Should I Buy Whole Life Insurance?

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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:

63 thoughts on “Should I Buy Whole Life Insurance?”

  1. You forgot to mention that when you die, your heirs only receive the policy’s face value amount and the life insurance company keeps the investment portfolio you worked so hard (against their astronomical fees and expenses) to build up.

  2. I have $1.5 million on me with a 20 year level term. I’m seriously thinking about raising it even more so that my wife would never have to worry about anything. We have three children and weddings to pay for and grandchildren to dote on. If I’m not here, I want her to be able to live as full a life as possible and life insurance will help do that.

    I have to say that I’m completely against whole life, though I do have it on all three kids. I bought it when they were two months old and it costs so little, I don’t even know how much it is!

  3. @Kevin – I didn’t know that! I just sent my parents’ agent some questions. They were sold whole life policies that they have to pay until the day they die. I am looking into what we can do to recoup what we can at this point.

    @Ron – That’s the other school of thought. One is to give them enough to keep them afloat for a few years; another is to replace your portion of income for the spouse entire life-time.

  4. A couple other points. My wife and I are going through the same scenario.

    1. Life insurance payouts are tax-free whereas you will have to pay taxes in many other accounts (roth’s would be an exception but you should probably fund one of those anyway.) And this could be a way to offset any estate taxes.

    2. If your whole life policy is fully funded, you could borrow against it while you’re still living making it an investment vehicle if your pre-tax account balances would have you paying more taxes in retirement than you would while working. There’s a fed reserve article floating around somewhere that details the break-even points for income, rate of savings, and pre- and post-retirement taxes.

    3. Kevin isn’t entirely correct. You can take the cash-value of the policy at any time after it’s fully funded or you can let it continue to build or you can leave the policy in place and collect the dividend. All of this income is tax-free because it’s life insurance. This also makes whole life policies good investment vehicles.

  5. Insurance is always a difficult subject. It’s important to have especially if you have children but, like you mention how much is enough? I think a basic insurance package is essential but I think that insurance companies also prey on our fears about what can happen. If you combined a basic insurance package with a good savings programme, personally I think that this is a better option than investing large amounts in high coverage.

  6. Whole life is a huge rip off for most people. Stick to a combination of a strong savings plan and fixed term life insurance. If 30 years from now you need a large death benefit you’ve done something wrong along the way.

    Estate planning does have some use for whole life style policies but most people won’t have an estate that is large enough to need to duck the estate tax and gift tax laws.

  7. I think a basic insurance package is essential. There is no point in going with heavy policies. And the insurance providers rob you off with the fees and charges

  8. It is always interesting to read comparisons of whole life insurance to a stock portfolio at 8%. First, in terms of good asset allocation, whole life insurance should be placed in the conservative after tax style, such as fixed income vehicles. In other words, you should not be 100% in the stock market – EVER. Eight percent is a great average, unless you are 65 now, and have been invested in stocks only for the past decade. The S&P has only averaged about 3.5% in these past ten years. The stock market is a NECESSARY place for investments, and the only true asset class that has proven to beat inflation in the long run, but proper diversification and asset allocation are a must.

    So back to using the buy term and invest the difference at an 8% CAGR. Try the calculation again using tax-free munis, CD’s, even high yield bonds, and pull out the cost of 20-30 years of level term insurance, and you will see that you can pull tax free from the cash value of the life insurance, still have a death benefit that you can use to cover estate taxes or to pay off a reverse mortgage.

    Oh yeah, most whole life is disability protected, unlike your other investments. If a prudent investor can allocate between 15 and 30% of his or her retirement savings to Whole Life (mutual companies such as Northwestern Mutual or New york Life), retirement income can be maximized.

  9. @JF — That’s an interesting point you are making. I’ll be investigating the comparison of whole life insurance against these more conservative investments. If I recall my previous calculation, I think whole life insurance still underperform these.

  10. JF’s points are important. I’ve preached “nothing but term, invest the rest” for a while. Recently, I’ve decided to become an insurance agent and have re-investigated the topic for myself. Even as a “Dave Ramsey-ite,” I’ve changed my opinions.

    It’s not as simple as buying term and investing the difference at 12%. Insurance contracts feature guaranteed returns and can’t be directly compared to stock market returns. They’re a different investment class and have to be factored into a complete investment portfolio picture. They’re much more stable, especially with established companies (e.g., Northwestern Mutual is more than 150 years old.) When stocks are up, everybody wants to be 100% in stocks. When stocks are down, many people appreciate having a portion of their portfolio in stable investments.

