Table of Contents
- Introduction to BTID
- What is Buy Term and Invest the Difference?
- The History and Origins of BTID
- Financial Pundits and BTID
- The Investment Industry’s Perspective
- Life Insurance Agents and BTID
- Comparing BTID vs. Whole Life Insurance
- The Infinite Banking Alternative
- Key Benefits of Whole Life Insurance
- Agent Commissions vs. Financial Planner Fees
- Conclusion: Is BTID Right for You?
- Frequently Asked Questions About BTID
Introduction to BTID
The debate between term life insurance and permanent life insurance has raged for decades in the financial world. At the center of this debate is a strategy known as “Buy Term and Invest the Difference” (BTID). This approach has become a cornerstone of mainstream financial advice, but is it the right choice for everyone? Does this one-size-fits-all strategy truly optimize your financial potential, or are there alternative approaches worth considering?
In this comprehensive analysis, we’ll examine the BTID strategy from multiple angles, compare it with alternative life insurance investment approaches, and help you determine which strategy aligns best with your financial goals and circumstances. Whether you’re new to life insurance planning or reevaluating your current strategy, this guide will provide valuable insights into term life insurance benefits, permanent life insurance alternatives, and how to make the most informed decision for your financial future.
What is Buy Term and Invest the Difference?
Buy Term and Invest the Difference (BTID) is a financial strategy that suggests purchasing a term life insurance policy rather than a permanent life insurance policy (such as whole life or universal life), and then investing the premium difference in alternative investment vehicles like mutual funds, ETFs, or retirement accounts.
Simply put, BTID advocates choosing an initially cheaper term insurance policy instead of whole life insurance, since the latter requires more capital investment upfront. You are then instructed to systematically invest the difference between what you pay for your term insurance premium versus what you would have paid for permanent insurance coverage.
For example, let’s say your term life rates are $30 a month and whole life would be $300 a month. Following the BTID strategy, you would purchase the term insurance and invest the difference—which in this example would be $270 a month—into investment vehicles such as mutual funds, ETFs, or retirement accounts.
The underlying assumption is that these market-based investments will outperform the cash value growth within a whole life insurance policy, potentially resulting in greater wealth accumulation over time while still maintaining death benefit protection during your most financially vulnerable years.
The History and Origins of BTID
Buy Term and Invest the Difference was first coined by Primerica Financial Services founder and longtime CEO Arthur L. Williams. Mr. Williams believed that life insurance was only for protecting the primary breadwinner and should not be used as a savings vehicle.
As a result, Williams launched a crusade to convince cash value life insurance policyholders to trade in their existing, more expensive whole life or universal life policies, and replace them with cheaper term life insurance policies.(1)
His reasoning was that middle-income families would be better served by buying cheaper term life, since whole life insurance rates are often multiples higher than term life rates with a similar death benefit.
Williams advocated for these middle-income families to buy term insurance and invest the premium savings in mutual funds and retirement accounts, such as the 401k plan and IRAs. This approach aligned with the emerging emphasis on personal retirement planning in the 1980s and the growing popularity of stock market investing for the average American.
”Our business is the replacement business. With the new [20-year term] policy, I told our agents we might have to change the name of our company from Massachusetts Indemnity to Cannibal Life. Our competition won’t be able to match it in price. We’re fixin’ to knock their butts off like you wouldn’t believe.”(2)
And knock their butts off he did, to the tune of billions of dollars in revenue for his Company. Mr. Williams himself is said to have had a net worth around $1.4 billion in 2008.(3)
The BTID strategy gained significant momentum during the bull markets of the 1980s and 1990s when stock market returns were exceptionally strong, further reinforcing the apparent advantage of investing in the market over building cash value in a life insurance policy.
Financial Pundits and BTID
Enter Dave Ramsey and Suze Orman
Many financial pundits, such as Dave Ramsey and Suze Orman, agree with Mr. Williams and use the slogan “buy term and invest the difference” whenever they are confronted with a caller asking which policy is better: whole life insurance vs term?
Dave Ramsey’s main criticism of whole life insurance is that he believes it is too expensive. And indeed, when comparing term life insurance vs whole life insurance purely on premium cost, a term life insurance policy is cheaper than a whole life policy with the same death benefit, at least initially. (But more on this nuanced comparison later.)
