In the following article, we will provide our readers with insight into the ever raging battle between term life vs whole life insurance. If you are not familiar with us, we are huge advocates of a properly designed whole life insurance policy focused on cash value growth.
So, if you are looking for a contrarian view of this debate that does not parrot the same old arguments of term vs whole life, just in a different format, look no further.
This article will first focus on the typical objections raised by the legion of term life advocates, AKA termites, led by Dave Ramsey and Suze Orman. The typical mantra is buy term and invest the difference, also known as BTID.
We provide a brief snapshot of the similarities and differences between whole life versus term life insurance coverage below. We will then follow with a more thorough analysis into each similarity and difference.
Next, we will cover some of the most popular objections to whole life insurance. After we list the objection we will explain why each specific objection does not hold water.
Finally, we will do a deep dive into the utility of whole life insurance and why this often maligned financial product is actually one of the best wealth building devices available.
A caveat for our readers. When discussing the following life insurance products it is impossible for us to not associate whole life with infinite banking. If you are not familiar with the concept of infinite banking, it is a strategy of using dividend paying whole life insurance as your own personal banking system.
In essence, your life insurance policy is used to create your own personal financing system that becomes essentially a second job. You are your own banker. And everything you do is now filtered through this new reality.
So you see, when we tout the many benefits of whole life insurance, we would be remiss if we don’t do this in light of infinite banking and how it can forever alter your whole life, that is your physical, mental, spiritual, emotional and financial being as a whole.
Whole Life Insurance vs Term Life Insurance
[Top 10 Similarities and Differences]
The primary similarities between the two insurance products are listed below and summarized in the following snapshot.
|Pays a Death Benefit Upon the Death of the Insured
|Pays a Death Benefit Upon the Death of the Insured
|Fixed Premiums that can be Flexible Depending on Policy Design
|Fixed Premiums Until Term Expires
|Coverage is Permanent, Lasting your Entire Life
|Coverage is for a Set Period of Time
|Guaranteed Cash Value Growth
|Has No Cash Value
|Annual Dividend Payment
|No Annual Dividend
|Cash Value Grows Tax Deferred
|Has No Cash Value
|Increasing Death Benefit
|Death Benefit is Level
|Premiums can be offset or Adjusted Based on Policy Design.
|Don't Pay, Don't Play. Policy will Lapse if Premiums are Not Paid.
|Can Be Blended with Term Life
|Can be Converted to Permanent Insurance
Compare Whole Life vs Term Life Insurance Quotes
So, lets take a deep dive into the differences and similarities of whole life insurance vs term.
Both life insurance policies offer death benefit protection which pays out a lump sum to your beneficiaries.
So, with term life, if you die before the term expires, your life insurance pays your beneficiary a lump sum payout income tax free.
The difference between whole life vs term life is that a whole life policy’s death benefit can increase over time thanks to interest and dividends. And the whole life policy has a guaranteed death benefit payout to your beneficiaries as long as you make the required premiums to the insurance company.
Nowadays, both term life and whole life offer some fashion of living benefits. Living benefits are things like a terminal illness rider, chronic illness rider, long-term care rider, etc.
Living benefits benefit you while you are living. For example, if your policy has a chronic illness rider and you are diagnosed as chronically ill, you will have access to a portion of your death benefit to be used by you however you need (or want) to use it.
The typical term life vs whole life article will start right away by focusing on the cost difference between the two. And that is a major difference between term vs permanent insurance coverage. But as we will write about below, this is a great fallacy that diverts the truth seeking pilgrim from the path of financial freedom and tosses them into the swamp of despair.
Term life has cheaper initial insurance premiums when you compare the cost of whole life vs term life with the same death benefit. But the word “cheaper” is such a relative term.
Cheaper compared to what? If your goal is to buy the cheapest protection out there while you are young, term insurance is the right product for you.
So yes, whole life insurance rates are higher versus term when you compare the two together focusing strictly on total death benefit protection divided by price. However, over time, whole life becomes much more affordable, taking into account the fixed level premiums, with increasing cash value growth and increasing death benefit.
In addition, you can set up a whole life policy to only require limited payments. Limited pay whole life insurance can be structured so that the policy is paid-up life insurance after 7 years, 10 years, 20 years, at age 65 or age 100. So there is a lot of flexibility here.
Fixed Level Premiums
Both term life and whole life provide you with fixed level premiums. It is important you understand the fine print with term policies, as some insurance companies offer level term policies where the premium increases every five years. The “level” part of these term insurance policies is the level death benefit. Ideally, you want level term life insurance where the premium AND the death benefit remains the same for the duration of the term policy.