    Also, just as a broad range of mutual funds are available, there’s quite a difference between insurance companies’ policies. 95% of the several thousand insurance companies whole life rates of return are terrible. But these companies are whose rates are always quoted for consumer advice. This is a good thing for consumer protection, but a smart shopper can do better. Investigate the mutuality companies referenced by JF.

    Finally, tax savings are an important advantage and can make a significant difference.

    Consider your personal strategy and portfolio holistically. Level-term might likely be the best for you. (I think most personal finance bloggers are focused and disciplined and don’t need to think about “forced savings” habits, etc.) However, a quality whole life policy with the best companies might be an important part of your overall picture.

  11. JJ hit it on the head. A company like Northwestern Mutual has a long history of dividends and strong financial security. Right now you would be earning 7.5% on your cash value which most people on wall street wish there money was in now… Not to mention the death benefit, and the tax advantages….. I feel all people should own SOME whole life, and many times some term in their overall financial mix.

  12. Whole life insurance is not a bad plan but it just depends on what the needs and preferences are for your family. There are many companies that are selling policies that might be good for your situation. It’s worth it to check them out.

  13. The number 1 thing to remember is make sure you know what you want you life insurance to provide – most likely to provide your family with the financial support to make sure they live comfortably.

  14. The number #1 thing everyone should understand first and foremost with the stock market is the difference between average and actual rate of return. Money managers preach average rate of returns of 7, 8, 9, even 10 percent. These numbers take certain time periods and average out the yields based on the number of years……this is completely inaccurate. The actual rate of return of the S&P over the last 100 years is 4.9%. You need to understand what Diviation is, the effect of managing fees have, the effect of taxes, etc. Whole life insurance is the foundation of any sound financial plan. Term and invest the difference people NEVER take into account the cost of the term insurance, the money managing fees, and diviation when calculating their stock market returns. Money is not math, there are many factors involved in building a stable, long-term plan that provides certainty. Those money managers now are changing their story with the recent plunge of the stock market……..7% average rate of return is a myth!

  15. @Grant — I agree and I’ve written about the effect of expenses before. However, the last time I did my calculation whole life insurance return is actually less than inflation, so I can’t consider it an investment.

  16. @Pinyo, Let’s not confuse asset classes. Whole life insurance is a saving asset, not an investment asset. If you really look at the benefits of whole life insurance when it comes to asset protection, sucession planning, tax minimization, disability protection, and the yield at the end, then you begin to have a shift of perspective as to what the product is. Whole life insurance should represent a percentage of your overall portfolio, it is not supposed to compete with higher risk products because that is not it’s function. Whole life is the rebar and concrete of your financial foundation, it allows you begin investing more aggressively with the knowledge that it will be there when things go bad. During retirment you will have that death benefit to cover all necessary expenses after death, allowing you to more fully enjoy the more high yield wealth you have created in the Stock Market, Real Estate, ETC. It’s about having all the tools, not just the flashy high yield ones.

  17. It is worth it to check out your life insurance options with a local broker…especially if you have loved ones or a family. I am insurance with ING here in California and the rates are very affordable!

  18. Grant, it sounds like you know a lot about the macroeconomic coordination of the protection, savings and growth areas of one’s life. Very nice! 🙂

  19. It is totally off the mark to compare permanent life insurance to an investment. We are talking about two completely different things here. Life insurance is first a risk management tool. The obvious risk is that you will die and leave survivors financially struggling. There are other risks such as disability which with a waiver of premium rider can be added to your policy that would pay the premiums if you become disabled. There are other risks such as attachments by creditors which life policy cash values have limitations in many states with respect to creditors. Another big risk which is actually more relevant is that you will actually spend money in your regular savings account if unrestricted access is permitted. If you don’t think that is a real problem consider the average $10k in credit card debt people are carrying because they can’t control their spending.

    There are three primary asset classes, stocks, bonds, and cash equivalents. The returned dividends from many whole life policies with a top company are earning somewhere around 4% after tax. Instead of comparing that to a mutual fund which is a true investment with a much higher risk factor, compare the cash value of a whole life policy to typical CD rates and it does quite well. The cash component of your portfolio if composed of your life insurance and your regular savings account is what can provide liquidity when needed without selling stock or bonds at disadvantageous times like a market down turn. You only get the long term gians in investments when you let them grow and here again life insurance functions as a risk management tool. To understand just how all aspects of your financial picture interact is the job of an ethical planner/agent and one who will take the time to understand your situation is where to start. One size fits all financial gurus spouting off on tv speak only in generalizations which are often wrong.

