Term Life vs Whole Life Insurance by the Numbers

How to Double Your Life Insurance Value

There have been many articles including by the White Coat Investors and Bogleheads written comparing term life insurance vs whole life insurance (one of the 3 main types of permanent life insurance). One way to demonstrate how whole life policies under deliver (except for the insurance salesperson’s commission) for most individuals financial plan is to show the numbers.

The Cliff Notes Version

I’ll admit, if you’re an analytical person who loves numbers like me, you’ll love the post. If you like the Cliff Notes version like my wife here’s the high points:

  • Best case scenario, a whole life policy grows at less than 4.5%. The guaranteed amount is significantly less. It’s typical to assume a 7% growth rate in equity investments.
  • Whole life premiums are high (21k vs 1k for term in example)! You may reduce your premium by going underinsured. Or, in times of financial difficulty stop paying the premium causing the policy to lapse.
  • Purchasing a term policy and investing the whole life premium savings results in almost 6 million dollars more after 50 years in the blog example! And that’s with the higher non-guaranteed whole life policy value.
  • Buy term insurance and invest the premium savings.

The Scenario

Let’s look at two people, Term Tammy and Whole Life Wally. Both individuals are 30 years old with perfect health, nonsmokers, and need 2 millions dollars of life insurance coverage.

Whole Life Wally goes to the insurance agent who provides his home and auto insurance for a life insurance quote. The insurance agent sells him a 2 million dollar whole life policy with an annual premium of $21,935 and he chooses to reinvests any dividends in the policy to buy additional coverage.

Wally is excited about his sparkling new policy that will force him to save money through the cash accumulation account. Plus, he is not “throwing the money away” since his policy earns cash value. Even better, Wally can keep the policy for his entire life guaranteeing his kids get the 2 million dollar payout tax-free!

Term Tammy goes to term4sale.com and finds a 25 year level term guaranteed policy from an A+ rated company with a premium of 1,000 dollars per year.

Term Tammy takes the money she saved from the whole life policy premium, $20,935, and makes monthly Roth contributions to his 401k and Roth IRA and invests in low cost index funds.

For the whole life policy, I’ll use the higher non-guaranteed amounts (a leg up). For the term policy, I’ll use a conservative 4.5% growth rate (instead of a the commonly 7% predicted growth rate). Let’s see who wins: term life vs whole life.

The Results through the Years

Score: Term Tammy 1. Whole Life Wally 0.
Score: Term Tammy is schooling Whole Life Wally 2-0
Whole Life Wally does have an edge with a larger death benefit (but smaller cash value). If we used a 7% investment growth rate ( by comparison, the S&P 500 has averaged 9.8%) for Term Tammy, her investments would be worth 3,156,557. I’ll give this round to Whole Life Wally. Score 2-1.
Term Tammy definitely takes this round. Final Score: Term Tammy beats Whole Life Wally 3-1.

Final Thoughts

I understand this scenario is not realistic as once you retire, you are no longer accumulating assets and investing $21,000. But, you probably would not keep a whole life insurance policy with a premium of the same amount (so you would never see the death benefit that was a big in the sales pitch).

There are many other angles we could compare term life vs whole life insurance (and in the future I will) including investment flexibility and control, unlikelihood of paying a $21,000 premium (but then I may be underinsured), but at the end of the day, the numbers tell the story. Keep investments in investment accounts (and keep expenses low). Keep insurance in insurance accounts (and only keep as long as needed).

If you want more information about the whole life policy (like how much lower the guaranteed amounts are) or growth of the separate investment account with the term policy, I have that information in tables below.

What is the reason you purchased your whole life or term life policy? What sales tactics have you heard?

Whole Life Table Data

Term Life Table Data

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