Next, whole life will get some props because it lasts, well, your whole life. Whole life is permanent insurance coverage that does not expire until you do or until it is fully endowed at age 100 (age 121 for new policies, people are living longer after all). Term Life, alternatively, last for a period of time, ranging from 10 years to 30 years.
Term insurance can be renewed upon policy expiry but the policy premiums go up a lot. And the closer you are to your actuarial life expectancy, the higher your term life premiums will be. You see, an estimated 99% of term policies expire worthless. Once you get close to death your premiums will skyrocket.
Guaranteed Cash Value Accumulation
Whole life is cash value life insurance. Your premium goes towards building up cash value in your policy which can be accessed through a withdrawal or borrowed against via a life insurance loan.
Term life has no cash value. Term insurance is a straight death benefit. That is why in our opinion, term life insurance policies should be called “death insurance“, rather than life insurance.
Annual Dividend Payments
Participating whole life insurance provides annual dividends. Life insurance dividends can be used as cash, to pay premium payments or to buy paid-up additional insurance. Paid-up additions grow both your death benefit and cash value account.
Term life does not pay dividends. If you are interested in recouping any of your premiums, consider return of premium term life insurance.
Death Benefit Grows
Your properly designed whole life policy has an increasing death benefit. The older you get, the bigger your death benefit. The death benefit of term life stays the same and expires at the end of the term, unless the policy is renewed or converted.
Convertible term life insurance is a good option for anyone who believes that they want permanent coverage one day but does not want to make the commitment just yet.
With a term policy, your premium must be paid or your policy will lapse. If your policy lapses, the life insurance coverage will terminate and your life insurance protection will end. It can be reinstated but you will have to provide evidence of insurability.
Whole life offers many different alternatives if you find that you cannot make the premium payment. You can use your dividend to pay your premium for a period of time. Premium offsets are available where your policy has grown and essentially is self completing, no longer requiring you to make any premium payments. You can also request a reduced paid-up policy where your cash value is used to buy coverage and you no longer need to make premiums.
Not Either/Or but AND
You can design a whole life policy to include a term rider, giving you the best of both worlds. That way it is no longer whole life vs term life, but instead, whole life AND term life. In fact, a properly designed whole life policy will often include a term rider to help provide additional coverage which maximizes your death benefit protection and early cash value growth.
Term life is limited in what it can do for you. However, whole life insurance is an amazing savings vehicle that can catapult you into an entirely new realm of financial freedom and independence. More on this below once we address some common objections to whole life.
Why Whole Life Insurance Sucks
Let’s jump into some common objections to whole life insurance and why most financial pundits, such as Dave and Suze, financial planners and life insurance agents recommend you buy term and invest the difference. (Hint: it is due to either ignorance or they see it as a threat).
The first objection is that whole life insurance cash value takes 7 to 10 years to grow. This statement is misguided, as many high early cash value policies can be designed so that cash value growth is greater than total premiums paid by year 5. And the longer you own the policy, the more efficient it becomes. Request a complimentary whole life illustration to see for yourself.
In addition, you can borrow from the policy within the first month or two, so that you can start using your cash value in multiple ways, rather than allowing your money to stagnate in a typical retirement plan.
Another popular objection is that whole life insurance returns are low. Dave makes the claim that returns are 1.2% nationally.(1) This seems a bit low considering Penn Mutual’s dividend payment for 2018 came in at 6.34%.(2)
When answering this objection we first have to ask, whole life returns are low compared to what? Whole life insurance is not an investment.
Rather, it is an alternative compound interest account that acts as an alternative to a savings account. With whole life, your long-term internal rate of return can be above 5%. What savings account offers anything close to that?
Besides, what do you think the return on term life insurance is going to be? Zero? Well, how about negative 100% because you will never see a penny of that money and your opportunity cost is is whatever you could have done with that money had you not bought the term life policy.
Company Keeps Your Cash Value
Dave Ramsey, outspoken critic of cash value life insurance, will often make the statement that the insurance company keeps your cash value when you die. But that is like saying the person who buys your home keeps your home equity when you sell it. Dave Ramsey and the truth about life insurance are not always in alignment.
It is Better to Self Insure
Another of Dave Ramsey’s and Suze Orman’s financial advice is that you can always self-insure. (3) Who needs whole life when you bought term and invested the difference so you obviously don’t need life insurance any longer. At least, that is the line of reasoning.
But would that line of reasoning work for other types of insurance policies?
For example, would anyone say, I have enough money so I just self-insure my Lambo? Or, my wealth is so substantial that I don’t worry about home insurance or liability insurance, I just self-insure?
Of course not.
And that is why the argument that you can always just self-insure is so empty. Insurance is meant to reduce your risk. Self-insuring only increases your risk. Plus, it messes with your mind.