  20. So, do you think Insurance Companies can return 8% (or 7%) annually to their clients policies? I mean, that seems pretty unrealistic.

  21. Could someone please help me understand my Knights of Columbus Whole life plan. I have a 100,000 plan that is active and up to date. I will retire in approximately 25 years. I understand the death benefit. However, I don’t understand the payout upon retirement. On my statement it says the “projected” monthly income for life at age 65 is 876.46. Does this mean that if I live till this age, the “projected” amount i would receive each month is this amount? Would I be taxed? I just don’t understand what the payout would be or how to figure that out? Thanks.

  22. I have a question. I have a 8 yr old and 10 yr old and I talked to a rep last night with AIL about a whole life insurance policy for both of them at 25,000.00. My husband is all about dave ramsey and says I should have gotten them a term life insurance policy instead. Did I make a bad mistake or am I okay?

  23. @Diane – I am not familiar with your plan. The best way to deal with this is to get the person who sell you the policy to sit down and ask questions. Based on my experience, they tend to make the policy sounds much better than it is. For example, on my parents policy the project income is really money that get added to the cash value (not payable to you) and this is not taxable in our case. And if we use the income to pay for the premium, the amount you get and how fast the cash value grow go down dramatically. That’s why I stay with term life and do my own saving / investing.

    @rolo – I personally would not buy life insurance for my children (because no one depends on their income). But I know some parents do to cover their final expenses and compensate for the inevitable time off work.

    In general, I prefer term life over whole because IF you invest the difference, you’ll usually end up in a better financial position.

  24. I never truly understand why people buy life insurance from there P&C guy. Liberty mutual is a personal lines of insurance company. I wish you put your ages on here because I would love to look and see how the prices compare. I would never, let me repeat never, recommend buying a whole life policy from liberty mutual. Don’t let their name fool you, they are not a true mutual company. Also their comdex rating is 78 which doesn’t even put them in the top 20% of insurance companies in terms of financial strength. I usually start at the top 10%, maybe top 15% depending on specific situations. The funny thing is that top rated insurance companies don’t cost more and in fact, can cost less. I have to go looking for the post on what you decided.

    • @Evolution – Thank you for your comment. I’m using Liberty Mutual right now, but I know I am overpaying. After asking around a bit, I am planning to check with Genworth to see if they can offer a better policy. I am looking to increase the death benefit anyway, so this is as good a time as any.

  25. 1. Kevin is completely wrong. If you were talking about Universal Life then he could be right but with a real whole life policy it pays the face amount plus a majority of the cash value at death.

    2. NYFinancialPro quotes a dividend rate which means absolutely nothing and can be completely ignored for comparisons sake.

    3. Grant, spell it with me and say it with me deviation. Also lay off the punch.

    4. James sounds like a LEAP guy with Grant.

    5. Why would you ever check with Genworth? I don’t feel like looking it up right now but I know it’s like 81 or 83 on the Comdex and yes, you’ll still overpay. If you’re are talking about their whole life then you’ll waste more money. I don’t mean to be blunt but this is the problem I run into all the time bad people selling bad companies.

    Take a step back and look at all these comments. Actually, you know what would be fun…challenge them. Let them design a policy for you. See how they compare and how much they vary. It would be hilarious. I’ll be happy to take part. My only hope is that I won’t blow everyone with my policy. Oh wait, that probably won’t work because what most insurance people do is lie about their policies in regards to underwriting and such so you can’t even trust what they design. No wonder it’s a horrible industry. Good luck.

    The truth is when done right, when designed properly, when set up the right way it will have a huge impact. Unfortunately, most people just sell this and don’t have a clue. I guess they believe ignorance is bliss. It’s so sad for me…

  26. you are incorrect. whole life with the right carrier is a fixed income(bond) instrument. you referenced an 8% rate of return. where are you finding a AAA rated bond yielding that right now? thats right, you arent, so doing your analysis, use a current yield 4-5%…..the outcome will shock you…after 15 years, cash value will be higher that your alternative, with less risk…..smarten up

  27. “if I invest our premium payments in an investment vehicle that returns on average 8% per year (i.e., the stock market)”

    Who is getting an average of 8% per year over a long period of time in stock market?