Suze Orman follows a similar perspective (as do most mainstream financial advisors) and frequently criticizes whole life insurance as being too costly for the average consumer. Both Ramsey and Orman advocate for a simplified approach to life insurance and investment planning that separates protection needs from investment goals.
For Dave Ramsey and Suze Orman, their advice follows a one-size-fits-all approach to insurance and investment planning. However, this standardized financial advice may not account for the unique circumstances, goals, and risk tolerances of every individual.
I don’t agree with this universal approach. Instead, I follow the wealth-building strategies often employed by the affluent and believe you should probably consider these strategies as well.
The Investment Industry’s Perspective
The Investment World and Financial Planners Love BTID
Buy term and invest the difference is effectively a massive billboard erected by the investment community that proclaims:
“Give us all your money!”
Recommending everyone but the ultra-wealthy practice BTID simply reinforces the programming imposed on the American public that our money should be handed over to Wall Street. This relationship between BTID strategy and the investment industry creates an interesting dynamic in financial planning that deserves closer examination.
When you hand your money over to Wall Street and Financial Planners through the BTID approach, you essentially transfer both responsibility and stewardship of your money to people and entities that generate revenues and fees from your investments, regardless of whether you actually make a profit. This creates a potential misalignment of incentives in some cases.
Financial advisors and investment platforms typically earn their income through various fee structures – management fees, transaction fees, load fees, and other investment-related expenses. These fees remain in place whether your investments perform well or poorly. In contrast, a whole life insurance policy, once established, requires no additional transaction costs to maintain, and the growth occurs within a structure that offers tax advantages similar to other retirement vehicles.
The financial services industry has a vested interest in promoting strategies that direct more capital into managed investment accounts. This isn’t necessarily nefarious – many advisors truly believe that market-based investments offer superior long-term returns. However, it’s important to recognize that the nearly universal recommendation of BTID aligns with the financial interests of the investment community.
Life Insurance Agents and BTID
Life Insurance Agents Jump Onto the BTID Bandwagon
Most life insurance agents echo the same sentiment about BTID, having accepted the conventional wisdom that buy term and invest the difference is the right decision for everyone who is not wealthy. This perspective has become so dominant that you would be hard-pressed to find many advocates for cash value life insurance in mainstream financial discussions.
In fact, this was my own belief when I first started in the industry.
After all, whole life insurance can seem outdated in today’s fast-paced financial world. In our present day, the common refrain is to “buy term and ditch the perm,” or something to that effect.
From life insurance websites to personal finance blogs, the message is remarkably consistent: buy term life insurance and invest the difference in the market. This has created an overwhelming consensus in financial planning circles.
It is essentially mass agreement that rarely gets questioned.
And what happens when someone challenges this herd mentality? Typically, you will get the canned response that the only people who recommend whole life insurance are those who profit from selling it.
Well, that observation isn’t surprising.
Perhaps that’s because the only people who dare to go against the status quo are those who have recognized limitations in the standard BTID advice. It is these contrarians who try to bring awareness to the advantages of life insurance that are often marginalized in financial discussions.
Ironically, there are countless life insurance agents who act as if selling term life insurance exclusively represents a rebellion against the system. Just search for “the whole life insurance rebellion” and see what comes up. When 99% of financial advice is pointing in the same direction, it’s difficult to call following that advice a rebellion.
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Most Life Insurance Agents Don’t Get It
Many life insurance agents, particularly those who focus exclusively on term life insurance, don’t fully understand overfunded life insurance, especially a properly designed whole life policy.
They don’t comprehend the many benefits of cash value life insurance or how it fits into a comprehensive wealth-building plan. This knowledge gap often leads to simplified comparisons that don’t account for the nuanced advantages of permanent life insurance when structured correctly.
“AND”
These same life insurance agents frequently don’t realize that whole life can include a term rider, effectively creating a combination whole life AND term life insurance policy.
Yes, you read that correctly. The most efficient whole life insurance policy design often blends term life into it, allowing you to maximize cash value growth while still providing a substantial death benefit from the beginning. This hybrid approach represents a middle ground that captures benefits from both types of insurance.
Advanced insurance planning isn’t about choosing strictly between term or whole life insurance—it’s about strategically combining elements of both to create an optimal financial tool based on an individual’s unique situation and goals.
