Why (almost) Every Life Insurance Policy With Cash Value Stinks

by Neal Frankle, CFP ®

Every life insurance policy with cash value is a terrible waste of money. Alright…..almost every policy. (I’ll explain the one exception at the end of this post).

A few weeks I wrote an article that appeared on Yahoo!Finance that discussed 4 life insurance policies you should never buy. One of those I listed was whole life. This got a lot of attention – from whole life agents who took issue with the post. (I found it interesting that not one person who owns whole life defended it or had a positive remark. Seems like the only fans are the the people who sell it.)

I’ve compared whole life vs term before. But here is a brief summary. Term is life insurance you rent. As long as you make the payments, you are covered. When you stop making payments your coverage ends. Whole life insurance premiums are many times more expensive. The selling point is that the companies take the extra money, invest it and grow cash value. At some point, the cash value is so huge (they say) the earnings from it pay for the insurance.

Using this argument, the agents try to convince the unsuspecting public to fork over their money to buy whole life when they could buy inexpensive term insurance at a fraction of the cost. The question is, who is right?

Here’s a little analysis I did that compares apples to apples. It compares dollars in to dollars out. Let’s look at the first salvo.

This chart compares two $500,000 policies for a healthy 41 year old male. The first is term and the second is whole life. As you can see, the premium for the term policy is $495 a year. The corresponding premium for a whole life is just a tad more – $6055 a year. A few shekels more.

life insurance policy with cash value

Over ten years, the term policy cost you $4950 while you shelled out a whopping $65,500 for the whole life policy. Now it’s true that the whole life policy builds up a cash value of $56,500 over that 10 year period. In other words, if you decide to cash out after 10 years, your net out-of-pocket cost is $9,000. So with the term policy, your total cost was $4950 and with whole life, your net cost was $9,000. At the end of the day, the whole life cost you $4050 more than the term.

Now let’s compare the two policies over 20 years.

life insurance with cash value

With term, you paid out a total of $9900. With whole life, you paid out $131,000 but if you cancel the policy you’ll get a nice $144,500 back after 20 years. That means you will get $13,500 more than you paid in. That’s nice. And if you compare it to the term policy (which is the whole point of this) you have $23,400 more in your pocket by owning whole life. Does that mean whole life is a better choice?


With the whole life, you shelled out $121,000 more than you did for the term policy. And you got back $23,400 more than the term. Is that a good return? Well you tell me.

The internal rate of return is about 2% on that whole life policy. So if you are willing to invest your money for 20 years and have a 2% return, then the whole life does work. 2% might seem decent right now, but how will it look 20 years from now? Probably very very bad.

Life insurance companies like to show you illustrations based on a 5% return but what you should focus on is the guaranteed values and do a comparison similar to what I’ve done above. Forget about projections – demand to see guaranteed values.

Each situation is different of course. If someone is trying to sell you whole life, ask them to prepare a comparison of the costs and guaranteed surrender values. I believe you will come to the same conclusion that I have. The only time whole makes sense is for estate planning purposes. It does not perform well for family protection.

Do you feel differently? If so…why?


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