  28. There is nothing magical about the returns at all. So they claim a 8.5% dividend and credit potentially 5% or so to the money left over in the contract after commissions, cost of insurance and other expenses. Where does this dividend come from? It comes from the profitability of the company and investment returns. Every other insurance company has access to the same markets that NML does. I can assure you that if they were doing something so exceptionally well with investments other companies would reverse engineer their investment mix to perform the same or poach employees of NML. Regarding the other part which is the performance of the company; One can conclude that they are making so much from overcharging people along the way that they are spreading the wealth and redistributing it in the form of a dividend. NY Life, Mass Mutual, and USAA have whole life polices that perform about the same or better and their stated dividends are less. In fact, in most cases, USAA policies usually perform better because there is not an 80% commission the first year and 10% comp there after.

    They say it is tax free. Yes, after you leave the money there for 10 years, you will probably have an internal rate of return of maybe 3% on the money left over after commissions and policy charges. You have to out about 20 to get the internal rate of return of about 5%. So say you go out 10 years and need some money. You can have access to the money via a low rate loan. If you actually withdraw any of the money and there are profits, I can assure you that there will be taxes due if there are profits. So the crafty insurance companies came up with the smoke and mirrors trick of the zero cost loan. Why isn’t it taxed? Think of a credit card or any other loan for that matter, do you pay taxes when you get a loan? However, if you default on a loan or credit card and it is forgiven, in certain cases, you walking with the money can be taxed, think 1099. The same exact thing can happen with life insurance. If you have actually make money on a contract and take some out via a withdrawal, it absolutely will be taxed. The other way you could be taxed is if you were to take out a zero cost loan and then, surrender or blow up the contract by not paying the life insurance portion of the contract, hello 1099. You have to die with the zero cost loan to have it forgiven tax free. However, the loan amount is subtracted from the death benefit it is still just your money repaying the loan that was secured by your cash value, which was your money. Think of it as a have a loan at a bank secured by a certificate of deposit that you own.

    Personally, I am relatively young and it is now when I need some liquid savings for unexpected events that come up. I feel it is safe to assume that 20 years from now when I am 50, I will have more squared away in life and savings. If you use savings or cash value or zero cost loans from a life contract early in the contract years, it really adversely affects the policy down the road.

    Want more proof that is not that good of deal? Think of the federal government and their need for income via taxes. If it was truly such a great deal that there was substantial ‘tax-free’ growth in the contracts, I am reasonably certain they would tax the growth during the life of the contract. More proof, turns out that in the 70’s doctors and other people that could afford it were throwing $90000 of cash into a $100000 death benefit contract. The IRS got tired of this and passed legislation referred to as TEFRA, DEFEA, and finally TAMRA that addressed these abuses. What all of this legislation did was establish rules pertaining to how much premium could be put into life insurance contracts relative to the death benefit sizes. The bottom line that the IRS apparently feels the life insurance is an inefficient enough vehicle that they do not need to tax it.

    Finally, they sell the kiddie polices that can be converted whole life policies that are 25 times the initial kiddie policy contract size at preferred rates with absolutely no underwriting. Do you really think they do this out of benevolence? Absolutely not! The whole life contracts are so profitable that they can take on this risk. The other thing this accomplishes is to get the youngsters into the pipeline. Down the road, when they grow, who ya gonna call? Ghostbusters, no, NML.

    In the sales presentation the agents emphasize thinking long term. On the illustrations, you finally see internal rates of return that touch the bond returns after about 20 years. Seriously, if you are thinking that long term, use an blended portfolio with a 50-50 split. I feel relatively confident hat you will have better performance over a 20 year timeframe even after taxes are figured in. Topping all of this off, you will not need to deal with company and policy rules if you want your money.

    Life insurance is ridiculously profitable and relatively easy to price with actuaries. As life expectancies have edged upward it has become even more profitable. What scares the bejeebers out of most insurance companies is Long Term Care and Disability Insurance. NML for all of their bravado and geniuses at the mother ship are not immune from this. They have an average LTC policy and average definition of own occupation for disability.

    Bottom line; is whole life insurance (or any permanent insurance) the holy grail as some portray it? Probably not. I would rank it as an ok forced savings vehicle that ranks up there with a house. What is truly important is that a person has the coverage they need. Personally, I gravitate toward term.

