Today’s guest post is by Glenn Cooke, a life insurance broker and president of LifeInsuranceCanada.com who believes in an educational approach to life insurance rather than a product sales approach. In the post he urges readers to take a closer look at the numbers behind the conventional wisdom of buy term and invest the difference.

Proponents of buy term invest the difference advocate strongly against purchasing whole life insurance. For those unfamiliar with the idea, it suggests that buying cheaper term life insurance and investing the difference in a mutual fund is a better financial option than purchasing a whole life policy and cancelling it at age 65 for the cash values. The strategy itself is rooted back in the 1980’s when the life insurance industry was promoting whole life insurance to consumers as some type of savings vehicle. The strategy often provokes a strong emotional reaction against life insurance companies. What many people may not realize that the biggest promoters of this concept even today are actually life insurance companies who use it to sell term life insurance and mutual funds.

Nevertheless, back in the 1980’s with interest rates where they were and with the products we had available back then, a pretty strong ‘numbers’ case could be made. But that was like 25-30 years ago. Things change. Is this emotional argument that got foisted onto consumers by the insurance industry still valid? Let’s have a look at the numbers today.

Before I do so, let me just state clearly – I have no preference either way. I do however believe in looking at the actual numbers once in a while, rather than just blithely continuing to parrot what everyone else has been repeating for 20 odd years without ever checking their facts.

It’s also important to appreciate that the buy term invest the difference argument is NOT a numbers game. It depends on your assumptions. What do you think is the correct long term interest rate over the next 15-20 years? 8%? or 3%? Or somewhere in between?

OK, lets get to the numbers. I’m using the Compulife® database for my premium information, the database used commonly by insurance brokers as well as what powers the quotes on my website. And we’re going to look at a male, nonsmoker age 45 purchasing $100,000 of life insurance. For the term policy I’m going to use Equitable Life’s 20 year term at $286 per year. For the whole life I’m going to use a whole life policy from BMO Life with premiums of $1276 per year.

Case 1: (Assume 8% rate of return, no taxes on earnings.)

  • Term Case: If they buy the term and invest the difference at 8%, at age 65 they cancel the insurance and have $48,928 saved.
  • Whole Life Case: If they buy the whole life and cancel at age 65, they will have a cash value of $27,160 (less a minimal amount of tax).

The term is $20 G’s better than the whole life. Case closed – it’s a win for buy term invest the difference.

But wait. All is not as it appears. Back in the 80’s one could convince consumers that 8% was a nice conservative rate of return and lead into both a term insurance and a mutual fund sale. Today? Clearly not all consumers are going to buy into the idea of an 8% rate of return over the long term.

So lets try the same numbers at 3% rate of return.

Case 2:(Assume 3% rate of return, no taxes on earnings.)

  • Term Case: Buy term and invest the different at 3% and cancel their policy at age 65, they’ll have $27,399.72 saved.
  • Whole Life Case: If they buy whole life and cancel at age 65, they’ll have a cash value of $27,160 (less a minimal amount of tax).

Really? At 3% rate of return the two products are almost identical! Actually, it turns out that they’re not identical. At this crossover point, the whole life actually has substantial benefits over the term policy.

  1. First, the 3% we just assumed you’d earn with your term and invest strategy? Not guaranteed. The cash value on that whole life policy? Guaranteed. We’re comparing a non-guaranteed rate of return with a guaranteed cash value. Win for the whole life policy. Clearly in today’s environment some Canadian consumers are going to be interested in the equivalent of a guaranteed 3% rate of return – even when compared a higher non-guaranteed rate of return.
  2. Secondly, what if we change our mind and don’t cancel the policy? If you bought the whole life, your premiums remain at $1276 for the rest of your life. If you bough the term life insurance, you now have to take a medical exam and buy a new whole life at age 65, for premiums of about $3500. Win for the whole life policy of over $2000 a year for the rest of your life.
  3. But there’s a third option. The whole life policy allows you to stop paying premiums and take a smaller policy of $46,500 for the rest of your life, no further premiums due. By comparison with the term policy, if you took your $27,000 in savings from your term policy, you could buy a 10 pay whole life policy of $25,000 for about $2500 per year for 10 years – which roughly burns down the money you just saved. Stop paying premiums and keep the coverage, the whole life policy will provide you $46,000 of lifetime coverage, the term option, about $25,000. Win for the whole life policy of $20,000 when you pass.

So now the ‘numbers’ seem like the whole policy is actually a better buy. But there’s some downside to this as well. With the term policy, despite the drawbacks mentioned above, the cash is liquid whereas it’s not easily accessible inside the whole life policy. Does that matter? Maybe it does, then again, for some folks maybe it doesn’t. And for many consumers, paying the higher premiums of whole life simply may not be feasible.

As you can see, it’s not as clear cut as it’s often made out to be. What product is ‘best’ often lies in the underlying assumptions. High interest rate or low? Guarantees vs. non guarantees? Higher premiums or lower premiums? As different people have different preferences and tolerances, so to do we have different solutions for different people. It’s not nearly as simple as buy term invest the difference and believe you’ll be better off financially in the future.

This article has 49 comments

  1. 3% return? As in no real return for a diversified portfolio over the next 20 years? And whole life still isn’t cheaper?

    Also, this article seems to be long enough to allow a scenario for a 25 or 30 year old new parent, a calculation which is conspicuous in its absence.

  2. At 3%whole life isn’t ‘cheaper’, it’s the same price, but has substantial other benefits. Whether you agree with 3% is another matter entirely. If you choose to assume higher than 3%, I’m not going to argue – it’s an ‘assumption’. By the same token, it should be clear that in today’s environment, some people are not going to trust salespeople who come in lauding 6% rates of return – which is what a buy term invest the difference fan is going to recommend (like say, a salesperson who is selling only termi insurance and wants your investment business). That’s their assumption to make. And being assumptions, neither is right or wrong. I don’t try and convince people what they think is a reasonable interest rate going forward, or that my assumption is the ‘right’ one. If 6% is right for you, that doesn’t mean 6% is right for everyone, that everyone has to agree with your assumptions.

