance quotes now, or you can also check out these list of insurance companies that can provide you with free quotes:

About the Author

By , on Feb 27, 2008
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (63 Comments)

  1. Pinyo says:

    @Neutral – Forget the invest the difference for a minute. For me, I cannot buy enough whole life coverage to reasonably take care of my family if I die…a term life insurance can meet that need affordably. Secondly, I don’t need a $50k or $100k whole life policy so that I can leave my family “something” — I already have that saved.

    @Eric – You do work for New York Life right?

    Anyway, I am going to end commenting on this post, because I doubt either sides will be convinced by the others. If you think whole life is the right choice for you, then go for it. If you think term life is the right choice for you — which it is for my family (a decision that is supported by 3 independent financial planners nonetheless) — then go for it. Thank you everyone who takes the time to read this article and comments.

  2. Eric says:

    Can someone explain why there is interest charged when borrowing from the cash value of a Whole Life policy. How is the interest payment different to the policyowner as opposed to borrowing from a 401(k)??

    I have heard different explanations and would like more input.

    Please be detailed in your answer.

  3. Neutral says:

    You guys do know that anyone who is a proponent of whole life insurance is automatically assumed by whole life haters to be either an insurance agent, someone who has a stake in whole life and is trying to make themselves feel better, or are out right lying or delusional, right? lol.

    I find it interesting that even if David is a self promoting liar that people like AK and NS think he is, it doesn’t matter. David still asked a very valid question that still stands unanswered. What happens when one’s “Buy term and invest the difference strategy” fails? Likewise, for whole life proponents…. In what ways can a whole life policy fail you? Anyone care to share what the worse case scenario for both strategies are?

  4. Abe says:

    This was pretty fascinating to review through the comments. There is such a difference of opinion in permanent life insurance vs. term that it can make one’s head spin. I invest my money into WL policies for my wife and I. In looking at my portfolio over the last 10 years it was the best thing I ever did and will never have a regret. My only regret is that I didn’t start one when I was in my 20’s vs. my 30’s. Age and health are such a significant impact on how quickly your death benefit and cash values will grow over time.

    In looking at term I researched and found that 99% of term policies do not ever pay out a death benefit meaning 1% of people die within their term….1%. The biggest money maker of them all is term life period. Suze Orman and Dave Ramsey get paid TONS for referring their millions of followers to Select Quote and Zander respectively. Why in the world would I invest in a 30 year term policy for my wife and I ($75/mo X 30 years = $27K!) and know there is a 99% chance I’ll die with no life insurance?

    I invest into my matching 401K. I put money into a mutual funds account. I have 2 IRA’s. WL is not the only investment vehicle I am using for my retirement, but I will be thrilled with what the CV has grown to in 30 years I guarantee you that. We all hope for the 8% growth this author dreams for and even his 5% reduced goal, but what if it’s 0%, what if it’s -5%? I just don’t think you can beat an account with these tax advantages knowing taxes will only increase over time, one that offers an escalating, permanent, and tax-free death benefit, escalating cash values and guarantees of 4% minimum over the course of a policy with no association to the stock market.

    It’s also nice to know I can take out loans/withdrawals tax-free and penalty-free well before I’m 59.5, can use an account like this for better loan rates at a bank, know the CV can’t ever be taken in the event of litigation or bankruptcy. It can be leveraged in estate planning, for disability, liability, and even distributed like a will. There are even ways to use this product for business protection, partnerships, bonus planning, mortgage protection, education funding, and pension maximization. The list goes on and on.

    I appreciate the extremely simplified process this author took in writing this article, but think about 25 things were left off the plate to consider. I truly believe when he turns 75 (with zero life insurance) he will look back and see this term life decision as one of his biggest financial regrets.

  5. Danny says:

    Just a interesting point for anybody who are interested on average return calculated by mutual companies. Say a fund had a gain of 10% first year, and 40% loss second year, and 50% gain the third year, and 5% loss the fourth year. They will tell you that they have 3.75% average return in the last four years. Guess how much money you will have had you invested 1000 in the first year. Hint, you real return is negative.

    If your whole life policy tells you that you have average return of 3.75% on your cash value starting at 1000 four years ago. How much is your cash value.

    In your mutual fund case you will end up with 940.50 with a fund claiming 3.75 return in the last 4 years.

    In your insurance policy you cash value will be over 1158.65

  6. Rachael says:

    Many people forget about Universal Life policies, which lock in a guaranteed rate of growth, and generally have higher percentage growth annually averaging between 4 and 6% even in today’s economy. If you have an increasing death benefit on one of these types of policies then your benefit will grow the longer you live. You will have a much less risky investment and if you start paying in at a younger age, you can capitalize on this for a lot less/mth. Also older individuals do not have the same amount of time to wait for recovery from stock market declines, therefore this prognosis is not accurate for every population. People in their 30’s and 40’s and maybe even 50’s, who have high risk tolerance and high income will be most well served by this advice.

  7. srk says:

    is your whole life participating or non-participating. company dividends will make a huge difference in you illustration and will also increase your death benefit.

  8. Jerry says:

    Suzy Orman ranks higher than Dave Ramsey, but nevertheless all of them Permanent life insurance should not be compared to purchasing mutual funds. Those are different dollars for a different risk class of a person’s portfolio. Permanent insurance is a safety net that help’s complete a person’s plan. Sure some companies issue poorly performing policies, but for a company like Northwestern Mutual who consistently does what is right for the policyholder and outperforms the competition it is a great fit for SOME people. Not everyone should own it.