Try driving down the road with no auto insurance vs having coverage. On one hand you can’t stop thinking about “what if”. Insurance deals with the what if, so you can focus on more important thoughts of abundance.
Anyway, not to belabor the point, but doesn’t it make sense to have life insurance when you need it most, i.e. when you die? Why self-insure when you can get the benefit of a leveraged death benefit to provide for your family and create a legacy?
And our personal favorite whole life objection is that agents sell it because they make huge commissions. However, a properly designed policy, that focuses more on paid-up additions than base insurance premiums, pays a very low commission. If you look at the total amount of insurance premiums the policyholder will make over whole life policy’s lifetime, the agent’s commission on these banking policies is minuscule.
For example, a $10,000 whole life policy designed for high cash value growth will pay the agent roughly $2,500 for first year commissions. That is because the policy is designed to be overfunded life insurance, focusing on cash value growth. The agent is making 25% commission in the first year.
In contrast, I would argue that the fees paid to financial planners over the long-term are much greater than any commission a life insurance agent will receive for a whole life policy. Financial planners earning 1% a year on a $1,000,000 portfolio are making $10,000, each and every year. Over 30 year time frame that is over $300,000 in fees.
Why Whole Life Insurance is the Best
In this final section we will introduce you to some ideas and concepts that relate to whole life insurance and why it is the best vehicle for wealth building and legacy creation in the marketplace.
Forced Savings Account
In a day and age when the median savings account balance is a paltry $5,200 (3) , Americans need an alternative. The concept of buy term and invest the difference has not served the American public at large well.
The average personal savings rate peeked in the 1970s and has been in a steady decline ever since. (4) Is it a coincidence that the phrase “buy term and invest the difference” was first introduced about that same time? Maybe, maybe not.
What we can surmise is that thanks to BTID in part, money has consistently flowed out of cash value life insurance and into stocks, bonds and mutual funds, as more and more of our society has taken the BTID pill. Now, more and more people rely on others to manage their money instead of taking personal responsibility and stewardship for their own financial discipline and well being.
Here is the reality. Whole life provides a forced savings account that can provide a solid 5% return over the long-term. And when you throw in the fact that you can access the cash value by borrowing against it income tax free, the return is even higher when compared to an account that must pay taxes, such as the unfortunate 401k plan, where proceeds are taxed as ordinary income.
Velocity of Money
Whole life insurance provides an annual dividend payment. You receive the payment on your policy’s entire cash value, whether or not you have an outstanding loan. So, you are making money in your policy, while simultaneously using your loan to either pay off debt or purchase investments, allowing you to fully utilize your money.
For example, a great real estate wealth building strategy is to use your cash value as the down payment for investment properties. Once you purchase a cash flowing asset, you can pay back your policy loan with the proceeds. Once you repay your loan, you can go out and repeat this process again and again.
And what if you want to buy stocks, Bitcoin or some other investment? Your cash value can be withdrawn or borrowed against whenever, and for whatever, you choose. So, if the market crashes, or you have a hot stock tip, or a chance at Facebook’s IPO, you can make that investment by utilizing your life insurance policy’s cash value.
Supplemental Retirement Income
A life insurance retirement plan using whole life allows you to supplement your income in retirement through policy loans. Your loans are income tax free. As your whole life policy grows, the dividends may be sufficient income, allowing your cash value and death benefit to continue to mature and grow over time.
Whole life provides risk mitigation since it is a non-correlated asset. Whole life insurance returns are contractually guaranteed. What you get is an asset that grows tax-deferred, is not linked to the stock market, that provides a tax free death benefit and tax free loans. The best part? If the stock market crashes you can pounce on any opportunities, without the fear of the herd that is running for the exits.
A whole life policy provides you with maximum control. Unlike 401k withdrawals rules that penalize you for early withdrawals, you can access your cash in your policy whenever you want for whatever you want.
Some Points to Ponder
When a well-packaged web of lies has been sold gradually to the masses over generations, the truth will seem utterly preposterous and its speaker a raving lunatic. ~ Dresden James
Why is it that Dave Ramsey, Suze Orman and the vast majority of financial planners and talking heads at CNBC recommend you buy term and invest the rest? We would posit that the answer is because they want your money. And they want your money for a long time. And when you finally start taking withdrawals, they want to give you back your money as little bit as possible.
The financial world loves buy term and invest the difference. They want you to buy term life because if you stick your money into whole life then the banks and financial institutions will never see that money. And we all know Wall Street loves making money with your money and then passing the majority of the risk off on you.
Maybe it is time for a paradigm shift. Consider an alternative to Wall Street. Spend time reading our articles, grab our free e-books and set up a complimentary strategy session. You have nothing to lose and everything to gain.