    In terms of the conspicuous absence of another scenario, you’re welcome to run them yourself. I had room for one scenario and used a 45 year old for the simple reason that age 65 and 20 years are the same point for that person, and cash values are readily available at that age. With those assumptions (45 year old, 3% rate of return) in complete contradiction to ‘buy term invest the difference’, whole life performs better. You’re welcome to disagree with the assumptions, but if you can appreciate that these are assumptions are going to be true for some people, then you have to arrive at the same conclusion as the article – that buy term invest the difference breaks down in some circumstances.

    If nothing else,I’ve done two things you’ve probably never seen (and you should be questioning why you’ve probably never seen these). First, I pointed out some assumptions that probably you’ve never seen questioned (i.e. comparing guarantees with non-guarantees). And secondly, I’ve shown you current numbers, rather than just parroting ‘facts’ that everyone is repeating because they read it in a book 25 years ago.

  3. “First, the 3% we just assumed you’d earn with your term and invest strategy? Not guaranteed. ” <– Come one… arguing that one cannot beat 3% on a 20-year span is borderline dishonest. Heck, some people borrow money at 3% to invest (real estate anyone?)

    "Secondly, what if we change our mind and don’t cancel the policy?" <– People who actually need life insurance at 65 years old are quite rare, I don't buy this "benefit".

    CanadianCapitalist: care to comment this guest post in detail? I'd love to see your take on M. Cooke's arguments.

    • Insurance Ninja

      Where are you investing in real estate for $1,200? Life insurance is sold in many estate planning case to those 65 and older that have been successful, do your research before casting stones!

  4. There are many assumptions here which may or may not be true.

    1.The author assumed that interest rates and yield rates of investments is going to stay the same for 20 years. Not being a psychic, he cannot assume that. Some day yield rates are going to be better. Always have over time.

    2. The other assumption is that at 45 years of age with low-paying jobs of today, how is a person going to afford over $100 per month just for insurance?

    3. Why pick age 45? Shouldn’t everyone be having life insurance as soon as they have income to protect or debts to cover if death occurs? Why not start at age 30? Then what happens with 10 more years of paying exorbitant whole life fees? What if he/she loses their job and cannot pay the much higher whole life payments? That means he will have to drop the policy and all that money has gone to waste except perhaps a small cash value.

    4. What happens if the insured dies? The life insurance company takes the “savings” in the whole life policy and uses them to help pay out the $100,000. So the savings are FOR the life insurance company NOT for the insured.

    5. That 3% means the person does not even try to find out how to use DRIP mutual funds, ETF’s, or individual stocks which pay dividends and have consistently done that. There are stocks known as Dividend Aristocrats that have always paid a dividend and increased that dividend over the years. By investing in individual stocks, a considerable increase in yield on investments is very probable.

    6. With a little research, one can find, a few mutual funds, or ETF’s that have consistently paid higher than 3% over time.

    Of course the author has a vested interest, so he thinks like a whole life insurance salesman.

    The problem is the same as always. When young you should have insurance to protect a family income if the wage-earner dies. No one should wait until they are 45 when the monthly payment is guaranteed to cost more.
    All third parties with no vested interest in life insurance companies recommend term life policies which are affordable from the get-go. See Dave Ramsey, Suze Orman for two of the most well-known. I could recommend many others.

    What young family, unless they have large incomes, can afford paying out over $106 a month? Almost anyone can get and afford term coverage for less than $24 a month with the same face value if the wage-earner dies.

    Buying whole life is like spending roughly $82 a month MORE than term life on lottery tickets which may or may not pay off.

    Why not pay $82 less a month and find someone to help you learn to invest for much more than a 3% return?

  5. Sorry should have said that second submission was a revision of a spelling error and a little proof-reading I should have done before I clicked the magic Submit button.

  6. 3% is dishonest? As noted, I’m not one to shove assumptions down people’s throats, perhaps you disagree. If you choose to assume a higher rate of return I’ve provided the numbers as well and showed that term performs better – did you read that part? Conversely, I’d like to see you justify where you’re going to get 6% guaranteed over the next 20 years. Anyone? I just showed you the equivalent of 3% guaranteed. The dishonest part is where people throw rate of return assumptions into calculations and never disclose that it’s not any way shape or form guaranteed – when they’re comparing it against fully guaranteed numbers. That’s a little fact that is almost always overlooked buy folks promoting buy term invest the difference.

    People who actually need life insurance at age 65 – You’re clearly not in the industry. Plenty of people are seeking insurance at 65. More than at age 40 quite possibly. Again, you’re requiring that everyone must follow the only path that you dictate. I make no such requirement. People buy life insurance at age 65 all the time – and they’re not sold it, they seek it out on their own.

    As I’ve noted repeatedly, you don’t have to ‘buy this benefit’ as you’ve called it. The fact is (and it is a fact) some people will hit age 65 and want the insurance. If they assumed 3% and bought the whole life, then they’d be in a better position. If nothing else, the whole life in that scenario is preferable because they have a better ‘choice’. Again, I’m OK with people having the option of having additional choice. If you don’t want that choice, fine – but others may.

  7. The previous posters have pointed out all the false affirmations of this post. I still can’t digest that when the insured person dies, the insurance company keeps the investment!!!

    It seems to me that this insurance agent is not really addressing informed investors, with his blog post. He is probably targeting the those who get easily confused between “real returns” and “nominal returns”. He spreads fear using the lowest expected “real returns” of stocks of about 3% (which was discussed in the news lately) and uses this number as expected “nominal returns”! Of course, when you understand the difference, assuming 1-3% inflation, you see how he is misleading people by not using the appropriate 4-6% nominal returns (appropriately for the assumed inflation rate).

    That was a good try, Mr. Cooke. But you haven’t fooled everyone yet with your fear technique.

  8. My take on this debate is very simple. Young parents who need lots of coverage often have no option other than term life. Take the same 45-year old in this post. Let’s assume he requires $1 million coverage, which may even be on the low side for a one-income family with multiple children. For $1 million coverage the annual premiums are as follows:

    Term Life: $2,860
    Whole Life: $12,760

    I think Term will be affordable for most people whereas a $1,000 monthly budget item might simply be unaffordable, whatever its merits maybe.

    Full Disclosure: Our insurance coverage is term life. It is ultra cheap and when the kids grow up, we will not need insurance anymore (hopefully).