Comparing BTID vs. Whole Life Insurance
Cost Comparisons: Term Life vs. Whole Life Insurance
The objection that whole life insurance is more expensive than term life insurance can be misleading because it fails to compare the products on equal terms. You cannot directly compare term life vs whole life insurance regarding price because the two products serve different objectives and provide different benefits.
If your goal is to get as much death benefit protection for the lowest price possible in the short term, then a term life insurance policy makes perfect sense. Let’s look at a concrete example:
A 30-year term life insurance policy for a 42-year-old in excellent health seeking a $2,500,000 death benefit might cost around $4,000 annually.
However, this policy only provides coverage to age 72, at which point the term insurance premium skyrockets each year, often making it prohibitively expensive to maintain.
In contrast, a guaranteed universal life insurance policy that lasts to age 121 would cost the same 42-year-old male roughly $18,000 a year for the same $2,500,000 death benefit.
The difference in price reflects the guaranteed permanence of the coverage—the insurance company must pay the death benefit eventually, rather than just covering a limited risk period as with term insurance.
Death Benefit and Cash Value Growth
When comparing whole life insurance to term insurance, it’s crucial to understand that whole life offers two distinct components: death benefit protection and cash value accumulation. Term insurance, by contrast, offers only a death benefit with no cash value component.
For our same 42-year-old male seeking $2,500,000 in coverage, a 7-pay whole life policy might require premiums around $80,000 annually—about 20 times the cost of the term policy as Dave Ramsey often points out.
But there’s more to consider…
Unlike the term policy, whose death benefit remains static at $2,500,000, the whole life insurance policy’s death benefit increases every year. It starts at $2,500,000, but within 5 years, the death benefit might grow to approximately $3.3 million through dividends and the accumulation of paid-up additions.
By year 10, the death benefit could reach $4 million, and by the time this 42-year-old reaches his life expectancy at age 82, the death benefit might have grown to $7.6 million—more than triple the original amount.
Furthermore, consider this important detail:
In a properly designed policy, the paid-up additions rider typically drops off after year 7 in this example, reducing the annual premium to approximately $18,000 (comparable to the guaranteed universal life policy mentioned earlier). This significant reduction occurs because the policy has been “overfunded” during those initial years to accelerate cash value accumulation.
This premium reduction represents the power of strategically overfunding a life insurance policy for high cash value accumulation while also securing a growing death benefit.
Additionally, by this point, the whole life insurance dividend may exceed the annual premium due on the policy, giving you the option to either continue paying premiums or let the dividends cover premium payments.
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Long-term Return Comparison
When we consider the longer time horizon, the comparison between BTID and whole life becomes more nuanced. The term policy’s premium remains at $4,000 annually until the end of the term period (typically 20 or 30 years), after which premiums increase dramatically if you wish to maintain coverage.
So the initial price difference between term life vs whole life narrows considerably over time—from the original ratio of 1/20 to perhaps 1/4 after the paid-up additions rider drops off.
But while the term policy’s death benefit remains static, the whole life insurance death benefit and cash value continue growing steadily, making a direct comparison increasingly favorable toward whole life as time passes.
Consider this crucial statistic: approximately 98% of term policies expire without paying a death benefit. This represents a complete loss of premiums paid—in our example, potentially $120,000 over 30 years—with nothing to show for it if you outlive the policy. This doesn’t even account for the opportunity cost of those premium dollars that could have been directed elsewhere.
As for the cash value component of whole life insurance, let’s continue our example:
By year 7 (the final year of overfunding), the cash value might reach approximately $678,000—only slightly more than the $616,000 in total premiums paid.
But here’s where the long-term advantage becomes apparent:
Remember that after year 7, the premium drops significantly from $80K to $18K annually. Despite this reduced premium payment, watch how the cash value continues to grow:
- In year 10, the cash value might reach $868,000
- In year 15, it could grow to $1,260,000
- In year 20, it might reach $1,785,000
- In year 30, potentially $3,365,000
- In year 40, possibly $6,000,000
This cash value growth projection doesn’t even factor in the strategic utilization of the policy through methods like the Infinite Banking Concept, which we’ll explore next. When properly leveraged, the growth potential could be even more substantial.