    Do you need coverage for a quadruple rated company that can withstand a nuclear attack? Ok, I am exageraging. Anyway, life insurance is profitable. If a company chooses to exit the business the life insurance line is sold to a willing suitor. Case in point would be Chase Life Insurance which sold the life block to Protective.

  29. Good luck getting 8% per year, every year….. The power and of compound interest would be something to think about. Northwestern Mutual policies grow and perform like no other permanent policies do. They make New York Life look bad, and New York Life is a good company. Stock market in 2008; down 40%. Northwestern Mutual whole life policies; 6.15 percent return.

  30. Jerry:

    Where’d you get 6.15%? I’m assuming that’s the dividend interest rate for that year. Unfortunately, dividend interest rates really don’t mean all that much to the performance of the policy.

    “The dividend interest rate is not the rate of return on the policy. Dividends are composed of an investment component, a mortality component and an expense component. Therefore, dividend interest rates should not be the sole basis for comparing insurers or policy performance.”

  31. You are not getting 8% per year. Ok, maybe someone did in the early 80’s when treasuries were at 16%, but you are not getting that now. The 8% is quoted but then what the policy really earns over the really really long term, say 20 years, is more like 5%. Saying that they earn 8 and just 8 is like me bragging about getting 600 miles per tank of gas and you assuming that I have a fuel efficient vehicle. Turns out that I have Suburban with a 40 gallon tank. So the actual mileage is not all it is cracked up to be. The same is true with life insurance, except it is called internal rate of return, IRR. If you want a real idea of what the company can do with investments ask what their current SPIA rates are on say a 70 y/o. Chances are that it is about 3.75%. Also ask what their fixed annuity rates are.

  32. Correct, 6.15% dividend yield, and for a insurer to maintain the highest ratings, it has to back a 4% promise. The dividend grows every year and can be rolled into cash value or used to pay for the policy premium. So in a decent whole life policy, the dividend will pay for the entire policy in 19-22 years. So tax-deferred growth, tax free dividends that can be used to pay premiums or roll over into the cash value; good luck finding a mutual fund with guaranteed growth every year, tax-deferred growth, AAA ratings, and the same market risk as a savings account at a bank.

  33. Pinyo, I enjoy reading the ongoing blog here, but Buy Term Invest the Difference (BTID). First of all, I tried it when I was in my early 20’s. It did not work out for me. I am now UNINSURABLE, not able to buy enough to cover my families needs because the term expeired. So BTID is great on paper, but what happens if it fails? Please answer that one questions; what happens if it fails? If I die my family is in financial ruin because of people like Dave Ramsey and Suzy Orman. So when you put on paper for all of these people the numbers, remember that there are some of us out there who BTID failed and we don’t get a do over. I can not buy life insurance (don’t say oh yes you can, etc… I know my health and I can not) So please make a posting in regards to what happens if it fails.

    Pinyo your website disclaimer says it all “The information found on Moolanomy is provided and intended for informational and entertainment purposes only and does not constitute financial, legal, or other advice of any kind. The information contained on this site is aimed at a general audience, and does not attempt to offer specific advice to your specific circumstances. If you are looking for professional advice, you should consult with an independent financial adviser.

    On your tab, about me you say…. “Currently, I work full-time as a Vice President for an Internet company in Fairfax, Virginia, and part-time managing this blog.

    Pinyo if you can make 8% in the market, please quit your job and go and do it professionally. Anyone who says that they can make 8% in the market right now SHUT UP!! Pinyo and anyone else, then quit your job and back it up, become a professional money manager and work for a huge firm. Because we all like to look at the past but the truth is that the market is all about the futue. The real truth is that you don’t make 8%. Yes there are years you make 8% and then there are years you make 20% and then there are years you make negative 30%. An average is just that an average, but to get 8% you need to calculate in the huge baby boomer bull of the 80’s and 90’s. Look at the numbers, it is simple math. Jan 1, 1980 the 401k was created, baby boomers flocked. Large group of people all going one direction, what do we have now; an aging population, with more and more baby boomers not funding their retirement but starting to pull from their retirements the market is going to have a difficutl time in making 8%. Plus look at the expansion of the 80’s and 90’s. People open your eyes, you need to see just as many McDonald’s, Subway’s, Home Depot, Lowes, Targets, Wal-Marts, buildings, etc… built and open at the same speed to get those same huge returns. It is not going to happen. Start planning on what our grandfather’s had, periods of long slow growth!