  9. Quote: That was a good try, Mr. Cooke. But you haven’t fooled everyone yet with your fear technique.

    Of note (and this part of what I was addressing when I wrote this article), is that the buy term invest the difference fanatics are as emotional as any whole life insurance salesperson. The comments (including the one I just quoted) show this to be the case. The comment merely attacks emotionally and doesn’t really counter any of the facts or assumptions I made in the article. You’re arguing against the conclusion for no other reason than you want me to be wrong. That’s just not sensible. I clearly showed in the article two seperate assumptions that produce two seperate conclusions.

    Those trying to paint this as a pro whole life article didn’t read the article in it’s entirety or are again failing to accept specific points about what I wrote. the vast majority of my clients (probably the other side of 95%) have term insurance. The remaining percentage, almost none of them have whole life. My blog is thetermguy.com. I AM the term guy. How does that make me a whole life advocate?

    What you should realize is how emphatic some folks are that YOU MUST ASSUME 6% OR BE WRONG. Not everyone assumes 6%. 20 years ago, you could get away with that with the public. Today, again, nobody here is showing me where I can get 6% guaranteed. Or they want everyone to have to agree that there’s no risk to that 6% or that there’s no value in guarantees. Not everyone believes this to be true. And for those that are running numbers, it’s generally accepted that one should also be running ranges of numbers – including worst case scenarios. and 3% is hardly a worst case scenario.

    What you should be taking from the article, rather than a fanatical ‘I bought term insurance therefore everyone else must as well’, should be that you should 1) always question your underlying assumptions (6% rate of return, little value to guarantees, no need for insurance at 65, comparing guarantees with nonguarantees etc) and 2) don’t just believe everything you’ve read on the internet when nobody’s cranked out the numbers for you. Actually run the numbers, as I did. Then you are able to make your own decision as to what’s best for you.

    In the end, as I’ve made clear in the article, for those that chose to not ignore that part, I do not advocate any specific type of insurance. I educate so that you can decide for yourself. If you feel that scenario 1 fits you better, I don’t disagree. I do disagree with the idea that scenario 1 has to fit everyone. I think that’s up to the consumer to decide.

  10. @LifeInsuranceCanada.com

    I agree with Canadian Capitalist

    I have no idea if Glenn is responding to me or to the person below me called EG.
    I believe it is EG because he did not really address any of my concerns.

    Wages are lower today, younger families often cannot afford whole life which costs over $82 more a month even if it was better. Some luxury cars [arguably] may be better than an inexpensive economy car. That does not equate to “everyone should go buy a luxury car because it is better”.

    Then third party financial gurus always recommend term life instead of whole life for the reasons I gave above.
    I gave two names, Dave Ramsey, Suze Orman, well-known and respected financial commentators.

    I could add to that the authors of various books on finances such as Personal Finance for Canadians for Dummies, Eric Tyson MBA and Tony Martin or Smoke and Mirrors by David Trahair, CA to mention only two.

    That is only the tip of the “iceberg” so to speak of financial experts who recommend Term Life insurance rather than Whole Life. Whole Life may sometimes be advantageous to those who have very high incomes and wish to protect some income forever for their heirs.

    Do most people have high incomes? I think not.

    Some people may need Life Insurance at age 65 ONLY if they still have debts and dependents.

    Life insurance was designed to maintain the income that a family was experiencing when a wage-earner dies. It also can pay back debts like a mortgage. In fact knowledgeable people recommend Term Life instead of mortgage insurance as mortgage insurance has “gotchas” as outlined on The Fifth Estate. The video is still out there.

    The fact remains that Term Life is affordable given the same coverage [face value] means that it probably is the best for the vast majority of people.

    If your home insurance [fire insurance really] salesman, said that he had a plan for you to pay almost 5x as much for your home insurance so that the company can have a savings plan as part of the insurance, what would you think?

    So how would that be any difference for car insurance or life insurance?

    Doesn’t it just feel better as well to be in control of your own money instead of giving it to a big, rich company to keep it for you until you decide to cancel the policy? And if you DO NOT cancel, and you die, then THEY get to keep it???

    I believe in insurance companies and banks. They are usually good places to INVEST your money, not save your money. Then you own part of them and as they get richer, you do too, in proportion to how much you invest in them.

    Why would anyone want to pay almost 5 times as much for the same life insurance coverage? That mystifies me.

    • I agree with everyone on this post except people that constantly quote Susie Orman or Dave Ramsey… they are american and has little (to no knowledge) of the Canadian marketplace. Please stop, they are no more qulaified to discuss the canadian life insurance industry than I am to justify the american one.

      My personal belief is that there is always some $$ required when someone passes away. I suspect no one will argue that point. Is permanent life insurance the cheapest way to have funds available on someone death, probably. That may require $25,000 (or so). Do the math.

      The vast majority of Canadians need term insurance to protect their family’s lifestyle should someone pass away prematurely. I would submit at least 10 -15 times their earnings (depending on spouse’s earnings, personal financial situation,etc). I see far too many families underinsured. The coverage is far more important than the type of insurance. You want to make sure the family is protected first and foremost. I hope we can all agree on that?

      As far as permanent insurance, I see much more relevant in families that have been successful financially. Many of those people diversify their assets (beyond fixed income and equity) and having permanent life insurance can benefit their legacy (better than many other investments) or can be a viable alternative to other fixed income investments. You ahve to RUN the numbers to determine break even points.

      As for those questioning why the CSV is not also paid out… it has to do with the fact that the life policy will actually pay out a death benefit on whole life policies whereby a HUGE % term policies will never be paid out. The CSV is a bi-product of paying higher premiums. Of course you have to pay higher premiums, the policy is likely to pay out… the term is not. Life insurance companies are after all, companies that need to make profit, just like banks, and every other business in the world.

      Both policies can have their role… I do agree with the author… before making any decisions run the numbers (be informed) and go in with an open mind. I have seen cases where the alternative investment’s return needed to be higher than 10%. I certainly would not want to gurantee anywhere near that. Ultimately the canadian public needs informed advisors advising them.

      Those that choose no advice, I wish them luck. Changing tax rules, changing economic environments, etc, etc., etc. make it very difficult to be current in all areas of financial planning.

