The Math behind Whole Life and Term Insurance

This episode is my contribution to the #LifeAWARE Life Insurance Movement started by Jeff Rose at

Life Insurance is a necessity for anyone who is married and especially someone who has children. The choices between one type of life insurance and another can become daunting, but it doesn't have to be.

There are two primary types of Life Insurance: Whole Life (permanent, lifelong) and Term Life (temporary). While I can not make a blanket statement to say you should do one and never buy the other, there are a lot arguments that can be made to show that Term Life is the better answer for the general population – and I have the math to prove it!

Mixing is for cake batter

Remember to save in savings, invest in investments, and insure through insurance. Do not mix these up or you will worry because you aren't getting the returns you wanted, be in a bind because your savings are not easy to get to (illiquid), or have paid too much for a product that is trying to be two things at once.

What is your mindset?

Before we get started you must have a long-term mindset. Do not make the decision on what type of life insurance to buy based on price and certainly do not make the decision based on “expected returns”. How long you have life insurance coverage depends on your financial plan for the next 10-25 years, which determines which type of insurance you should buy. Thinking long term can save you THOUSANDS of dollars!

The math behind Whole Life

Using the scenario of a 30 year old male in good shape looking to buy a $250,000 policy we can determine:

  • He will pay about $178 a month
  • In 20 years it will cost him $42,720
  • In 20 years his Whole Life policy will build up a savings account of $34,000
  • In 40 years he will have paid $85,440 but will have $124,000 in the savings portion
  • If you cash out, you no longer have the coverage
  • If you die, you don't get the savings – only the $250,000 face value of the policy

The math behind Term Life

If we were to offer this 30 year old the same coverage but as Term Life Insurance:

  • He will pay $13 a month, $165 a month cheaper
  • It will have cost him $3,120 for the entire 20 years, $39,000 less for the same coverage
  • There is no savings built up inside the policy. Saving money is your job, not your insurance company's
  • After 20 years you either drop the coverage, test for a new policy, or pay quite a bit more to continue the same policy

Put your Financial Planning hat on

I am not an insurance salesman but I am here to teach the difference between these two types of life insurance coverage. It would be irresponsible for me to say “buy term because it is cheaper” because after the term is over you have no coverage. But that is OK if you follow the rest of my advice. You see, if you do what I teach then the following events will put you into the position where you shouldn't need life insurance:

  • Pay off all your debt (which should take a lot less than 20 years)
  • Invest for retirement (which you should do whether you buy Whole Life or Term Life anyway)
  • Your kids have grown up and moved out on their own (or close to it)
  • Your 15 year mortgage will be paid off

Invest in Investments, Insure through Term Insurance

Since this guy can be spending $165 less by purchasing Term Life Insurance instead of the Whole Life policy, he can save or invest the difference:

  • $165 a month (difference between the Whole Life and Term policy) put under a mattress will turn into $39,600 in 20 years – $5,600 more than the Whole Life policy
  • $165 a month saved in investments earning 6% over 20 years turns into $46,791 or $334,000 in 40 years
  • However, continued investing after the policy has reached its term in an account that averages 10% and it turns into $75,603 in 20 years or more than $1,000,000 (that's a million dollars) in 40 years

Long-term financial PLANNING has caused you to become self-insured by doing all the right things with your money while covered under a Term Life Insurance policy and you enjoy the continued success of building wealth by eliminating debt, paying off the house, and investing on your own.

UPDATE: Life Aware Vid-torial

I posted a video showing how the math works. Go to


Questions You Must Ask a Financial Advisor Before Hiring One - sos071
Rolling Credit Card Debt Into a Mortgage


  • ontargetcoach

    Reply Reply August 21, 2012

    Hey I really enjoy the YNAB minute! I’m really digging ours in the free trial period. 