    As to whole life insurance, it is an excellent product but it is NOT an investment. Whole Life Insurance on a bank’s balance sheet is a Tier I asset. That means it is not in the same classification as stocks, commodities and mutal funds. Pinyo, you are comparing two different items. As I said please answer, what happens if it fails (who is harmed, who is hurt by the advice you are giving when it fails??) Do you know what insurance I do have that will at least put me in the ground, my whole life insurance. Guess what insurance is still in force, my whole life insurance. You see whole life insurance covers me for just that my whole life. In what you are writing you are saying life is perfect and just follow read my advice, but life isn not perfect. No one person can stand up and say that their life was perfect. Life happens, good and bad happens and whole life remains constant. It is there to protect me no matter what happens.

    Will and Grant Rowland—TOUCHDOWN, you guys get it and you are my brother’s in this fight. I agree with everything you guys wrote. I could have written the same thing I just wanted to give a different view point. But in the end BTID and whole life has one major flaw. Whole life can not fail you where BTID can. And that is the question that never gets answered, what happens if BTID fails? What happens to the families and loved ones if BTID fails?

  34. I really enjoy reading the comments on this website. However, one comment bothered me a little. Just because a comment is made by an insurance agent it does not automatically mean that agent is misleading people so he can sell a policy with a bigger commission check. In REAL life, some people could not save a dime if it were the last dime on earth. Not everyone will buy term and invest the difference. There are people who will spend all of their income and unfortunately, they are the majority. Insurance policies, like whole life or universal life, can be thought of as a forced savings for people who can draw on those funds during an emergency or disability etc.
    In any type of business, there are honest people who believe in what they are selling. If you think the insurance business is corrupt you should try the car business. I am a former car salesman and I can tell you that the car business is far more corrupt. In the average lifetime a person will spend far more on vehicles than for insurance. I would take a cash value policy over the trade in value of a vehicle anyday.

  35. @DLN

    I’m sorry to hear about your situation. I think you should clarify to others of why BTID didn’t work for you. What age are you now? Are you not able to get a group term policy through your employer? Etc.

    First, you say you “tried it in your 20’s”. So how long of a term did you buy? I only think of myself in that I bought my first policy when I was 26 and it was a 30 year term. Even if I became uninsurable as yourself, I would be locked in for 30 years.

    Secondly, if you did try this strategy, then we assume that you invested the difference. How much did you actually invest and how was it invested? Is that money no longer there to take care of your family.

    I think more of that information would be helpful to others choosing between term or whole life.

  36. @ Jeff,

    Thanks for you follow up post. I will give you the details but it does not change the facts.

    19 years old bought 20 year term. I put $650 aside into the market. I had 18 months when I was unemployed when I could not put the money aside. Term ran out two and half years ago. Can I buy group term, yes I can but I can not get enough. Do I have the money available, mixed bag; some in real estate, some in the market, etc…. So it is not all liquid. I am still $750,000 shy of what I need for life insurance needs.

    as you said sorry to hear about your situation. I think more of that information would be helpful to other choosing between term and whole life. Are you kidding??!! If I die today, if I die tomorrow. My family will need $750k and no one is going to give it to them. Don’t use words like it would be helpful to other choosing between term and whole life. With those words you are still thinking BTID is a good deal. Jeff you are not answering the question… What if it fails. Simply put you don’t have the courage to say well BTID is a great idea and you should do it, but if it fails OH well too bad. You should have done a better job, because the concept is perfect and this guys just did not do it correct…. That is BULL. My damn family is massively underprotected because of BTID and no one wants to say well you know there are some flaws with the system.

  37. Those on here who believe that whole life insurance is a scam or “not worth it” are completely missing the whole point of financial planning. Finacial planning is specifically designed to provide income for the future and to protect the individual from unforeseen financial risk. Period! If you buy term and invest the rest you are completely leaving yourself and your family open to tax risks, your asset investments to market downturns, creditor risks, liquidity, etc.the list goes on. Will gave some points on this above.

    Let me pose a few question to add to the conversation. Note: I’m not saying any or all of these things WILL happen. But you cannot with a straight face tell me that they can’t happen.

    1. What happens if your retired and the market is in a downturn? (i.e 2008) Well if you bought term and invested the rest you have no choice but to sell your assets for income at a depressed value. If you have a whole life insurance policy you can access the cash value and let your assets recover. Pretty good tool to have in the tool box.