  11. quote: I still can’t digest that when the insured person dies, the insurance company keeps the investment!!!

    This is beyond the scope of the article, but that’s another bit of nonsense that’s been foisted onto consumers and perpetuated by people who don’t understand the mechanics of whole life insurance. There is no investment with whole life insurance. There is a reserve, a portion of which is refunded if you cancel. To believe there’s an investment that the insurance company ‘keeps’, you have to start by agreeing with whole life salespeople that whole life is an investment. It isn’t.

    The reserve is intended to BE the death benefit and it IS returned to you when you die. The insurance companies start out assuming 100% of the risk – if you die, they pay the full death benefit out of pocket. Reserve=0, death benefit =100K, so the company is risking $100k. The reserve gets built to 50,000 reducing the risk of the insurance company to 50,000 as well. If you die, they pay 50K from reserve, 50K from their risk. Eventually the reserve is intended to completely reduce the risk of the insurance company to 0 and your entire death benefit is paid from the reserve. That’s how it actually happens, despite anyone who attempts to suggest that the reserve is an investment (and appreciating that in the article I just compared the reserve to an investment 🙂 ). The reserve isn’t there to be your cash value or investment. It’s there to pay your death benefit – that is actually how it works without the sales hype on either side.

    And that’s just good planning on the part of the insurance company – building a reserve to take their risk to 0 over the long term. You can mock up a policy where the death benefit increases over time so that it equals the face amount + the reserve/cash value, but that leaves the company’s risk at 100% level over time. And that of course creates a higher premium. So if you want to assume the reserve is an investment and you want it back out when you die you can do it – it just costs more.

  12. One other point to emphasize:

    Mr. Cooke’s argument is all based on the rates always being low [3% he uses]. The history of the market says that there ARE periods of low yield but over time, 20 – 30 years, the market goes UP.

    So therefore since he CANNOT guarantee a steady low market, his whole argument dries up. As soon as the market gets back to more normal levels, say even 6% average, then his Whole Life idea, as he himself admits is moot.

    I too believe in choice. If you really want to pay almost 5x as much for Whole Life insurance, go to a company that will take that extra money.

    If you really want to keep that extra almost 80% [77.1%] of your money and handle it yourself, then go to a company which specializes in Term Insurance and keep the extra almost 80% savings.

    If life insurance was a savings opportunity for the individual, then why are the insurance companies and banks the biggest most beautiful buildings in Toronto and elsewhere?

    The point is “WHO is getting the savings?” Does your home look like those bank and insurance buildings?

  13. Hi Glenn, I buy term-20 for a coverage of $100K and invest the difference. After 10 years I die. My family gets $100K AND the investment to whatever it has grown.

    If I buy whole life, my family only gets $100K.

    Shouldn’t this be highlighted as a big disadvantage of whole life policies?

  14. It is interesting that he points out he is a term salesman in general because he did seem to make the case for Whole Life as better savings.

    I think some of us disagree.
    As I pointed out, his numbers only work for the example he gave of a 45 year old buying insurance.

    But which life insurance salesman that you know tells you to wait for age 45 before you buy life insurance?

    If you buy when you are 35 and have a 25 year policy, you would save even more.

    Rates are lower when you are younger. You have a longer time to save even if you could only achieve a 3% yield.

    You can find the graphs yourself to show that there have been sideways markets like we are in now [or at least have been] but over time, the market goes up and gives a much better return than 3%.

    I cannot resist mentioning some I think fallacies that are heard out there.
    “80% of mutual funds do worse than the market.”

    Okay so why would you want to invest in the 80%, instead discover the 20% that do better and invest in them!
    “Stocks are only giving a 3% return.”

    But that is NOT all stocks. Just the average. Get someone to help you, read about DRIP INVESTING, ETF’s and good mutual funds that beat the market and you CAN do better than the market.

  15. You Said: . Some luxury cars [arguably] may be better than an inexpensive economy car. That does not equate to “everyone should go buy a luxury car because it is better”.

    I believe you are inferring that I said everyone should buy a luxury car. Read the article. I am specifically saying that exact opposite. I am saying that those who say you must buy a luxury car are wrong. Similiarly, those who say (and we’re seeing this in the comments) that no one can buy a luxury car are wrong as well. If you want a luxury car, go nuts. If you want to drive a lada, go nuts. The article makes this clear.

    >>>You said : Then third party financial gurus always recommend term life instead of whole life for the reasons I gave above.
    I gave two names, Dave Ramsey, Suze Orman, well-known and respected financial commentators.

    Those are Americans. I am familiar with them as I do a fair bit of work (less nowadays) in the U.S. financial sector. You would be advised to be cautious about assuming that financial commentators are therefore financial advocates. Dave Ramsey for example does not base his teachings on financial advice. His teachings are based on the Christian bible. He is interpreting the bible and applying it to today’s environment. That will produce different results than what happens if you don’t start with ‘this is what the bible says’. I have plenty of Canadian Dave Ramsey followers as clients because one thing Dave Ramsey does advise is to look for a ‘teacher’, which is what I attempt to do. And Dave Ramsey followers in Canada are well aware that his advice does not apply across the board in Canada. We have different insurance products than Americans do (I created a pdf comparing the two for Dave Ramsey followers a while ago) for starters. And if you get reading up on Dave Ramsey, there’s frequent criticism of his interest rate assumptions. Is he wrong? Well, some folks agree with his assumptions, others don’t. Again, see my article for my suggestion that you question interest rate assumptions.

    And there are certainly well known Canadian financial commentators – that you know the name of – that do not advocate term only but instead advocate ‘term most of the time, permanent sometimes’. On that, you’ll just have to trust me.

    You Said: Your home insurance [fire insurance really] salesman, said that he had a plan for you to pay almost 5x as much for your home insurance so that the company can have a savings plan as part of the insurance, what would you think?So how would that be any difference for car insurance or life insurance?

    The difference is simple. Your risk class with car insurance does not increase every year. With life insurance, it does. Your risk class eventually means the actual year by year cost of insurance will become unaffordable. So life insurance companies smooth out the year by year costs over time. Over short periods of time this smoothing creates 10 and 20 year term. If you simply continue the smoothing process over long periods of time you get permanent insurance, of which whole life is one variant. And be clear – the reserving process I mentioned that happens in whole life insurance? That happens in term insurance as well, just to a lesser extent. if you’re going to argue that you must buy life insurance on the direct year-by-year cost, then you shouldn’t have 10 year term or 20 year term, you should have 1 year term. And I assume nobody reading this has that.

