Whole Life Insurance vs. Term Insurance - some great resources

Dear Design Independence Readers,

There's a lot more that I could say on this topic, but for this post I simply wanted to share an e-mail I wrote.  Life insurance philosophy came up in a great discussion with a good friend who works for a well-known, high-integrity, mutual life company.

Full disclosure: I own only term insurance, and no whole life insurance.  I am definitely a DIY investor, rather than a DIFM investor.  Happy reading!


Dear ________,

As always it was great to talk to you last night.  Sorry my mouth kept running when it was clearly time for you to break away!  Forgive me for not being more sensitive.  I hope you had a great night with your family.

I spent just a few minutes pulling this stuff together, and honestly, the more thoughtful the discussion of this subject, the more I can see a place for some form of whole life for many high-to-very-high earners and mid-to-high net worth individuals.  Roughly I'd define this as the U.S. top 10% - say $100K+ income, and net worth of a half million or higher.  This person is still working and still growing wealth.

Where whole life has gotten a bad name is with small policies, sold to median income folks, who for whatever reason fail to buy adequate term insurance in addition to their whole life policies, or for whom the benefits of the policy are swamped by the costs.  If their death occurs, they really haven't taken care of their families.  I don't think this is the scenario you and I are talking about.

In my opinion, the correct hierarchy for people's insurance and financial lives is this:

  1. Grow in your job / invest in yourself (best return) - always do this
  2. Protect what you've grown.  Get disability insurance NOW  (my friend Gareth pointed out that really all important insurance should be addressed at this step, something I was taking for granted.  Home, including umbrella liability, Auto, & Health; thanks Gareth!)
  3. Protect those you love.  If you're not financially independent, this means term insurance equal to at least twelve times expenses.  The ideal amount may be twenty-five times expenses if you don't want your spouse to have to consider working again in the future.  Formulated a little more precisely, I want the policy amount of term insurance plus my assets to be greater than twenty-five times annual expenses.  I calculated this right now, and my family is at 33 times expenses in term insurance on me.  If you don't have term insurance, get it now.
  4. Invest enough to receive any available employer match in your qualified account through your employer.  This typically amounts to a 50% to 100%+ immediate return on investment.  It's the best deal going.
  5. Grow a big cash cushion - for high-earners, twelve months of expenses is best; think about how long it will take to land the kind of job you expect!  Six is the absolute minimum
  6. Eliminate all debt but the mortgage - the flexibility this provides is really wonderful
  7. Maximize qualified accounts / invest in your own business if you have that opportunity
  8. Now, if someone has done all those things, we can begin to think about where to park money, and here we can consider whole life, taxable investments in public securities, real estate investments of all types including paying off your own home, investing in other people's private businesses, etc.  I would particularly note than many of the tax-advantages and cash-flow advantages touted for Whole Life can be achieved with higher returns (and of course more risk) by investing for cash flow in real estate.  In some ways we can think of a Whole Life policy as a "do-it-for-me" option for very wealthy, very high-earning people, while real estate investing is more of a do-it-myself mindset.  All this needs to be undergirded by knowing what the money is for.  That decision gives the answer for where the money belongs.

Two articles I thought particularly good:

The Whole Story: The True Rate of Return of Permanent Life Insurance (more advanced article)

The Differences Between Term and Whole Life Insurance (more basic article)

Podcasts - these are from Joshua Sheats of Radical Personal Finance.  He worked for Northwestern Mutual for six years before leaving to launch his show.  He is very knowledgeable! I've linked the episodes here, but I would highly recommend downloading these episodes on your phone and listening to them over time.  He is in favor of whole life, but gives a very nuanced treatment of it.

Episode 173 - The Economic Basis of Life Insurance

Episode 180 - How Life Insurance Policies Actually Work

Episode 189 - Term Life Insurance

Episode 199 - Whole Life Insurance

Have a wonderful day!

Matt Miner

Updated - 4/7/17 with short version of my friend's very helpful and additional helpful color commentary.  Note in particular b. iii, something I did not address.

"#1 is ALWAYS – get the amount of death benefit right (w/ term) – Ensure insurability.  Then convert in time if/when client’s financial goals merit.

a.       Not all whole life is alike, and if you’re going to go that route, it makes sense to consider the provider and here’s how I think about that:

          i.      Carrier’s credit risk – the company is making a promise for something 30 – 60 years from now.  Understand risk associated with the company’s credit and cash reserves.

          ii.      Returns / Dividends – Two facets of this: 1.) Historical performance & 2.)  Future performance based on underlying company fundamentals 1. Mortality rates (stricter underwriting = lower mortality = return on money); 2. Expense management; 3. Investment earnings (on the company’s cash reserves) 4. Persistency (lapses vs return purchases – increasing vs decreasing coverage)

          iii.      Integrity of the advisor – This is a complex product. It’s one of the things that prompts my questions.  I am bias toward simplicity, transparency.  And WL is anything but.  That’s why integrity in the advisor and company is important – You won’t completely understand the thing you purchase. There are many actuarial equations to understand how cash value grows and this becomes especially important as people have many more questions years after they buy – when they want to take cash value. 

b.       Whole life vs other (real estate)

          i.      Tax advantages

          ii.      Liquidity with return

          iii.      Trade market risk / real estate risk for company credit risk – Smartest is to have some of each"