149R | Whole Life Insurance

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149R | Whole Life Insurance
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Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.  See our disclosures for more info.

Jonathan digs deep comparing whole life insurance and term insurance. Laura gets over $130 of clothes from Old Navy for 80 cents!

How Laura Broke Old Navy

According to Brad, this may be Laura’s best shopping experience of all time. She only paid 80 cents for goods that would normally cost $132.92! The girls and Laura have eight new activewear items to add to their wardrobe for the price tag of 80 cents!

The score started with a standard Old Navy sale. It was offering 50% off the entire site. Plus, an extra 30% off for clearance items. Naturally, Laura shopped through the clearance section to fit some great deals.

Laura also scored free shipping. She needed $50 worth of items in her cart, so she made sure to just hit that threshold. The big savings came from a $50 Old Navy rewards coupon. The coupon effectively eliminated the entire subtotal minus 80 cents. She earned the coupon by being a credit card holder at Old Navy. She uses the card for everyday purchases when she is not trying to score travel rewards sign up bonuses.

Laura knew the rules of the Old Navy game and used them to score an amazing deal. What deals will you find next?

Whole Life Insurance

While talking with a friend, Jonathan was prompted to dive into the entire world of whole life insurance. Although he knew that whole life insurance policies were generally a bad investment, he wanted to find out more about the numbers behind this reality.

Buy term, invest the difference.

It took a lot of digging around to come up with whole life insurance policy rates. With so many different nuances, whole life insurance options are overwhelmingly complex. The complexity itself is a red flag. If a financial product is in your best interest, then it is not complex.

Whole life insurance is never bought, it’s sold. It has to be sold becasue no one using common sense with all the information in front of them would voluntarily sign up to pay up to 10 times more for an insurance product.

In his research, Jonathan uncovered two types of life insurance policies for kids through one company. Gerber offers these two policies:

  • The Grow-Up Plan. This is their flagship program that offers standard whole life insurance for your kid.
  • The Life College Plan. This is a whole life insurance policy for you that is marketed to help you save for college with less risk than stocks and more return than savings bonds. At the end of a 10 or 20 year period, your child will receive a payout out or if you die prematurely they will receive a death benefit.

These are fairly standard options in the whole life insurance world. Let’s take a closer look.

Related: Insurance–A Framework

The Numbers

With the Life College plan, your kid is guaranteed to receive $32,000 at the end of a 20 year period or a death benefit earlier. If you ever stop making payments at any point, then you would receive nothing. You would need to pay $106/month over 20 years to receive the benefit.

If you chose to invest that $106/month over a 20 year period with an 8% market return, then you would earn nearly $63,000! The contributions alone are worth over $25,000. Even with a top tier bank like CIT Bank, you could earn around 2% interest on the contributions for a grand total of around $31,000 at the end of a 20 year period.

The same Life College plan will allow you to contribute $433/month for 20 years with a guarantee of a $131,000 payout. If you invested this amount of money over a 20 year period with an 8% return, you would accumulate $257,000!

Related: Earn More Interest On Your Emergency Fund: CIT Savings Builder Review

The Heartstrings

The reason that whole life insurance is an option is the heartstrings attached. The salesman pulls at your emotional side to get people to sign up for these plans.

First, they tout the importance of teaching children about finances through insurance. However, there are a million better ways to do this including an allowance or a trip to the bank.

Second, they promote guaranteed insurability. If your child developed a condition that made them uninsurable in the future, the whole life insurance policy you bought for them as a child could come into play. However, this is life insurance working the wrong way. You are supposed to ensure that your family is financially okay if you die early, not the other way around.

Buy Term, Invest The Difference

Jonathan and his friend compared their numbers to get a better understanding of their policies. Jonathan has an $800,000 term life insurance plan that costs $30/month. His friend has a $300,000 to $500,000 whole life insurance plan that costs $250/month.

If Jonathan invests the difference of $220 into the market with 8% returns over a 20 year period, his investment account would be worth around $130,000. Let’s say he leaves that money untouched in his investment account until he dies at 80 years old without any other contributions, it would be worth around $961,000.

The numbers of these policies speak for themselves!

Related: Get The Best Price On Life Insurance With Policygenius

OnTrajectory

Brad and Jonathan are looking forward to testing out OnTrajectory for themselves. Let us know what you think about this robust planning tool! Click here to get a free trial of this software.

Check out the full episode about OnTrajectory with Tyson Koska here.

Community Feedback

Let’s hear what is going on in the community this week.

Win For Denise

Denise and her husband did something ‘crazy.’ They sold their 4/4 house in northern Virginia that was costing them around $5,000 a month to maintain. The house felt akin to throwing away their money into a very fancy garbage can.

After making the sale, they moved into a rental nearby. Now, they are getting themselves set up for success in the future. Congrats!

Win For Javier

Javier became a lifetime member at his Crossfit gym for $3,500! That cut out a recurring annual expense of $1,800 and will allow him to enjoy Crossfit as often as he would like.