    You said: Doesn’t it just feel better as well to be in control of your own money instead of giving it to a big, rich company to keep it for you until you decide to cancel the policy? And if you DO NOT cancel, and you die, then THEY get to keep it???

    That’s an emotional statement, and is little different than the emotions that get raised when someone tries to sell whole life insurance as an investment IMO. If that’s important to you, go nuts. I personally am more concerned with results than I am in having what I see as a knee-jerk reaction to the idea that life insurance companies are evil.

  16. It’s hard to believe the lack of sophisticated analysis both in the article and in the comments. Everyone just defends their turf, based on the assumptions they make that underlie their business models. Demonstrates clearly why the financial services business is so lacking in trust among the general public.

    Whole life is a much better product than portrayed even in the article. However, it is not comparable to a comprehensive investment plan.

    A sophisticated approach would likely include both, as many people do benefit from having some permanent life insurance for estate planning.

    As for comparing buying a full amount of face value as either term exclusively or whole life exclusively, this is either ill-informed or disingenuous. For a young(ish) family the more likely approach would be to buy a modest amount of whole life, with a large term rider. If over time there was a greater need for whole life, some of the term could be converted to additional permanent insurance.

    Finally, amid all the posturing about how much better the investment advisors could do than whole life returns, why not share some concrete examples of the great performance you have provided over the past 10 years of returns. It always amazes me how investment planning companies never provide an overall or specific statistic on returns their investment advice has provided to THEIR clients. Relying on returns stated by fund companies or portfolio managers is a marketing illusion.

  17. You said: Hi Glenn, I buy term-20 for a coverage of $100K and invest the difference. After 10 years I die. My family gets $100K AND the investment to whatever it has grown. If I buy whole life, my family only gets $100K. Shouldn’t this be highlighted as a big disadvantage of whole life policies?

    This is absolutely the case. However, I don’t think I’d characterize is as a “big disadvantage”. Few of my clients have $100K, most are in the $500-2MM range so if there’s a savings of a few 10’s of thousands, when attached to the death benefit, it’s really inconsequential – not a big disadvantage.

    I didn’t cover every possible scenario – can’t, and there’s too many variables. The other disadvantage, as noted in the article (I inserted this based on CC’s comments when he first read the article) is the issue of affordability. If you can’t afford – or choose not to afford the premiums – for whole life insurance, then the most important thing is always the death benefit over the type of insurance – so buy term. When someone dies, the beneficiaries never care what type of coverage they had, only the amount of the death benefit. So the numbers can say ‘buy whole life’ all day long, if the consumer says they don’t like the premiums becaue they have bills to pay, then the answer is, buy term. The hardline stance says ‘well, the consumer should have the premiums and make the logical choice’. Frankly, it doesn’t always work that way – consumers place a value on money today vs later that does not always equate with an interest rate.

    >>>It is interesting that he points out he is a term salesman in general because he did seem to make the case for Whole Life as better savings.
    I am not a term salesman. Don’t colour me with a specific product sale. I educate, I do not sell ‘product’.
    Neither did I make the case for whole life. I presented TWO options in the article didn’t I? One was for whole life and wasn’t one for term insurance? Go check scenario 1 again. I presented options, and educated you on the possibility that if you change your assumptions, your conclusions change, so make sure you questioned and understood your assumptions.

  18. >> This is absolutely the case. However, I don’t think I’d characterize is as a “big disadvantage”. Few of my clients have $100K, most are in the $500-2MM range so if there’s a savings of a few 10′s of thousands, when attached to the death benefit, it’s really inconsequential – not a big disadvantage.

    This is very misleading. Few 10s of thousands dollars is a big deal even for someone whose networth is $500K-2M. Clearly your view is not balanced and biased towards whole life.

  19. You Said: It’s hard to believe the lack of sophisticated analysis both in the article and in the comments.

    Appreciate that the analysis I did was not on whole life or term insurance. It was on ‘buy term invest the difference’ – and I don’t believe you’ll find a more sophisticated analysis of this ‘theory’ than you’ve just read. I was not recommending a specific product purchase. If you’ve got something more specific about the analysis I did wrt to ‘buy term invest the difference’, please step forward. If you’ve read this as ‘buy whole life’, or ‘buy term’, or ‘buy a mix of both’, then you’re reading it with a bias and inferring something I did not write. I could have (and probably have somewhere) written the article on why investing in life insurance is never a good idea. Ideally some buy term invest the difference fans might have read this and given some pause to the realization that they haven’t seen the actual numbers in 20 years probably,they just trusted what they were told. Or that nobody ever noticed that they were comparing guaranteed with non-guaranteed rates of return like they’re somehow equivalent, or being adamant that their 6% is as good as guaranteed (as you’ll notice from some of the comments). Doesn’t it sound really unwholesome somehow that a whole bunch of people are comparing gtd. with non-guarantees, and nobody sees that as a reason to ask some questions?

    The problem is not term, or whole life. The problem is that people that suggest ‘you must always buy term’ are as often wrong as those that say ‘you should only buy whole life because it’s an investment’. Too many people invested in their beliefs, too few run the numbers and ask questions.

  20. >>>>This is very misleading. Few 10s of thousands dollars is a big deal even for someone whose networth is $500K-2M. Clearly your view is not balanced and biased towards whole life.

    Uh, no it’s not. 20,000 out of 1,000,000 is 2%. For me, 2% of a million dollars isn’t a big deal. if you die, and you think your beneficiaries receiving $1,000,000 vs $1,020,000 is ‘a big deal’, then I won’t argue with you. But no, I don’t think that’s a big deal when it comes to a million dollar death benefit.

  21. >> Uh, no it’s not. 20,000 out of 1,000,000 is 2%. For me, 2% of a million dollars isn’t a big deal. if you die, and you think your beneficiaries receiving $1,000,000 vs $1,020,000 is ‘a big deal’, then I won’t argue with you. But no, I don’t think that’s a big deal when it comes to a million dollar death benefit.