Increasing Cash Value and Death Benefit
Whole life insurance offers flexible premium payment structures. While some policies are designed to accept premiums until age 100, limited pay whole life insurance plans allow shorter commitment periods, such as 7-Pay, 10-Pay, 15-Pay and 20-Pay policies.
Once you’ve completed your premium payments for the designated period, the policy becomes fully paid-up life insurance. You never need to make another payment, yet the policy continues providing protection and growing cash value.
Dave Ramsey often claims that term life insurance costs approximately 1/20th the price of whole life insurance. While this initial cost comparison is factually accurate, it doesn’t tell the complete story of long-term value.
As previously illustrated, a 42-year-old seeking $2,500,000 in coverage might pay around $4,000 annually for a 30-year term policy.
The same individual seeking equivalent whole life coverage might initially pay approximately $80,000 annually for a 7-pay whole life structure.
But there’s an important consideration regarding long-term performance.
The whole life insurance policy’s death benefit increases year over year. While it begins at $2,500,000, within 5 years it might grow to $3.3 million.
By year 10, the death benefit could reach $4 million, and by the insured’s statistical life expectancy of age 82, the death benefit might have grown to $7.6 million compared to the original $2.5 million—an increase exceeding $5 million.
An additional crucial detail:
The paid-up additions rider on the whole life policy typically drops off after year 7, reducing the annual premium to approximately $18,000 (similar to a guaranteed universal life policy with equivalent initial coverage).
This demonstrates the power of strategically overfunding a life insurance policy to maximize cash value accumulation while securing a growing death benefit.
By this stage, the policy’s life insurance dividend may exceed the annual premium, allowing you to either continue paying into the policy or let dividends cover your premium—entirely your choice.
Meanwhile, the term policy’s premium remains fixed at $4,000 annually.
Over time, the cost ratio between term life and whole life narrows considerably—closer to 1/4 rather than the initial 1/20.
However, the death benefit and cash value in the whole life policy continue growing substantially, making direct comparisons increasingly less valid, as the term policy’s death benefit remains static at $2.5 million with no cash value component.
It’s important to remember that term life insurance provides only death protection. If you survive the 30-year term period, you’ve effectively contributed $120,000 to the insurance company with nothing tangible in return.
98% of Term Policies Expire Worthless
Industry statistics indicate that approximately 98% of term policies expire without paying a death benefit. This represents a complete loss of premium payments—a 100% loss—without even considering the opportunity cost of what those premium dollars might have achieved elsewhere (such as building cash value in a whole life policy).
What about the cash value accumulation in a properly designed whole life policy? The growth can be substantial over time.
By year 7 (typically the final year of maximum overfunding), the cash value might reach approximately $678,000, which may seem modest compared to the $616,000 in total premiums paid.
But the long-term growth potential becomes increasingly apparent:
Remember that after year 7, the premium typically decreases significantly from about $80K to $18K annually. Despite this reduced premium payment, the cash value continues its growth trajectory:
- In year 10, the cash value might reach $868,000
- In year 15, it could grow to $1,260,000
- In year 20, it might reach $1,785,000
- In year 30, potentially $3,365,000
- In year 40, possibly $6,000,000
These projections don’t even account for the strategic utilization of policy values through infinite banking strategies. When properly implemented, you’re not simply letting your money sit idle—you’re strategically deploying it to purchase cash-flowing assets and then replenishing your policy over those same 30+ years.
Your policy might accumulate $3.3 million in cash value, but you could simultaneously own millions in additional cash-flowing assets.
How substantial could this additional asset portfolio become?
The answer depends entirely on your investment decisions and strategic execution. The key distinction is that you maintain complete control over this process—not Wall Street institutions or financial planners.
Agent Commissions vs Financial Planner Fees
When discussing financial costs, the value created should always be the primary consideration. Should insurance agents earn commissions? Should financial planners earn fees? I believe both deserve compensation for valuable services provided.
I appreciate the value delivered by knowledgeable agents and financial planners and willingly compensate them accordingly. The same principle applies to CPA and attorney fees.
When professionals provide valuable expertise, compensating them fairly is entirely reasonable.
If you purchase a $10,000 annual premium whole life policy designed for maximum early cash value growth, the first-year commission to the agent typically ranges from $2,500 to $4,000.
