Whole Life Versus Buy Term and Invest the Difference

Age	Premium	Value	Death	Premium	Investment	Value	Death
33	4800	0	403081	552	4248	4432.309	504432.3
34	4800	0	406376	552	4248	9211.224	509211.2
35	12000	10250	416972	552	11448	21876.24	521876.2
36	12000	22016	428221	552	11448	35531.66	535531.7
37	12000	34850	440538	552	11448	50254.93	550254.9
38	12000	48445	453615	552	11448	66129.56	566129.6
39	12000	63227	467881	552	11448	83245.59	583245.6
40	12000	78955	483092	552	11448	101700.1	601700.1
41	12000	95934	499553	552	11448	121597.7	621597.7
42	12000	114949	518051	552	11448	143051.4	643051.4
43	11223	135690	538275	552	10671	165372	665372
44	10620	157664	559732	552	10068	188808.9	688808.9
45	10620	181318	582869	552	10068	214078.6	714078.6
46	10620	206950	607984	552	10068	241324.3	741324.3
47	10620	234770	635287	552	10068	270700.7	770700.7
48	10620	264864	664864	552	10068	302374.3	802374.3
49	10620	296943	696943	552	10068	336524.8	836524.8
50	10620	331612	731612	552	10068	373345.9	873345.9
51	10620	369133	769133	552	10068	413046.3	913046.3
52	10620	409863	809863	552	10068	455851.4	955851.4
53	10620	453985	853985	1575	9045	500936.4	1000936
54	10620	501782	901782	1575	9045	549547.1	1049547
55	10620	553473	953473	1575	9045	601959.1	1101959
56	10620	609358	1009358	1575	9045	658469.7	1158470
57	10620	669919	1069919	1575	9045	719399.5	1219399
58	10620	735505	1135505	1575	9045	785094	1285094
59	10620	806558	1206558	1575	9045	855925.8	1355926
60	10620	883446	1283446	1575	9045	932296.6	1432297
61	10620	966576	1366576	1575	9045	1014640	1514640
62	10620	1056580	1456580	1575	9045	1103422	1603422
63	0	1143823	1456580	0	0	1189709	1189709
64	0	1238855	1511403	0	0	1282745	1282745
65	0	1341551	1609861	0	0	1383055	1383055
66	0	1304978	1581027	0	0	1337013	1337013
67	0	1267837	1550996	0	0	1287369	1287369
68	0	1230983	1520603	0	0	1233844	1233844
69	0	1194144	1489327	0	0	1176133	1176133
70	0	1157463	1457112	0	0	1113909	1113909
71	0	1121188	1402368	0	0	1046819	1046819
72	0	1085612	1343205	0	0	974482.2	974482.2

These tables are based on a whole life insurance policy illustration given to me on June 24th, 2012. The first Premium, Value and Death columns represent the Premium, Cash Value and Death Benefit of the $400,000 Whole Life Insurance policy with an increasing death benefit. The second Premium, Investment, Value and Death columns represent the effect of purchasing a 20 Year $500,000 Term Life Insurance policy with Primerica and investing the difference into an investment account.

• Assumes a 7.82% Interest Rate
• Whole Life Premium = Term Life Premium + Investment
• At age 66, annual withdrawls of $143,014 are made
• LV(M) = LV(M-1) * 1.0782 + sum (n=1,12) [ (LI(M)/12)*(1+.0782/12)^n ]

LV(M) stands for LifeValue and represents the value in the investment account after the Mth year for the "Buy Term and Invest the Difference" strategy. LI(M) stands for LifeInvestment and represents the value being invested during the Mth year. The term "sum(n=1,12)" is usually written using a capital sigma and is a shorthand notation which represents adding all the terms as n ranges from 1 to 12.

Renewable Term versus Convertible Term

Here, I assume that at age 53, I will use the guaranteed renewal aspect to purchase a new 20 year term. Then, at age 63, I will let the policy lapse. The reason I did this is to try to compare with the policy illustration which assumed no more payments would be made at age 63.

It is important to note that Primerica Life Insurance is renewable term (no need for new medical exams). Most term life insurance is convertible term, which is not good, since you only have the option to convert to whole life after the term is finished. These companies plan to hit you with high renewal rates in the future.

Theory of Decreasing Responsibility

Based on the theory of decreasing responsibility, once the kids are grown and the mortgages are paid off, the need for life insurance goes down dramatically. In general, this means that you would normally stop paying for life insurance as you get older since the rates will start to become extremely high.

Whole Life Cash Value

In a whole life policy (aka universal life, indexed universal life, variable life), the cash value is owned by the life insurance company. There are often more fees and less control than in a normal retirement account. Since premiums are paid with after tax dollars, this is comparable to using a ROTH IRA to accumulate money tax free. One might also compare the wealth transfer ability of various ROTH IRAs to the wealth transfer ability of a whole life policy, in terms of being able to avoid income tax, estate tax and probate.

Unlike using a ROTH IRA, when the "withdrawls" occur, there is a major difference between the whole life policy and the ROTH IRA. In a whole life policy, the withdrawls are loaned from the account. This means that after the withdrawls from age 66 to 72, the cash value loan would be $1,001,098, meaning that you might have to pay $40,000 or so a year to cover interest. This is used to pay for the continued life insurance coverage each year! Most people don't know this and their policy typically implodes on itself as they get older and coverage becomes more expensive. This is why I have not run the numbers out to age 121. My illustration was run out to age 121 to imply that I would have a 9.6 million cash value and 11.2 million death benefit.

Even worse is that the assumed rate of 7.82% may not even be achieved in which case keeping the whole life policy is even more difficult. The increased cost given here along with the analysis is why over 25% of people lapse their whole life policy within the first three years, after paying a lot of money in commissions and fees.

Conclusion

The conclusion is that you might wait 30 or 40 years for your whole life policy to catch up to the alternative. After that time, you will then realize that your policy can no longer handle the high cost of insurance coverage. My advice would be to do some research or ask a professional since many times these contracts may be quite complex.

Dedicated to Jerry Izu.

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