    The difference of 10000-20000 will happen when we are looking at insurance values of $100K. When we are talking about a million dollar insurance, the difference is more in the order of 100K-200K.

  22. Using your own example:
    Equitable Life’s 20 year term at $286 per year.
    BMO Life with premiums of $1276.
    That is a person using term life is able to invest the difference of $990 per year. If he dies after 10 years, his family would have $100K + $9900 (plus the growth on $9900).

    If we are talking about $1M in insurance, all numbers would scale appropriately.

  23. >>>>That is a person using term life is able to invest the difference of $990 per year. If he dies after 10 years, his family would have $100K + $9900 (plus the growth on $9900).
    What if he dies tomorrow? What’s the difference then?

    What if he dies in 40 years? Is 10 year term insurance still a great financial buy?

    And what’s more likely for a 45 year old – death in 10 years, or death in 40 years?

    Depends on your assumptions. If everyone drops dead nicely in 10 years, yup, 10 year term was a great buy. Actually, I’d recommend waiting 9 years and then buying a 5 year term :). Kidding aside, you can see again that forcing assumptions to arrive at a foregone conclusion doesn’t work for 100% of people.

  24. Others pointed that if the person dies, the life insurance firm keeps the investment (for a whole life policy). I elaborated what they meant by putting in some numbers so that you don’t have any “reserve fund” concept to defend. When I buy a 20 year policy, I definitely will think of death during this term. If I wanted to be unreasonable I would have considered a case of dying after 19 years to make whole life look even more shameful. So I considered an average of 10 years. This assumption is definitely more reasonable than your assumption of 3% returns over 20 years.

    Bottomline: this post has hidden realistic scenarios and put up unrealistic assumptions to make a bad product look better than what it is.

  25. AM, more seriously, here’s the generic answer. Over the short term, and with long term interest rate assumptions being high, buy term invest the difference makes term life insurance a better purchase.

    Over longer term, and if we assume lower rates of return, then whole life starts to actually look viable – not maybe, it’s the way the numbers work out.

    The article didn’t argue for either, it merely showed you what happens under two comparable scenarios with different assumptions. In one scenario, term won. In the other, whole life won. Under buy term invest the difference, only term can win, and that happens by assuming high interest rates, a need for life insurance that stops at age 65. Neither are always the case. I do challenge the assumption that buy term invest the difference is correct for everyone.

    And of note, I believe term insurance premiums may be on the rise. Long term interest rates are clearly depressed (whatever your assumptions are) . And in all that, guaranteed whole life insurance seems to be remaining stable. All of those things combined provide the potential environment indicated in scenario #2. The industry is changing substantially and rapidly and old assumptions about products and premiums are no longer the case. I’ve recently seen cases where whole life was the same price or cheaper than term to 100 life insurance. But we don’t know that unless we actually run quotes for both types of insurance and compare.

  26. It’s great to see an author so actively involved in responding to comments.

    Following on the first comment I posted, I’d like to clarify 2 things:

    1) I know that there are no laws pertaining to the titles of blog posts, but I’m not okay with the headline at the top of this page. There is no evidence presented here that whole life is cheaper than term life, and no rationale for a 3% investment return over a 20 year time period for a reasonable portfolio. Whole life may be cheaper than term life if I take my term life savings and buy lottery tickets, but that isn’t a reasonable comparator. If investment returns are 0% after inflation for the next 20 years for Canada’s pension funds, we’re all going to have a lot bigger problem than your choice of term life.

    (PS: The yield on XIU is 2.8%.)

    2) I still don’t see how there isn’t room in a blog post for a table with whole life/term life costs by age and situation. And no, ‘go do it for yourself’ doesn’t justify it’s omission. I’m not a life insurance salesman, and I’m not trying to defend a product that has been sold more than bought over the past 30 years. If you’re going to take this argument on, the onus is on you to convince a group of financially literate readers that whole life can reasonably be recommended other than in very specialized situations.

  27. A lot of ground has been covered already.

    On the matter of the notion of guarantee, I think personally it’s a very insidious concept: people often give up way too much return seeking guarantees when reasonable amounts of risk over reasonably long time periods should be the norm.

    That said, even if you do insist on a guarantee, 3% is guaranteed. A 20-year Government of Ontario bond can be purchased at retail yielding just under 3.1% [quote from TD bond desk]. I’d still go for term and invest the difference.

  28. >>You said: I know that there are no laws pertaining to the titles of blog posts, but I’m not okay with the headline at the top of this page.

    It wasn’t my title. Blame the Canadian Capitalist :).

    >>You said:There is no evidence presented here that whole life is cheaper than term life,

    I didn’t say it was, so please don’t infer that I said that. I presented the case where it’s the same price over 20 years – if you assume 3% interest. And I further pointed out that at 3%, whole life actually had other, non premium benefits as an advantage over term insurance. You can place 0 value to them, but they exist and some people place some value on them. When someone presents buy term invest the difference, they never seem to provide consumers with these other choices. Notice that? Anyone seeing buy term invest the difference advocates making sure consumers are clear that permanent insurance has other non-forfeiture options that term doesn’t, or that the interest rates assumed are not guaranteed as they happily compare it to a guaranteed number? I think that’s a choice the consumer needs to make, not someone else acting in their best interests.

    >>You said: and no rationale for a 3% investment return over a 20 year time period for a reasonable portfolio.
    And that’s where we disagree. 3% isn’t reasonable for you. It’s maybe not reasonable for me. But if you think everyone in the world has to submit to assuming 6% using equity funds, you are very much mistaken. There are plenty of people today, who suffered 30-40% losses in the last 5 years. These people absolutely are going to throw you out the door if you suggest 6% as a reasonable rate of return. These people place a value on guarantees and conservative interest rates that you don’t. They’re not wrong. They have different assumptions. And with different assumptions, comes different conclusions.

    >>You said: in a blog post for a table with whole life/term life costs by age and situation. And no, ‘go do it for yourself’ doesn’t justify it’s omission.

    There wasn’t room, despite your asssertion there was. The article was already too long at two pages. And I wasn’t trying to justify it in every case, I simply took one case so I could compare it and keep it simple. I was exposing situations where buy term invest the difference fell down. It doesn’t fall down 100% of the time, and I gave equal coverage to that as well – see scenario 1. But it does fall down SOME of the time. That’s additional information to most people. Buy term invest the difference is not 100%.