This is because most premium payments are directed toward paid-up additions rather than base premium, which significantly limits the agent’s commission compared to traditionally designed policies.
Including renewals over the policy’s lifetime, the agent’s total lifetime commission might range from 75% to 90% of the first-year premium, or approximately $7,500 to $9,000 in total commissions distributed over many years.
CFP Fees
In contrast, financial planners typically charge annual fees ranging from 1% to 2% on total managed assets.
Many well-established financial planners manage hundreds of millions in client assets and routinely charge 1.5% in annual management fees. (4)
To reiterate, I have no objection to these fee structures when planners deliver corresponding value. However, there’s an important observation worth noting:
Who typically criticizes life insurance agents for earning “excessive” commissions?
Frequently, it’s members of the investment community—professionals who themselves generate revenue through various fees charged to their clients.
The irony is difficult to ignore!
The reality is that many financial professionals prefer directing client funds into managed investment accounts because that’s where they generate ongoing revenue.
They generally avoid recommending substantial allocation to whole life insurance because those assets move outside their fee-generating management structure. Additionally, some may recognize that once clients experience the autonomy of controlling their own financial resources, they might be less inclined to delegate financial management to third parties.
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Conclusion: Is BTID Right for You?
If you prefer delegating financial responsibility to external parties, the Buy Term and Invest the Difference approach might align with your preferences.
Personally, my independent nature and commitment to continuous learning have led me toward alternative strategies.
If you share similar traits and desire greater financial control and stewardship, I encourage you to explore the various resources linked throughout this article for deeper understanding.
The decision between BTID and alternative strategies like infinite banking ultimately depends on your personal financial goals, risk tolerance, and desire for control over your financial future. Both approaches have their place in financial planning, but the one-size-fits-all recommendation of BTID deserves more critical examination than it typically receives in mainstream financial advice.
As always, we welcome you to schedule a complimentary strategy session with our team to discuss these concepts in greater detail as they relate to your specific situation.
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Frequently Asked Questions About BTID
What is the primary difference between term life insurance and whole life insurance?
Term life insurance provides death benefit protection for a specific period (10, 20, or 30 years typically) with no cash value component. Whole life insurance offers permanent lifetime coverage plus a cash value component that grows tax-deferred and can be accessed during your lifetime. Term is initially less expensive but expires without value if you outlive the term period, while whole life costs more initially but builds equity and provides lifelong protection.
How does the BTID strategy work in practice?
The Buy Term and Invest the Difference strategy involves purchasing a lower-cost term life insurance policy instead of whole life insurance, then systematically investing the premium difference in alternative vehicles like mutual funds, ETFs, or retirement accounts. For example, if term insurance costs $30 monthly and comparable whole life coverage costs $300 monthly, you would invest the $270 difference. The strategy assumes these market investments will outperform whole life cash value growth over time.
Does BTID make sense in today’s economic environment?
The effectiveness of BTID depends largely on investment performance, tax considerations, and individual financial discipline. In periods of market volatility or when tax-advantaged investment space is limited, the guaranteed growth and tax advantages of whole life may be more appealing. Additionally, BTID requires strict discipline to consistently invest the difference rather than spending it. Each person’s situation is unique and should be evaluated based on their specific financial circumstances, goals, and risk tolerance.
What happens if I outlive my term insurance policy?
If you outlive your term life insurance policy, coverage typically ends without any return of premiums or accumulated value. At this point, you have three main options: 1) Let the coverage expire if you no longer need life insurance, 2) Convert the policy to permanent insurance if it has a conversion provision (though at significantly higher premiums based on your current age), or 3) Purchase new coverage, which will be substantially more expensive and subject to new medical underwriting. This is why approximately 98% of term policies expire without paying a claim.
How does cash value growth in whole life compare to market investments?
Whole life cash value typically grows at a more conservative but guaranteed rate (often 2-4% guaranteed), plus non-guaranteed dividends from mutual insurance companies that historically have added another 2-4% in total returns. Unlike market investments, this growth is guaranteed never to decrease, even during market downturns. Market investments potentially offer higher returns but with greater volatility and risk of loss. The key difference is that whole life provides guaranteed growth with tax advantages and death benefit protection in a single product, while BTID separates these functions into distinct products.