    For Dave Ramsey’s market it usually isn’t in someone’s budget to own much to any whole life at all. But for those with the budget and serious planning mindset, there is no other tool that can beat it. It can help someone leverage their retirement. Does anyone know how many term life death claims occur after age 75? Term goes away. Term doesn’t pay estate taxes and from a tax efficiency standpoint neither do mutual funds, individuals stocks, or any other taxable at death asset. Mutual funds don’t pay for key person protection for businesses. this forum simply consists of people who don’t understand how things work. It’d be like me talking about how to write software; if I don’t have training to do that, then how can I accurately talk about it. Find someone in our indistry you trust and let them do things for you.

  9. JNM FL says:

    This is a very interesting page to go through. I was trained during my internship with New York Life (strong WL product), started my career after college with MetLife (large platform of all Life Insurance products), and am now own my own brokerage with over 10 agents and growing.

    The truth of the matter is that none of you are wrong. The questions are the following:

    1) what is the amount of insurance you want to leave to your family and how old is your youngest child?

    EG: your children are 2 & 5, spouse unemployed, you are the sole provider earning $100,000 annually. Meaning your bring home income is $75,000 minus your personal expenses (you are no longer here) let’s say leaves you with $50,000 tax-free per year to the family. How do we replace that? SIMPLE. A $1 million policy will provide your family with a $50,000 income stream if invested wisely by the surviving spouse. Being that your youngest child is 2 your best bet is finding a 25 year policy which will take your youngest child protected through their college years.

    Once you do the proper job of protecting the well being of your family, IF you are either maxing out your 401(k), which should only be done of being matched, or a ROTH or TRADITIONAL IRA then you might want to look at a WL or a VUL as just another stream of income during retirement.

    2) what kind of legacy do you want to leave behind, and does it matter when?

    All of the buy term, invest the difference people will find themselves uninsured at later ages and will surely make the excuse later in life that it is too expensive at that age. You see, the people who invest in permanent insurance is because they truly care for their loved ones and are able to plan early in life so they do not have to end up making these excuses. Owners of WL policies understand that at some point either they themselves or their family will benefit.

    3) quick fact: 71% of the Fortune 1,000 companies Executives have COLI plans as part of their supplemental retirement planning.

    COLI: Corporate Owned Life Insurance, and take a guess at how it is funded. When people have TOO much money WL policies come imto play more often than not, if the wealthy client is lucky enough to be insurable. Many have been burned by this insurability part and all wish they would have done it earlier in life. People buy life insurance for 2 reasons. NEED and GREED.

    4) What will your tax rate be when you retire?

    Take into account the taxes that you will all pay not only on the capital gains at the time of the sale but also the income tax that you will pay. The thing about it is we don’t know what our tax rate may be. Income distribution is a another subject of it’s own, but as you get older that’s the number 1 thing on nretirees minds and the WL policies are clear for you. NO TAXES.

    ****it is just another facet to your retirement plan, not the main stream of income.

    The CONS-

    Be prepared to pay this premium for the long haul. No ifs or buts, you will throw out all of the guarantees that came with the policy if you miss a payment.

    Cost of insurance will rise as the insured becomes older. This is something most agents will not illustrate because it is very unattractive during a presentation.

    If you default on the loans and the policy lapses be prepared to deal with Uncle Sam.

    Basically if you’re income is not consistent enough it is not a product for you.

    If you are fixed on high risk it is not for you.

    If you are always worried that your money could do better elsewhere it is not for you.

    If you are a responsible, diversifying, caring person who understands that this will accomplish more than one goal for you (insurance for family, living cash benefit, Disability of waiver premium rider) then maybe it is for you.

    It is important to remember that when we are arguing our points on this it is not all about return percentages, rather to understand that we all have different personalities so we will react differently to all variables in life. Our morals and values not to mention past experiences we have been through or seen will all come into play at some point during the life insurance process. None of us are right or wrong.

    We should all plan accordingly to what will make us feel better as a person. Once we achieve that goal we just go on with life and make the best of it! Good luck to all!

  10. Kevin Mulligan says:

    @Jerry: Interesting point of view. Do you hold the same opinion of Suzy Orman, Smart Money magazine, etc.?

  11. Jerry says:

    I have trouble supporting a buy term invest the difference approach that Dave Ramsey uses; the guy has no credentials and filed for bankruptcy. He takes advantage of churches and the people who attend them. Pyramid scheme no doubt.

    And Northwestern Mutual sells a 10-pay Long Term Care policy that is completely paid up in 10 years and the dividend that accrues at 6% goes to a refund account and is returned to the policyholder even if a claim is made.

  12. dm says:

    What is not being mentioned is the fact that changes in your health may cause you to desire to extend your term coverage longer than originally anticipated. Conversions are always done at your attained age and must be converted to a whole life policy and often times the insured will pay much more at that point than he would have had he taken a small amount of whole life early on. Hedge your bet on how long you will live and what illnesses may befall you and buy a $50000 whole life along with some term. You will never regret it when you are in your fifities!!! I sell P&C, mutual funds and Life Insurance and no one regrets WL later on, we will all have final expenses, no cheap way out.

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