    Nevertheless, if you insist on an every age comparison of term vs. permanent, I have one on my website, sans cash values. It’s been there for years for anyone that’s cared to look at it. And it’s longer than this article, so as I noted, it’ wouldn’t have fit. But I have already run the numbers and published them. Except the numbers are two years old I think and frankly not as good for term as they were.

    What’s really missing from the buy term invest the difference argument is the changes in the marketplace as I noted. In fact, if we want to compare non-guaranteed equities with non-guaranteed whole life cash values based on dividends (which is not the product I used, I used guaranteed whole life), then the actual crossover point I believe is closer to 7%. Imagine the fury if I’d have written that article, comparing non-guaranteed equity investments at 6% with 7% whole life dividends. I’m sure that’d get the party started.

  29. >>YOu said: On the matter of the notion of guarantee, I think personally it’s a very insidious concept: people often give up way too much return seeking guarantees when reasonable amounts of risk over reasonably long time periods should be the norm.

    Everyone’s pain tolerance if different. I am personally very conservative and am willing to give up way more than most would consider rationale in order to guarantee that my spouse and family are covered off if I die or if there’s a financial catastrophe. Others who are older and who’ve just seen a 35% cut in their retirement savings are also hyper conservative and willing to pay for guarantees. Younger folks with too much optimism 🙂 may not place value on guarantees. I don’t judge.

    What’s actually missing is not giving up the rate of return for guarantees, or giving up ‘way too much’. What’s missing is actually DEFINING exactly how much you’re giving up for that guarantee. In this article we can see that for this specific case, if you think you can earn 6% over 20 years, then you’d be giving up 3% for a guarantee and a boatload of cash. But what if I think I can only earn 4%? Then I’m only giving up 1% for the guarantee and I don’t see that as being a large amount to give up for a guarantee. An important difference here is that I actually defined it – here’s what happens at 3% and here’s what happens at 8%. It’s misleading to simply fire up a comparison at 8% (or even 6%) and assume that’s how the world is going to rock for the next 20 years. (I can remember when 12% was a conservative number. And I can remember when 8% was conservative.)

  30. Glenn I agree with the commentator above that it is nice to see someone so active on the comment board to answer points you conceive of as being wrong. It also seems you are a bit miffed that we “missed” various points.

    My response to this is that you also missed some of OUR points. I cannot argue about what others have said.

    Your comment about Dave Ramsey is untrue. Just a point of clarification. He is NOT teaching and basing his life insurance comments on the “Christian Bible”. First of all there is no “Christian Bible” The Bible is a compilation and mainly Jewish authors, some of whom had become Christians.

    Dave does not make any interpretations of the Bible. He leaves the Bible out of it. That does not mean however that most of the points he argues would disagree with the Bible.

    However I do not believe you can dismiss any person’s arguments because he happens to believe the Bible nor because he is American.

    His argument is the same as all third party advocates that I have read whether Canadian, or not. And no I do NOT know who you are referring to who may agree with you.

    You say American insurance products are different. Do you care to refer me us as to how they are different? I cannot search your whole website for the argument.
    Now to comment on Canadian authors: Personal Finance for Canadians for Dummies has a Canadian author combined with an American one. But the arguments that I have made that MOST times Term Life is the best is exactly what they say.

    This whole argument actually started with a CANADIAN, Dr. J.J. Brown who wrote many books but always recommended Term Life without exception. He too ran the numbers, but many more numbers than you did Glenn. In Winning the Insurance Game he gives exactly the same advice as the Term Life advocates do, always buy Term Life”

    My main point is simply this: Term Life is what MOST people need. There may be a few exceptions. I also made points about NOT assuming that 3% yields were always going to be the norm.

    Now I must go.

    I still have not seen any evidence for having Whole Life rather than term.
    Oh and by the way, emotions are part of us. Sometimes we need to do something that “feels” right even if some others “feel” it is not.

  31. Charles Pedley, frankly your arguments about Dave Ramsey are intentionally misleading. Dave Ramsey sells financial peace university courses that are distributed and taught through churches and based on Christian principles. There’s nothing wrong with that,but suggesting this is not the case is false, and you know it.

    Actually, I just visited your website, and see that you’re promoting Dave Ramsey’s products. OK. You say you don’t know the difference between Canadian and U.S. life insurance products – but you’re promoting a U.S. financial course that talks about life insurance? Wow.

    I’ve spoken with Dave Ramsey’s and Zander Insurance (Dave’s insurance company recommendation) and they’re both quality organizations. I doubt either one would try to infer any differently that they’re both Christian organizations and that Canadian and U.S. products are not different.

    It seems that some of the confrontational comments are coming from people with a stake in the game, perhaps not surprisingly.

  32. I think one issue that the author should address is does whole life term life really benefit everyone? CC alluded to this too, but the question of:

    “And what’s more likely for a 45 year old – death in 10 years, or death in 40 years?”

    should really be: “Wha’ts more likely for a 45 year old – will his family need to replace his income in the next 10 years, or in the next 40”?

    I can’t speak for all 45 year olds, but this 37 year old is expecting to have the mortgage and kids education saved up for by the time he’s 55, and therefore won’t need life insurance past 55. Insurance is there to replace a catastrophic loss of income/assets, not a bonus you pass on to your children (I believe).

  33. Thanks for the interesting discussion, all. At the very least, it’s reminded me to ensure that my insurance needs are up to date.

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  37. >>>should really be: “Wha’ts more likely for a 45 year old – will his family need to replace his income in the next 10 years, or in the next 40″?

    The article didn’t purport to address specific product recommendations, I noted I was doing pretty much the opposite of that. But the answer of course is the first one, and the correct fit to that is of course term life insurance. Everyone here likely already knows this I expect.

    But you raise two deeper questions. One is, what’s the 45 year old likely to *want*. And the answer is, at 45 term insurance, and at 65, permanent (despite the frantic assertions that by term-only advocates that insurance past 65 is not allowed). People change their attitude towards life insurance as they get older. Anyone with enough experience in insurance will tell you this change happens. So, do you somehow ‘sell’ people that they need some term or permanent? Or let them go ahead and purchase term insurance? As long as they have the option to switch to permanent insurance if they change their mind, then term insurance is fine. Because at 45, few are interested in the idea that they may want permanent insurance later.