    2. What happens if you use up the majority or all of your “high yield” investments before you die? This ones easy and its implication far from funny. Well, you leave your heirs with nothing because you can no longer afford term insurance at old age and your investments are gone. Your family fits the bill at the time of your death. That sounds awesome doesn’t it?

    3. What happens if you are sued and found liable to pay court ordered judgments? Your “high yield” investments (minus 401k to be fair) can technically be garnered and you are completely exposed. Your cash value in your life insurance contract is untouchable.

    There are many other tax and estate planning options when referring to a whole life insurance contract as well that need to be considered. The point is a whole life insurance policy is not an investment vehicle that attempt to gain high yields. It is a risk management tool that helps protect you, your family, and your assets that you have built throughout your life.

    If you guys want to buy term and invest the rest. go right ahead. But when life happens, and as we know it will, you guys are going to be very exposed to serious financial risk.

  38. I purchased a whole life policy from NML because I see it as an important piece of our overall financial portfolio. The policy was designed for life benefits over death benefits which will allow the cash values to perform 3 functions- 1. support loan and repayment over time (think infinite banking), 2. provide a private pension through withdrawals and/or loans during retirement, and 3. provide a tax-favored inheritance vehicle upon death.

    I see Whole Life as one of many buckets to pull from to create a blended income stream in the future and one that will allow me to manage my income levels and resulting tax hit during retirement. Also, I’m personally all for taxing myself today in exchange for tax-free use of my money later.

    I spent many many hours researching the topic. Spent many hours with the life insurance agents, and spent hours discussing with my fee-based financial planner. It’s a complex product and one that I feel should be undertaken with a long-term view and commitment. I also have term insurance as there’s a place for it in our portfolio.

    As a final note, I hired James Hunt to perform an objective review of my policy illustration. I found his feedback, especially on how to minimize the purchase price of the policy, to be invaluable. I’ll be applying his teachings when I purchase my next whole life policies.

    Cheers to those of you considering the choice.

  39. I’m admittedly an insurance salesman at one of the three companies with the best whole life policies. Those are New York Life, Mass Mutual, and Northwestern Mutual (in no particular order). Lots of people in my industry see the commission and go a little crazy. Do your due diligence when choosing an agent. Whole life is a valuable tool for many of the reasons already stated. If you have an agent that is not going through why he came up with the amount of whole life he did and how much should be in the market, look for a new agent. If you say that you want to put $500/mo into long range savings it SHOULD NOT all be towards whole life insurance, no matter how strong the company. Find someone trustworthy who stays within your savings budget. The first job of life insurance is to cover your need. If you need 1,000,000 of insurance and you’re a 60/40 investor, put $200/mo into whole life and cover the rest with term. Put the other $300 in high risk/high return stuff. Insurance isn’t a magic bullet, but it shouldn’t be forgotten. And do yourself a favor, don’t buy whole life insurance from a stock company. IF YOU LEARN ONE THING DON’T BUY IT FROM A STOCK COMPANY! Their dividends (the means of making a policy grow) don’t go to the policyowners. So buying it from one of them is no better than putting massive amounts of cash into a savings account.

  40. Comparing whole life to a stock investment is nonsense because they have drastically different levels of risk.. Ask any broker what the guaranteed return in on a mutual fuind or stock and the answer is 0. When compaing whole life to something with a similar level of risk like a CD then it performs very well over time and long term is the only true way to look at and that is why it is called permanent.

  41. Anyone reading this should most certainly get all the info BEFORE buying insurance. Also, I would say, if you are broke, or close to it, it’s even more important to talk with someone who will help you in the areas you need to get your cashflow in the positive.

    Also, there are other options out there, besides Whole life. Indexed Universal live has potential of better rates of returns, with other features not available in many whole life products. VUL’s are another option for those with higher risk tolerances. While these products are NOT suited to everyone, they are a solid financial planning tool that needs to be considered.

    As a disclaimer, I am an insurance agent, and came from a background of Dave Ramsey’s ‘buy term invest the difference’. I agree with his statement only in as much as it’s appropriate for most of his audience, as they have nothing for insurance, but it’s a blanket statement that, in my opinion, does more harm than good. In my experience, well over half the people I talk to would be better suited to own a permanent policy as part of their total investment strategy. I don’t know a single wealthy person that does NOT own a permanent product. Follow the money.