  • FinancialGuy

    Reply Reply March 1, 2014

    It is clear that you have an agenda and like to give biased advice based on limited information. 1. Insurance first and foremost is a protection device; it is secondarily an investment. Your illustration implies the assumption that one buys a whole life policy with the intent of cashing it out in 20 or 40 years. If one plans to end coverage after a certain term, then indeed they should get term insurance as it is designed to provide temporary coverage during a period you are least likely to get the death benefit. The truth is term policies rarely pay a death benefit because those who buy it generally outlive it or convert it to a permanent policy. Less than 5% of term policies actually pay a benefit and that is why it is cheap. So if you just want income protection against an unlikely yet financially crushing death, then term is a good choice. But that brings me to point 2. Term policies can go to a max of 30 years, so your 40 year illustration is pointless. Did your analysis include the annual price of the term policy after the initial term policy? Yes you can continue to renew the term policy after 30 years (or any term period selected) but the premium will sky rocket. Using your example, the 30 year old man can buy ~$320,000 of 20 year term. After 20 years he can renew the policy annually for a premium of $3,278 as the premium jumps 10 fold. But wait, it keeps rising each year so after another 10 years the premium would be $7,891 and in the 40th year, the premium would jump to $21,293. Interesting how you failed to mention that. Apples & Oranges dude. If you are going to compare, compare the same terms and conditions. 3. Say you invested the savings from buying term in the early years and you invested it. What return are you comfortable you can get on a guaranteed basis? Guaranteed you ask? Yes because that is what a whole life policy does. Currently a AA+ rated mutual insurance company will guarantee 4% not to mention that dividend it will pay (unguaranteed). This is why the insurance company one chooses is so important. One that has paid dividends for over 100 consecutive years might be one you want to consider. Beyond that, what if you wanted your money in 2008 or 2009? What if you are retiring then and wanted the investment money? Need I say how important timing of returns is? 4. Yes mutual funds, especially equity funds are a good investment but a portiion of a portfolio should be in something less risky and the guarantees of a whole life contract are vital. 5. What happens are the tax effects on your investment portfolio? All earning are taxable either as regular or capital gains income. With a whole life policy, you can withdraw the cash value up to the total premiums paid out as a return of capital and not as income and therefore tax free. Beyond that you can borrow the cash value. Yes you will pay interest but because you borrowed the cash value, actually against the cash value, your money continues to earn both the interest and dividend and based on the current dividend payment of the company whose policy I quoted before, then net earnings would exceed the borrowing cost. Yes the death benefit is reduced by the withdrawals and loans (if not paid back and they don’t have to be). But the good news is something I forgot tomention. The dividends received can be reinvested in the policy to buy additional paid up insurance which means both the death benefit and cash values will increase as a result. This while you are reducing the benefit due to the withdrawals and loans, that benefit had been rising since the policy was issued, typically to 2-4 times the initial death benefit. So you are reducing a much higher benefit and the net benefit is often still often higher than the original amount and any decrease typically coincides with a reduced need over that time period.

    There is more of course and one should speak to a good agent about insurance and not treat online blogs, newsletters and posts as gospel, because they never tell the full story. Most don’t even know it.

    • Steve Stewart

      Reply Reply March 2, 2014

      Thanks for commenting FinancialGuy. You are obviously as passionate about whole life insurance as I am about having Term. I am not a life insurance agent, as you appear to be, but I can see the benefits of saving thousands of dollars in REAL investments like mutual funds instead of insurance (which you admitted is first and foremost a protection device).

      I will end up spending a total of $5,775 on life insurance and a few hundred dollars on capital gains (taxes). Using the example in my video a 30 year old would have to spend upwards of $31,500 to do the same thing. Sorry, that’s a lot of money for someone just getting started and then they turn 50 and could have used the difference ($25,725) for an emergency savings account, investing, or a downpayment on the house and still be covered by a $500,000 insurance policy through age 50.

      Yes, I will most likely not receive the death benefit, but my wife is living longer from all the good nights sleep she is getting from knowing that if I were to die then she would be able to take care of our daughter.

      I totally agree with you: One should speak to a good agent about insurance and not just take my advice as the standard. However, most insurance agents will not teach them the benefits of term and will only talk about whole life. That is why I wrote this article: To educate the everyday American on how to get on a moneyplan NOW so they can beat debt, invest wisely, and protect their family in an affordable way.

      Thanks for the comment.

  • FinancialGuy

    Reply Reply March 2, 2014


    Actually I am not passionate about whole life. Rather I am passionate about helping people. I sell large amounts of both term and whole life insurance and often package them together. I do so not because I have an agenda to sell a product but rather because I do a comprehensive financial review and fact finder, and I determine what the client needs. Sometimes they need some permanent insurance with and an additional amount of coverage for a limited period such as until their kids finish college. Term and whole life serve different needs, and it is important to figure out which is the appropriate choice. Term will never be a useful estate planning tool.

    One of the most important lessons my father taught me was “Everything in moderation”. Accordingly I am suspicious of anyone who espouses an absolute opinion on one side or the others. To me there answer generally lies somewhere in the middle. I have many clients who came to me cursing Susie Orman because they bought term and invested the rest and when they needed their money in 2008/2009 a great portion of it was not there. Sure maybe the market came back in the following years but that did them no good because they had to pay for their childrens college or medical expenses then, or that was when they needed to generation retirement income because they had just retired..