Can I implement both strategies simultaneously?
Yes, many financial experts recommend a blended approach rather than an either/or decision. You might maintain some permanent life insurance for lifetime protection and tax-advantaged cash accumulation while also using term insurance to cover larger, temporary needs (like income replacement during working years or mortgage protection). Similarly, you can build cash value in a whole life policy while also contributing to market-based retirement accounts. This balanced approach provides diversification across different asset classes with varying risk profiles and tax treatments.
What role does financial discipline play in the BTID strategy?
Financial discipline is absolutely critical to the success of the BTID approach. The strategy only works if you consistently invest the premium difference rather than spending it on other expenses. Studies suggest many consumers intend to invest the difference but fail to maintain this discipline over time. Whole life insurance essentially creates a forced savings mechanism through contractual premium payments, which can benefit those who struggle with consistent investing habits. When evaluating BTID, honestly assess your track record of financial discipline and consistent investment behavior.
How do tax considerations impact the BTID vs. whole life decision?
Tax treatment represents a significant factor in this comparison. Whole life insurance offers several tax advantages: tax-deferred cash value growth, potentially tax-free access to cash value through policy loans, and income tax-free death benefits. With BTID, investment growth typically incurs annual tax liabilities unless held in tax-advantaged accounts like 401(k)s or IRAs, which have contribution limits and potential penalties for early access. For high-income individuals who have maximized qualified retirement contributions, whole life can provide additional tax-advantaged growth potential.
What is the Infinite Banking Concept and how does it relate to whole life insurance?
The Infinite Banking Concept (IBC), developed by Nelson Nash, involves using properly structured dividend-paying whole life insurance as your personal banking system. Rather than merely accumulating cash value, you actively utilize policy loans to finance purchases and investments, repaying these loans according to your established schedule. This approach provides financing flexibility, potential interest savings, tax advantages, and uninterrupted compound growth on your policy cash value. Unlike BTID, which separates protection and investment functions, IBC integrates these aspects while adding a strategic financing dimension.
Are there situations where BTID clearly makes more sense than whole life?
BTID may be more appropriate in certain circumstances, such as when someone has a strict budget limitation but needs substantial death benefit protection, when coverage is needed for a specific, finite period (like until children are independent), or when someone has already maximized other investment opportunities with higher expected returns. It can also make sense for individuals who strongly prefer maintaining complete separation between insurance protection and investment activities, or for those who prioritize maximum investment flexibility and control over their portfolio allocation.
How do I determine which life insurance strategy best fits my situation?
The optimal approach depends on your specific financial situation, goals, risk tolerance, and personal preferences. Consider factors like your income level, tax bracket, other investment assets, debt situation, family protection needs, business planning requirements, estate planning objectives, and your comfort with financial markets. Most importantly, work with knowledgeable professionals who can explain the nuances of different strategies rather than those promoting one-size-fits-all solutions. A customized approach often incorporates elements of both strategies tailored to your unique circumstances.
Discover if Infinite Banking or BTID is Right for Your Financial Future
Before committing to either strategy, get a personalized analysis from our independent advisory team. We’ll help you understand which approach truly aligns with your financial goals, risk tolerance, and wealth-building objectives.
- ✓ Receive a detailed comparison of Buy Term and Invest the Difference vs. Whole Life Insurance strategies customized to your situation
- ✓ Understand how to maximize cash value growth while maintaining appropriate death benefit protection
- ✓ Learn about the potential tax advantages and cash flow benefits of properly structured life insurance
- ✓ Get a clear explanation of all options, costs, and long-term financial implications
Schedule your complimentary 30-minute Insurance Strategy Session today and take the first step toward greater financial control.
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3 comments
Kiko
This was a phenomenal article! I always wanted to hear a through flip to Dave Ramseys disposition to whole life policies. As a new life insurance agent this just armed me with a wealth of easy to understand knowledge of how this product works. I’ve been studying the concept of overfunding LIRPs (IULs). But this was truly helpful. Thank you!
Insurance&Estates
Thanks for connecting! Glad to help, the boilerplate recommendation to “cash in your whole life policy” is truly tragic for many.
Best, Steve Gibbs for I&E
steven r long sr
great stuff