  42. @MB – Thank you for disclosing your affiliation. I appreciate it. And good advice that everyone should do their own homework on this.

  43. Interesting discussion. Always hated life insurance and had no reason to own it. Then went to work for a mutual company and learned about the banking possibilities. What a gift. Into my 6th year now…. has performed as illustrated (a little better actually), went thru 2008 with not a blip…. wish I could say the same for my IRA. It is a great strategy. The rich buy it, banks buy it, it’s an executive benefit. As a boomer, I just wish I would have started 20 years ago. How peaceful life could have been, but it’s pretty peaceful now. At least I KNOW that if I do this, I’ll have this… and it’s safe… and most likely will be free of the taxman. Has to be with a mutual company and properly engineered to create cash if that’s what you want. Life insurance for living.

  44. Mewsik:
    Great to hear! It’s always so good to hear when someone gets the correct information into their hands and is taught how to use it properly. One of the most difficult and frustrating things for an appointed life insurance agent is the lack of knowledge people have about the products available, and how powerful they ‘can’ be if used properly. Trust is something that has been damaged by past people in this business, and that, combined with big names trashing one product or another has really hurt a lot of people as far as their financial futures are concerned. Hopefully you tell those you care about details of your experience so that they will be able to make well informed decisions sooner, rather than later.

  45. Love the “back and forth” on WL -vs- Term. As an insurance agent with NYL I always make certain that my clients receive a comprehensive understanding of the “pro’s and con’s of both. I always let them decide which type is best for their personal situation. Most importantly I make sure they understand what they own. In the end many clients choose a combination of both term and whole life.

    I think the agents that “tell” clients what to buy are doing them a disservice.

    My own 2 cents on Whole Life is that it is a tremendous product in that in a very uncertain world this product offers strong guarantees. It creates a foundation of security which should be primary in the long term financial planning strategy for most folks.

    PS – I became an agent AFTER I purchased my first Whole Life policy. The reason (sorry Pinyo) was not for the commissions but to help families with protecting their “house”.

  46. After paying into my NW Mutual whole life policies for 25 years I could not be happier. It is great to have a stable but rapidly growing investment in my portfolio and one that is available for me if needed. One thing that has not been mentioned is it is great to build a nice cash value that can be used to self insure us instead of buying long term care insurance at $600 a month. Like most life insurance…long term care insurance usually is never paid out and it is gone after your death leaving nothing for your heirs. I have my dividends from my whole life policy buying more paid up life insurance so my policy payout at death will be over double the original face value…nice going away present to my kids and still insures me against care costs or other problems we may have. Thank you NW Mutual..great product.

  47. Not sure about NWM LTC policies but New York Life LTC policies come with an optional “Return of Premium upon Death” rider. That rider (which is costly) together with the current 20% (of annual premiums paid) NY State credit makes it especially attractive to NYS residents. State tax treatment obviously varies from state to state.

    BTW, Tim, if you exhaust the cash value from your WL policy to pay for LTC costs you are not leaving your family with much of a death benefit. Also, check into the concept of “direct recognition” as it applies to future loans against your WL policy’s cash value.

  48. Yes, be very careful with loans from cash value’s of life insurance products. Make sure you know EVERYTHING about them, including, but not limited to: interest rate, loan charges, and effect on death benefit. Loans from C.V. can be an excellent way to take care of unexpected costs, but the consequences of not carefully weighing the true costs can be devastating.

  49. Eric and MB….thanks for the info and I will check this out prior to using it. The only way I would dip into this cash value was if I had no other way to keep my 2 kids from having to help me with my long term care costs if it got ugly for me or my wife. I have provisions in my will that could possibly speed up my and my wifes passing but who knows how things will work out. My father died of a deadly brain cancer at age 87 and opted to have surgery and chemo in a hopeless situation and my wife and I know we will not let this happen to us…far to hard on the family and we have our plans well written out so their is no hard decisions to be made by our kids. My son is the executor and knows about our cash value emergency plan and will do what is best financially at the time we need him (he is a good money guy). All we can do is set it up to work out and if not…”Oh Well”. This cash value is a smaller portion of our total picture so mostly just a backup plan. No crystal ball in my attic unfortunately. Thanks again.

  50. 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.

  51. 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.

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

  53. 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!

  54. 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.

  55. 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.

  56. 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.

  57. 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

  58. 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.

  59. 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?

  60. 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.

  61. @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.

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