Simply by asking, Javier was able to score a lifetime membership and shave $45,000 off of his FI number. Congrats!

Terry’s RA Advice

Terry called in to add on to Anthony Gary’s advice about becoming an RA. After college, RAs can become hall directors or community supervisors. Most schools pay around $15k to $40k per year, plus free housing.

In Terry’s case, he earned $18k/year plus free housing. He also earned his master’s degree for free since he was a school employee. Check out your options here.

Anthony’s Advice On Negotiation

Anthony Gary, from episode 138, called in to share his thoughts on Tori Dunlap’s salary negotiation tips. He wanted to point out other things to negotiate besides salary.

Some things to consider include your start date, COBRA costs, technology stipends, sign-on bonus, gym membership, work from home options, vacation days, and more. He shared his guide on negotiating your salary which can be found here.

Listen: How To Get Paid To Go To College With Gary Anthony

Win For Jennifer

Jennifer’s 1992 Honda Civic has hit 265,ooo miles! After 30 years on the road, this is extremely impressive.

Related: Longest Lasting Cars On The Road Today.

Call For Wins

At the end of the year, we are dedicating an episode to wins from the community. Please send in your win! Send us a voicemail or shoot us an email at [email protected]

Help us inspire the community!

Cities of FI

Please take a few minutes to fill out of survey about the best cities of FI. We appreciate your help!

Related Episodes:

ChooseFI has partnered with CardRatings for our coverage of credit card products. ChooseFI and CardRatings may receive a commission from card issuers.
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13 thoughts on “149R | Whole Life Insurance”

  1. Whole Life Insurance should be avoided like the plague for most people! Especially if you are young and have a high risk tolerance, the returns are not great.

    It is easy to bash Whole Life because of the smucks that sell it to unsuspecting folks (who are being taken advantage of), but let’s not forget there are times when you might want permanent life insurance. Don’t bash people with special needs children who are funding their special needs trust with permanent life insurance! A special needs trust (or any trust where you need to control the amount of income coming out of it) is often best funded with permanent life insurance.

    There are about 10 appropriate indications for permanent life insurance I can think of. Aside from special needs, none are for young accumulators seeking FI. If you want bond-like returns (don’t compare whole life with stocks, you use it as a bond alternative not as an alternative to equities) and have the need for a permanent death benefit (estate >11M or 22M if married, liquidity at death if you have a large illiquid asset such as a ranch, key person insurance, widow/widower tax penalty prevention, or as an estate strategy) or for the cash value (asset protection from law suits, or as a buffer asset for mitigation of sequence of return risk), then permanent insurance may be part of your plan.

    Be Black and White that young accumulators should avoid whole life like the plague, but don’t forget there are a few good reasons why older folks or people with special needs children might want to have permanent life insurance.

    • Yeah I should have dropped the special needs caveat – in there – I think I hit everything else. We talked in depth with william in episode 108 about that. it is a great point and thanks for the feedback

    • The comments on whole life has serious problems. That 106 dollar per month policy is 20 per month. I’d love to see the quote. Also, if casing payments leaves you with nothing, it’s not whole life. Also, no one but a full-time investor gets 8% consistently for 20 years. Also, life insurance paid out is tax free and usually fee free, not tax deferred and fee-generating. Just because the Dow returns 8 percent when you cherry-pick the start and end dates for a low start and super high end doesn’t mean that’s what you’ll achieve after taxes and fees. Properly managed whole life returns 3 and 1/2 to 4% over a lifetime if used for retirement, and compared to the buy term and invest the difference you have to make 7 to 8% after taxes, after fees. That happens with very little risk and very little attention with whole life insurance, and with enormous risk and a need for attention that everyone minimizes when invested in the market.

      One of the main reasons that whole life has gotten a bad rap is that 30 years ago they allowed life insurance companies to switch from mutual to stock companies and most did. That means the dividends earned by whole life policies from those companies now have to be split between policyholders and stockholders. so whole life policies from those companies probably do not compare favorably. If you get a quote from one of the top mutual insurance companies, preferably a fraternal because they are also nonprofit not just mutual, your common sense will guide you much differently than this article says.

    • Whole life insurance is not an investment. I don’t understand why the autor of the post is comparing an investment with a whole life insurance policy.

      Second investments will be taxed whole life insurance usually generates tax free income.

      Third. Whole life offers a guarantee death benefit Example 200K death benefit. If you are investing $200/ month in the market in two years time you only contributed $4800 plus any potential gains.
      If you die prematurely your family will receive your $4800 plus any gains but if they have a whole life they will get 200K in death benefit.

      Fourth. The author of the post forgot to mention that death benefit increases over time. And death benefit it’s tax free to the beneficiaries.

      Fifth. A good financial professional will conduct a proper and in-depth fact finder before making a recommendation.

      Please don’t bash whole life insurance if you don’t understand the complexity of the product. Is best for you to seek professional help to have a better understanding.

