Before we get into discussing this subject, I want to say each of these products have a place for clients. We will be comparing these two products just on a dollar cost basis over someone’s life. At Cash Value Solutions, term is typically a short-term solution for clients until their whole life policies carry the amount of death benefit they need. So, we have clients that own both.
A simple example of why to have term and whole life insurance.
When we structure contracts to perform the Infinite Banking Concept, we are minimizing the amount of death benefit initially. We do this because our focus is Cash Value accumulation, so buying more death benefit would slow this down. Let me give you a rough example. If your 25-30 years old and pay a $5,000 premium in a policy designed for the IBC, it may result in a death benefit of $250,000-$300,000. If you want a total of $1,000,000 in death benefit still, we can make up the difference with a term policy. You should also understand that the IBC policies have a rising death benefit, and become quite large over time. This alone could in time fill the need of life insurance, and be a reason to drop your term policy.
A layout of the cost comparison.
For this comparison we will use a $1,000,000 death benefit on a 25-year-old male, with a standard health rating.
In the example I’m going to give you comparing cost of these products, we will be using a generic whole life policy, NOT one designed for the IBC. The most cost-effective way to buy term insurance is in long periods of time. I have 2 30-year term policies, and at this point you cannot buy term for a period of time after age 85, so we have to use the 1-year renewable term price which covers us out to age 95. Term insurance cannot be purchased past 95. This is 1 reason why this is such a hard comparison to make (These products are meant to provide different protection, permanent or for a specified term. Each have their place and 1 product isn’t a replacement for the other.).
I think it would be helpful for you to think of term insurance as a rental. You are renting the rights to payment of the death benefit if you pass away during the contracts time period. If you live past that time, your premium stays with the insurance company and you receive nothing (there are other types of term insurance but for this comparison we won’t get into that). Most people buying term insurance end up getting nothing. Studies show only between 1-3% of policies pay a death benefit, depending on the year looked at. This is because people get older and don’t feel the need to have life insurance anymore so they don’t renew, or people just lapse their policy by not paying the premium (again this would most likely be because they don’t feel the need for it, but some may have had life happen and not be able to pay).
With whole life you are an owner. The life insurance company knows they will be paying you a death benefit no matter what, as long as the premiums are paid. The contract lasts until age 121, and if you are alive at this point the contract endows; meaning the cash value and death benefit are equal. You would receive $8,197,144 based on the non-guaranteed values in this example.
With the whole life chart, you see there are guaranteed values and non-guaranteed values. Guarantees are based on no dividends being paid. The life insurance company charges you a premium for a worst-case scenario to come through on their promise to pay you the $1,000,000 death benefit in this example (again this is guaranteed). If their investment, mortality, and operating expenses are better than the worst-case scenario, you receive a return of the premium in excess to deliver on this promise in the form of a dividend. Dividends are not guaranteed and results may be more or less favorable, but the companies we work with have paid them consecutively for over 100 years, so I often refer to the non-guaranteed values.
Looking at the comparison of whole life and term life cost.
As you see looking at the tables below, the whole life product has a fixed premium payment every year of $7,680.
For years 1-30 the first term policy has a fixed premium of $1,264, and the second term policy, years 31-60, has a fixed premium of $8,960. After this the term policies rates skyrocket, as each year you renew, the company knows you are getting closer to death. I have highlighted years 30 and 31 on both tables to mark where the term policies premium changes and show that the whole life stays level at this point. Age 85 and 86 are highlighted because this is where you can no longer buy term except for a 1-year renewal, again this is where the price skyrockets. Finally, age 95 is highlighted because this is where you can no longer purchase anymore term life insurance. Cumulatively, premium paid on the term policy at age 95 is $6,148,510. The whole life cumulative premium at age 100 when no more premium is due equals $576,000. (The purpose of this exercise is to look at how each product is priced throughout one’s life. I’m not trying to prove one is cheaper than the other because I realize we would need to take into account the time value of money.)
As you can see, buying whole life is a more economical way to buy permanent protection (there is no such thing with term). You have guaranteed level premiums, access to the cash value for literally any need or want you can think of, and permanent protection given you pay the required premiums. Your death benefit is likely to rise over time, and provide you an ever-increasing amount of protection.
Term life fills a need for protection when you can’t afford whole life, or can’t afford as much whole life protection as you want (refer to my first example in this post). You also run the risk of becoming uninsurable with term insurance. There is no guarantee you will qualify for the second term policy I illustrated at age 56-85, and if you do qualify premiums could be more expensive if you have developed a health condition. This is a very good reason to get into permanent protection as soon as you can.
With whole life your health rating is locked in for life.
The goal of this article was never to say 1 product is cheaper than the other.
We have had questions as to why premiums are so different between each product recently, and wanted to explain this for everyone. The goal of this article was sharing insight on each product and where they would fit into your financial blueprint, AND try to provide clarity on whole life insurance (which is misunderstood in the marketplace). The comparison of these two products is difficult to make because they function so differently.
At Cash Value Solutions we use both products. Just remember that term is a cheap short-term solution, and you cannot practice the Infinite Banking Concept with it. Please reach out with questions or Book Your IBC Discovery Call to learn about and implement the IBC yourself.