I hope this post doesn’t end up on one of my favorite blogs, Bad Money Advice, but I wanted to actually compare some numbers for people.  Everyone, and I mean everyone tells you to stay the hell away from Whole Life Insurance, I think the main concerns are fees, lack of clarity, and evil insurance companies only offer these products cause people are stupid and insurance salesmen can sell anything.

I do not think Whole Life is for everyone.  I don’t own Whole Life Insurance, nor have I ever sold it…but I don’t believe it is evil! If you are cash strapped and are aware that you need that million dollar death benefit then Whole Life isn’t likely to make sense.   But, I also truly believe most people DO NOT “invest the difference.”

For one, unless you had illustrations ran you don’t have a clue what the difference is!

For another, if everyone was actively investing the difference then this country’s middle class  probably wouldn’t be in the position it is today.  But I digress,  if you want to read some great arguments against whole life insurance here are a few posts that are coherent and actually make some sense:

That being said, want a great article written by yours truly giving some “outside of the box” reasons to buy whole life insurance than check out my guest post on Cash Money Life

If Whole Life Insurance provided no utility then it wouldn’t exist.  I am not going to discuss the need for life insurance in this post, rather I just want to compare dollars of buying a whole life policy vs. buying term and investing the difference.

Variables used:

  • My Birthday – I am a 28 year old Male.
  • I am assuming I am super preferred (2nd highest – cause no way I am not ultra, the highest).
  • I am using a Triple A rated company, because that is the illustration program I have access to at 11:45pm at home on my couch
  • We are only spending $1,000/year.
  • Outside Investments grow at 5% Net and we are going to roll everything back into the investment
  • I am buying 20 year level term OR a straight whole life policy nothing fancy on either side.

Example: Math on Whole Life Insurance vs Buy Term and Invest the Difference

20 Year Term and Invest the Difference

As explained before $1,000 buys $115,000 Death Benefit so that will be what we are solving for in the 20 year Term.  To buy 20 year term for $115,000 we are looking at $161/year, so we will be reinvesting $839.

YearBOY InvestedGrowth @ 5%AdditionsEOY BalanceDeath Benefit
1$839.00$41.95$0.00$880.95$115,000.00
2$880.95$44.05$839.00$1,764.00$115,000.00
3$1,764.00$88.20$839.00$2,691.20$115,000.00
4$2,691.20$134.56$839.00$3,664.76$115,000.00
5$3,664.76$183.24$839.00$4,687.00$115,000.00
6$4,687.00$234.35$839.00$5,760.34$115,000.00
7$5,760.34$288.02$839.00$6,887.36$115,000.00
8$6,887.36$344.37$839.00$8,070.73$115,000.00
9$8,070.73$403.54$839.00$9,313.27$115,000.00
10$9,313.27$465.66$839.00$10,617.93$115,000.00
11$10,617.93$530.90$839.00$11,987.83$115,000.00
12$11,987.83$599.39$839.00$13,426.22$115,000.00
13$13,426.22$671.31$839.00$14,936.53$115,000.00
14$14,936.53$746.83$839.00$16,522.36$115,000.00
15$16,522.36$826.12$839.00$18,187.47$115,000.00
16$18,187.47$909.37$839.00$19,935.85$115,000.00
17$19,935.85$996.79$839.00$21,771.64$115,000.00
18$21,771.64$1,088.58$839.00$23,699.22$115,000.00
19$23,699.22$1,184.96$839.00$25,723.18$115,000.00
20$25,723.18$1,286.16$839.00$27,848.34$115,000.00
21$27,848.34$1,392.42$839.00$30,079.76$0.00

Alright, not too shabby we have protected our family for 20 years and have a net of $28,000ish.  A great option for a lot of people.  At the 21st year you will not have insurance, so you have zero options.

Whole Life Insurance

YearGuaranteed Cash ValueDeath BenefitNon Guaranteed CashNon Guaranteed Death Benefit
1$0.00$115,000.00$0.00$115,000.00
2$7.00$115,000.00
3$955.00$115,000.00
4$1,942.00$115,000.00
5$2,969.00$115,000.00$3,140.00$116,723.00
6$4,038.00$115,000.00
7$5,146.00$115,000.00
8$6,297.00$115,000.00
9$7,488.00$115,000.00
10$8,720.00$115,000.00$9,543.00$119,372.00
11$9,872.00$115,000.00
12$11,061.00$115,000.00
13$12,286.00$115,000.00
14$13,549.00$115,000.00
15$14,847.00$115,000.00$17,028.00$123,711.00
16$16,180.00$115,000.00
17$17,545.00$115,000.00
18$18,941.00$115,000.00
19$20,373.00$115,000.00
20$21,841.00$115,000.00$28,251.00$135,416.00
21$23,356.00$115,000.00$31,111.00$138,764.00

At the 21st year you have a bunch of different options – you can take a loan against some or all of the cash, you can withdraw the cash and collapse (may have tax ramifications), you can take a paid up addition and use the cash to buy a life insurance policy as a legacy and not add another dime to it.

I think one should make their own conclusions from the comparisons, to determine whether the positives of whole life outweigh the couple thousand difference on the guaranteed side (the non-guarantees at current dividend rate end up higher than that of term and invest the difference so that is a non-issue)?

More important than the numbers above, is the message that the norm doesn’t always provide a full picture of what is going on.

UPDATE:

As indicated in the comments below, Weakonomist made some points that I had used a return rate that was way too low.  As I thought I indicated above, the reason I used 5% was for safety of muni-bonds vs. a guarantee from a triple A rated company.  Below is the table of a 8% net vs. non-guarantee side of the whole life policy (instead of excess increasing the Death Benefit I threw it into cash since that is likely what a client would do if he or she is trying to increase, well…cash value):

YearEOY BalanceNon-Guarantee Cash Value
1$906.12$0.00
2$1,817.61
3$2,802.02
4$3,865.18
5$5,013.39$3,140.00
6$6,253.47
7$7,592.74
8$9,039.16
9$10,601.30
10$12,288.40$9,543.00
11$14,110.47
12$16,078.31
13$18,203.57
14$20,498.86
15$22,977.77$17,028.00
16$25,654.99
17$28,546.39
18$31,669.10
19$35,041.63
20$38,683.96$28,251.00
21$42,617.67$31,111.00

I never claimed that whole life would beat anything, what I did say was that it isn’t as bad as everyone makes it out to be.  At 5% return, it is close, with added flexibility, but if you are ‘planning’ on getting 8% NET (post fees and taxes) then invest the difference, if you do it, will come out ahead.

Again, everything written above is moot if you have a need for income replacement of $1,000,000 and you can only afford $750,000 10 year term…then we have a different problem.