      • Thank you as always for your insight. I wish I heard this podcast before i purchased my whole life policy 12 years ago. Did podcasts exist then? LOL. Question is should i continue funding the policy for the remaining 8 years? I only have mortgage and auto debt; fully funded on retirement plans and college savings plan; have two teenagers. I also have term life policy too. The policy does have a cash value approximately 5x the annual premium; I did fall behind on some payments and have a “loan” balance approximately 8x the annual premium. Thoughts?

  2. Pumpkin day! Our family has been celebrating that for 36 years. It started off as my babyshower and has become a large family tradition. We carve all the kids names into pumpkins and hide them in addition to everyone bringing food. Good to see the pumpkin day love spreading!

  3. I do something very similar with my Banana Republic card rewards points, which can be used at BR, Gap, Athleta, and Old Navy. It’s great paying next to nothing for clothing — more for investments!

  4. FiPhysician had some good points. I’d add that utilizing a plain vanilla whole life policy with Paid Up Additions (to buy extra insurance and most of the money goes directly to cash value) to store cash and get guaranteed bond like returns is quite viable for certain people. Also, for those with a defined benefit it can additionally provide a death benefit on the annuitant that allows the single life annuity (higher amount) to be taken instead of a choosing a survivor benefit, which can significantly reduce the monthly income stream. Also, Cash Value is just the actuarily reduced death benefit amount. Whole life will pay the death benefit even if you are still alive when you reach the endowment age in the contract, eg 121 years of age. Just like home equity, you don’t get a check for home equity (CV) and the value of the home when you sell it (death benefit).
    As an aside, I recently applied for a mortgage and on the application it specifically had a spot for Cash Value of life insurance in the “asset listing” area. That was the only printed/filled in portion of the application. The mortgage company certainly knows the features and value of cash value!
    You should talk to/interview Joshua Sheets of Radical Personal Finance for a good in-depth and professional discussion about whole life. He was a life insurance agent and he has a few podcast on the subject too. Paula Pants interview with him on Afford Anything had a good discussion of the subject too.
    Also, Wade Pfau who was on this (ChooseFi) podcast, has done a lot of research on retirement income planning. He says he is agnostic on products/vehicles; as in he is interested in what works not what the prevailing opinion is or what’s parroted as being the “thing to do!”
    His white paper does shed some educated light on the “buy term and invest the difference mantra” that was discussed (not all that accurately) on this episode. (You can’t really compare contractual guarantees to stock market returns.)
    It’s not an exact RE type scenario but helps illustrate how it can be utilized and provide significantly more income in retirement.

    https://www.oneamerica.com/wps/wcm/connect/23b21fa6-8e9c-49c9-a49e-1a0b0ef95d91/OA_WP_Opt-Ret_Inc_05-15_web.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=23b21fa6-8e9c-49c9-a49e-

    BigErn has an interesting post as well. Again, shows how one might actually analyze things correctly instead of just believing what you’ve been told is the way to do things.

    https://earlyretirementnow.com/2018/09/26/the-ten-commandments-of-whole-life-insurance/

    So, for me it comes down to the point that whole life for JUST life insurance is inadequate, one probably needs lots of term insurance to be adequately covered. But for some it can be a good vehicle for safe, long term, liquid cash that grows at a guaranteed rate and provides a permanent death benefit.
    It probably isn’t right for many people but for some can be useful. Of course the hard sell and inappropriate selling of it is a whole other story.

  5. I have seen now insurance agent advertising the concept of infinity banking through whole life insurance policies. Any comment on this ?

  6. I own whole life and the bottom line is that it is not for folks who are looking for FI. The only way to make a positive return is to keep paying the premiums for a long time (usually 65) and you will end up with returns of about 3-5%. Its not an investment. It is Life Insurance and the problem is that insurance companies represented by sales folks are selling them as investment vehicle. For 99% of the people out there, WL insurance does not make sense. If you are in the top 1% it makes sense as a diversification tool, estate planning and a additional source of collateral.

    I am not happy with my policy and about to surrender or transfer it to a variable annuity w/ Vanguard because that is the other option to avoid paying taxes until the cash value has reached the cost basis paid.

  7. I am new(ish) to the FI community (have followed MMM for a couple of years) and very new to chooseFI specifically, so please forgive me if I am simply ignorant as I’ve only listened to about 10 episodes thus far, but but one thing I’ve noticed within the FI or FIRE community overall, is very little talk about social responsibility in terms of spending and investing. While on one level I can applaud the $130 worth of clothes from Old Navy for 8 cents in terms of value and ingenuity, however I cannot support it from a socially responsible standpoint. Sweat shops are a horrific reality that our first world money savings goals shouldn’t support. Perhaps there are more episodes that speak to this directly and I simply haven’t gotten there yet…I’d love to know! So far I absolutely love where the FI community comes from except for this point and I would love to figure out how to utilize all of the pillars of FI in a way that doesn’t inadvertently support harm to other humans or the environment. I am hopeful that I am just ignorant to the ways you all make this work. Please educate me!

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