    I think you mistook my comment about whole life or any life insurance for that matter being first a protection device. In your analysis you said that beyond a certain period of years your wife would live longer sleeping well because the money you did not put into a whole life policy was growing nicely and giving her a financial cushion. Can you guarantee that? Did your analysis assume an annual compounded average rate of return? Such assumptions are misleading and inaccurate. Say the market is up 22% one year and down 10% another. It does not matter which comes first. That would result in an average rate of return of 6% as in your example: (-10+20)/2=6. $1,000 compounded at 6% for two years would yield $1,123.60. However if the market did indeed go up 22% and down 10% the amount at the end of 2 years would actually been $1,098.00 which would be an annual compounded rate of return of 4.79% and not 6%. Compounded interest rates are a myth and can only be used in making financial projections when returns can be predictable and steady. Does anyone investing in the market today think that that can happen? A typical whole life policy currently pays 4% on the cash value. Mind you that does not mean 4% on the investment as cash value takes time to build up and is very low in the beginning. Additionally, while not guaranteed, the dividend of a leading mutual company such as Guardian, MassMutual, New York Life or Northwestern Mutual has been paid annually for over 100 consecutive years and while it can fluctuate, rarely by more than 1% year to year. Currently those policies are generating IRRS in the neighborhood of 5%. IRR is a calculation that looks at the total returns and then calculates the annual compounded rate of return. Oh and that is an after tax number.

    A final note. Not only do I ask you to find me an investment that can generate a 5% annually compounded real rate of return on an after-tax basis, but one that can do it on a consistent basis with as low a risk as the whole life policy? Are you talking about stocks? Real estate?Bonds? Do they have the equivalent risk of a AA+ rated insurer? Most of the time I hear buy term and invest the rest, the alternate investment choices are more risky.

    So again. I mention apples and oranges. It is misleading to compare investments without analyzing risk. I do not know of any other investment out there that provides steady guaranteed returns, plus the upside of a dividend, very low risk with no risk to principal at all, is tax deferred and possibly tax free and allows for the increase in death benefits. Can a bank deposit do that? A mutual fund? Real estate? Commodities?

    As I said, for an aggressive investor willing to take a lot of risk, a whole life policy may not be all that appealing. But I think most of your readers and the public at large, especially in these days of tremendous market volatility would be very interested and wise to put a portion of their investment portfolio into a whole life policy if they are eligible.Notice I said part of their investment portfolio and not their operating budget. If they can’t afford to invest in mutual funds or stocks or a 401K plan (which generally invests in mutual funds) then they are probably best off with term insurance.

    • Steve Stewart

      Reply Reply March 2, 2014

      You bring up some really great points. However, I am still not convinced that we need yet another financial product to encroach on our money when there are plenty of savings accounts, tax-favored accounts, and non tax-favored investment accounts out there that can do the job.

      I won’t bemoan someone who feels they need a guaranteed ROR, I’m just going to educate them to think about the other options before tying their money up. It’s easier to get money out of the vehicles I recommend (other than retirement savings) and whole life doesn’t give me the benefit for the dollars I’ve spent.

      If whole life prices drop to within 2-4 times that of term life with the same benefits you speak of then I will revise my recommendations. Until then I feel it my duty to stick to my opinion as you do yours.

    • Bo

      Reply Reply July 10, 2018

      I am 100% with Financial Guy for it is sound, and factual reflection of the market.

  • Scott W Johnson

    Reply Reply May 20, 2016

    It is pretty difficult for whole life insurance policy to be a better financial instrument than a combination of Term Life with Additional savings in 401Ks, Roth IRAs, and 529 plans.

  • Alix Jung

    Reply Reply October 17, 2017

    I got a question. How can you know for sure something is going to gain 6%? Bank can not even guarantee for that for 20 years? Investments ideas are great…but the 6% could also become -50%.

    • Steve Stewart

      Reply Reply October 17, 2017

      Hi Alix,

      You can be sure that things won’t gain 6% as this number is an average. However, as an average, investments do not go down 50%. Historically the stock market has grown between 8-10% over a 20 year time frame. So, while we saw -50% in 2008, we also have experienced a market increase from 6,500 in early 2009 to almost 23,000 in October 2017. That’s CRAZY.

      You can count on another drop occurring, which shouldn’t scare you away from investing or making decisions based on market returns. In fact, a market drop can be a good thing. I mean, when is the best time to buy an investment you will hold for a long time? It’s when the price is low.

      Conversely, don’t wait for a drop to begin investing. You need to give investments time to grow. During that time, some of your choices will pay dividends (literally) – which can be reinvested to buy more shares.

      If you don’t know how to pick good investments then sit down with a financial advisor. Find one who will take the time to teach you about compound growth and diversification. A fee-based advisor will cost you more on a one-on-one basis while a commission-based advisor gets paid from your investments under their management. You can verify some of their background using FINRA’s Broker Check

      Does that help?

  • John Scott

    Reply Reply September 1, 2018

    Thanks for explaining the math. People willing to do a research of their own before buying a policy might find it useful.

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