Editor’s Note: A riddle asks, “Why do you drive on a parkway and park on a driveway?” There’s no logical answer—that’s just the way it is.

Unfortunately, a similar non sequitur has driven folks away from one of the most powerful wealth-building tools ever created: dividend-paying whole life insurance. As you’ll see below, “whole life insurance” is not about life insurance at all… it’s about safe, private, massive wealth generation.

Tim Mittelstaedt

From Tim Mittelstaedt, editor, Income for Life Premium: The critics are at it again…

Recently, we came across a 2013 article from Wealthfront, a popular money manager. It repeats the same false idea often found in mainstream media: Whole life insurance is a bad investment.

With a simple Internet search, you’ll find dozens—even hundreds—of similar articles, studies, and blog posts.

One argument: Fees are too high. The “financial gurus” say you are better off buying cheaper term insurance and investing the difference.

What does “buying term and investing the difference” even mean?

According to the Wealthfront article, it goes like this…

A healthy 30-year-old male will pay $672 annually for a 20-year term life insurance policy. However, the same male would pay $8,230 annually for a whole life insurance policy.

That means whole life insurance is $7,558 “more expensive” each year.

The skeptics argue you should buy the cheaper $672-per-year term insurance… then invest the extra $7,558 each year in the market (stocks, mutual funds, ETFs, or some combination).

They claim over the long term, you’ll fare much better. Wealthfront’s study shows you’ll have $77,000 more after 20 years of “buying term and investing the difference.”

This is probably the most common objection we receive to our Income for Life strategy. But, as you’ll see below, this idea is wrong.

Today, I’m going to address the objection that you should buy term insurance and invest the difference.

I’ll give you five reasons it’s invalid…

1. It’s Not About the Life Insurance

Money Bag

Every single “buy term and invest the difference” case study I’ve seen assumes one thing: Your purpose in buying life insurance is to have a death benefit. You want a lump sum of money for your family in case you suddenly pass away.

And there’s nothing wrong with that. Having some life insurance to help deal with a sudden loss in your family is smart planning. Term insurance is the cheapest way to get that protection.

But death benefit insurance has little to do with our Income for Life strategy. We’re not putting our money in dividend-paying whole life insurance for this death benefit protection.

We’re paying money into whole life insurance because it’s one of the safest places to save money.

And a dividend-paying whole life insurance policy comes with nearly a dozen great benefits you can’t find anywhere else.

With Income for Life, you can:

  • Grow your money at up to 5% over the long term (with a contractual guaranteed minimum growth rate of 4%)
  • Compound your money tax-deferred (pay no taxes on gains each year)
  • Completely avoid risk of principal loss—meaning you can sleep at night knowing your account balance won’t go down in value (even if the stock market crashes 50% tomorrow)
  • Safeguard your money in a place with a century-long track record of safety
  • Contribute unlimited amounts to your account (unlike an IRA or 401(k))
  • Protect your money from creditors or lawsuits (in most states)
  • Avoid reporting your account to the IRS come tax time
  • Access your money anytime… without facing penalties or withholding taxes
  • Build a line of credit to use for any reason—no questions asked.

Show me another savings account that offers all these benefits. It doesn’t exist.

And you keep all these benefits until you pass away.

With term insurance, you get none of these benefits.

Notice what you don’t see on that list: life insurance. That’s because with our Income for Life strategy, you rarely use a dividend-paying whole life insurance policy as an actual insurance vehicle.

[When a mutual insurance company issues a whole life policy, it calls it “participating” or “dividend-paying” whole life insurance. It calls it “participating” because policyholders own the mutual company and participate in the profits by earning interest and dividends.]

That’s why critics comparing term insurance and whole life insurance are just plain silly.

These policies are structured in very different ways. And they’re used for unrelated purposes.

2. Whole Life Insurance IS “Buying Term and Investing the Difference”

The irony is a whole life policy is actually one of the best ways to “buy term insurance and invest the difference.”

That’s because the mutual insurance company uses a portion of your premium payment to buy your “death benefit,” or insurance protection. Then, it credits the rest of your payments to your account.

Senior Couple

The investment managers then grow this money in very safe, conservative investments. High-quality corporate bonds. Mortgages backed by valuable real estate. And sometimes, a small amount in very high-quality dividend stocks.

It’s a conservative strategy with an investment horizon extending decades into the future.

3. No One “Invests the Difference”

But, let’s take a moment to consider the counterargument…

Let’s say you do believe in the “buy term and invest the difference” methodology. Are you disciplined enough to invest the difference? Do you have the stomach to take every remaining dollar (in Wealthfront’s study, $7,558) and invest it?

I’m going to argue that no one does this.

Think about it: If you have term insurance, did you get a whole life insurance quote for an equal amount? Did you calculate the difference in cost between term and whole life and then invest that money every year? No.

It’s a hypothetical example critics love to use. But it’s one that I’d wager no one actually follows through on.

4. Stock Market Returns Are Similar to Whole Life Returns

Now, what if you are the exception? What if you made this calculation AND you invested the difference?

Wealthfront argues investing the difference in its fund would grow to $313,939 over 20 years. That translates to an annual growth rate of 7.1%. And you’d have $77,000 more in your account than you would with a whole life insurance policy.

[Wealthfront invests clients’ funds into a diversified portfolio of stock market-based ETFs.]

But Wealthfront doesn’t include any taxes in its projections. And taxes are a real cost when you invest in a taxable account. You must account for them if you’re going to compare a taxable investment account to whole life.

Apples to Oranges

That’s because money in a whole life insurance policy grows tax-free. This creates an illogical “apples-versus-oranges” comparison.

Our preferred Income for Life insurance expert proved you’d need to earn 7.5% in an alternate taxable account to equal the tax-free returns of a whole life insurance policy.

[His example used a 46-year-old male and covered a 30-year period. If you’re older, the returns could be a little lower than the example used.]

When you compare the after-tax returns of money invested in the market to those of a whole life insurance policy, they are very similar. An unfortunate—yet crucial—detail Wealthfront forgot to include.

So, on a return-versus-return basis, a whole life policy and Wealthfront’s hypothetical investment are largely equal.

That’s where Wealthfront’s case study stops.

But this is a huge injustice.

That’s because it doesn’t report all the additional benefits that come with a whole life policy above and beyond its return percentage…

5. Term Life Misses Tons of Benefits

Let’s cover one of the most exciting benefits of whole life insurance…

With the “buy term and invest the difference” strategy, you commit your remaining money to the stock market. If you ever need that money, you have to sell your stocks, mutual funds, or ETFs.

When you do that, you interrupt the compounding process.

But when you put money into a dividend-paying whole life insurance policy, you can borrow money from the insurance company (up to your account value)… and the money in your policy will keep growing. There’s no interruption in the compounding process.

Of course, let’s not forget the convenience that comes with this easy access to funds from your whole life provider.

You can borrow for any reason—no questions asked. You’ll have your money in a few days. The transaction (and the amount in your account) is completely private. And you sidestep all the red tape of a traditional bank loan.

Costs

You could use loans to finance your car purchases. To finance college costs. To invest in Legacy stocks. Or, to invest in rental real estate (that’s what I’m doing).

And I’ll say it again—all the while, your money in the policy keeps growing.

You simply can’t enjoy this “dual compounding” strategy with any other approach.

Once you understand the unique benefits of a whole life policy, you’ll see why “buy term and invest the difference” just isn’t a logical comparison.

Reeves’ Note: If you’ve ever wanted to unleash your IFL whole life account for maximum returns, we’re offering an unprecedented opportunity…