    The second deeper question in this is the assumption that people’s need for insurance starts during family/income years and goes to 0 at retirement. That’s fine – and it’s certainly what most people assume, and that of course leads to term as the appropriate product. But it’s only true if you start with the emotional assumption that you need life insurance during those years, then nothing after 65. What is less apparent, and you won’t read this on the internet (well, until now 🙂 ), is that people who assume they need no life insurance, and those that assume they need life insurance forever are both equally valid (though of course we end up with different conclusions based on that assumption). What is not true is to assume that everyone must have insurance during their income earning years and then nothing after. There are entire cultures that would look at you like you’re three kinds of stupid by making that assumption.

    Let me illustrate with a question. You figure you need $500K of term coverage if you die when you’re young. Really? You’re dead – what the heck do you need life insurance for? The answer is generally, because you want to provide for your family after your death. Really? But again, you’re dead, what do you care?

    The reason you care is you have an emotional desire to provide for your family after your death – that’s not a need, that’s an emotion. But if you start with that emotion, you’re probably going to end up at term insurance. By the same token, some people do not believe or feel that they need to provide for their family after they die. Is that wrong? Maybe, but they are certainly entitled to that attitude. Those people do not need life insurance. And some people say “I want insurance to leave for my family, no matter when I die, age 65 has nothing to do with it”. Is that invalid? It’s no more invalid than suggesting you only need insurance until 65 and then done, because you ‘calculated’ that your family has ‘enough’ at age 65. And for those folks, they have a need for permanent life insurance.

    Certainly the majority of westernized folks earning an income are seeking term life insurance. But it’s not 100% by any stretch – it depends on your assumptions.

    So don’t believe those that say whole life is appropriate, or that term is the best, or that a mix of both is best. The short answer is that most will want term life insurance, and a few some variation of permanent. The long answer is, it depends on your assumptions. What’s very important is that you question the assumptions to make sure they’re appropriate for you, and then arrive at a conclusion. This is done rarely, that’s why I questioned the assumptions on buy term invest the difference, because it’s almost universally accepted that it’s always true. It’s not ‘always’ true, it’s only mostly true.

  38. …and if you think people don’t change their attitudes as they get older, how many 65 year olds are driving Honda Accords with tinted windows? And how many 40 year olds are driving white Ford Lincolns with Kleenex boxes in the back window :).

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  40. It’s clear from the comments here that Mr Cooke is a salesman who is unaware of his bias and who prefers a good old fashioned ad hominem fistfight to a reasoned argument. I hope we don’t see any more guest posts from him diluting the quality of this blog.

  41. Fantastic debate, the debate goes on and on. Glenn I totaly see your point.

  42. RE: “Let me illustrate with a question. You figure you need $500K of term coverage if you die when you’re young. Really? You’re dead – what the heck do you need life insurance for? The answer is generally, because you want to provide for your family after your death. Really? But again, you’re dead, what do you care?”

    No, the actual answer is I NEED to replace the income that my death costs the family. So by that logic, when I’m 65 there won’t be much income except pension/rrrsps which can be redirected easily enough to my spouse. I like to think I want to provide for my family during my life as well not just my death – but if I die I need to ensure I’ve done that too. And I never said for everyone, I said this 37 year old. Strange article, and CC I’d be careful about who I let do guest posts from now on to be honest.

  43. First, a mea culpa. The article did not purport to examine the intricacies of differing life products, so I retract my prior comment about that.

    However, Patrick, Geoff, and others, appear to be ill informed about the scope of insurance products, the advantages that some products can provide to some consumers, and are dogmatic in their viewpoint. Unfortunately, most of the comments reflect varying degrees of that kind of thinking, which is what I generally see when talking to advisors. Most have determined that their way is the one and only right way, and all others should be shouted down. And most are obsessed with investment rates of return and their (illusory) methods of managing them. Stocks always go up in the long run, right? Perhaps (or maybe not anymore), but what does that have to do with the specific needs and timings of individual clients?

    I reiterate my previous comment, even though it is all easily measured, I have yet to meet an advisor or firm that can or will provide longitudinal statistics on how their services have enhanced the financial well-being of their clients. Everyone seems to prefer to rely on their Andex charts or other phoney analyses of past performance.

    To state that one approach (buy term invest difference) is suitable for all clients in all situations is absurd. Yet that seems to be the perspective of many of the commenters here. More a measure of willful ignorance than anything else.

  44. I just read this series of posts (it took a while! *lol*) and as a professional wealth manager (i.e. fee for service and access to all tools – all insurance, all investments, etc.) and no bias to us one over the over, I have to say that the author has done a very good job at addressing the various nuances of term vs. permanent insurance. It’s one of the best that I’ve seen at trying to be neutral on the subject. The readers who have argument vehemently against whole life, mainly from a passionate standpoint I think, have good reason to; because for 20-years insurance agents looking for a larger commission have recommend permanent insurance to every human being within 100-km of them without any sound analytical reason why other than the commission they’d receive (and they’ve done it with completely misleading tax and eventual cash value arguments). So most people today, as they should, can’t even listen to an insurance agent without launching an attack. If regulators would clean up the investment and insurance industries (ban the payment of commissions and require a proper educational bar) and do what needs to be done to turn them into legitimate professions maybe we could finally allow the finance industry to have some respect and then people might listen to well reasoned recommendations. Until then I fear misconceptions and misinformation (on both sides of an argument) will be the norm to everyone’s detriment.

  45. Great post! The one thing I would add though is how having permanent insurance can reduce risk and have more money for retirement. About two years ago I wrote a story about annuities at that time a 65 year male could get 8% guaranteed for a life pay annuity.

    http://www.milliondollarjourney.com/how-annuities-work.htm

    Brian

  46. I agree with your closing statement, it’s not as clear cut as it’s often made out to be. Everyone’s life and financial situation are different so it’s important that whatever decision one makes about the type of insurance they invest in makes sense to them. Take health insurance for example, there are so many options to customize a plan to fit your needs. There plans for students, seniors, the self-employed, and families that all require different coverage.