I knew it might have been a little controversial when I posted…
“Do you know the difference between whole life insurance and term insurance?”
But we had some great responses!
- It’s a scam.”
- “Hey, what’s the difference?”
- “I don’t know anything about it.”
- “It’s a foreign language.”
- “Dave Ramsey, Suze Orman says to buy term and invest the difference.”
What I’m going to share with you here are the facts between whole life insurance and term life insurance.
By the way, I personally own both.
Simply put, whole life insurance is something that you purchase for your whole life, term insurance is for a period of time.
The basic definition of insurance is:
“The indemnification of a loss or what would be lost in the event that X occurred.”
In this instance, we’re talking about a life. How do we place an economic value on a life? A human life is priceless yet, there are actuaries at insurance companies that will assess the value of human life. That in and of itself I find fascinating.
The process is scientific, they take a multiple of your income, based on your age, health, lifestyle, and net worth and they will compile all that together and give you a number.
- Someone in their 20s or 30s, they will consider based on all the variables, insuring someone for 30x their annual income.
- Someone in their 40s, it’s 20-25x their annual income.
- In their 50s it’s 15x their annual income.
- In their 60s, it depends. 10x their income or 1x their net worth.
Term life insurance is transferring the risk to an insurance company to allow them to manage that risk of death for a period of time.
Whole life insurance covers your full life and has a guaranteed fixed account portion where every dollar is earning a guaranteed 4% on the money that goes into it.
It’s like renting a home versus purchasing a home and building equity.
In term life insurance, you’re just paying for the term insurance much like auto insurance or homeowners’ insurance. With term insurance, they have an annual renewable yearly. They offer a 5, 10, 15, 20, and even a 30-year term life insurance policy.
Obviously, if you purchase term insurance for a longer period of time, you’re going to pay more for it.
Suze Orman and Dave Ramsey say that whole life insurance is a scam! You should buy term insurance and invest the difference. But the biggest flaw in “buy term invests the difference” is that people almost never invest the difference.
People’s propensity to consume is the number one thing that they fight and the more money they make, the more money they spend.
Let’s assume that someone will buy term and actually invest the difference.
Here are the facts.
Suze Orman and Dave Ramsey work for financial institutions. Do you think they do this for free? No! They work for financial institutions and financial institutions:
- Want our money,
- Want it on a regular basis,
- Hold on to it for as long as possible,
- Payback as slow as possible
This is their agenda and those are the four rules they live by.
There’s self-interest in a life insurance company selling whole life insurance.
But there is more self-interest in selling term life insurance.
If you and I owned a life insurance company, we would want to sell a lot of term insurance because that would be our biggest moneymaker.
Why?
Because they are not going to insure people that are sick or unhealthy. These people are “uninsurable”. They’re closer to death.
To get life insurance, whether it’s whole life or term, you must go through an application process.
They are going to discover your:
- Net worth,
- Income,
- Age,
- Driving record,
- Credit,
- Lifestyle …
See where I’m going with that?
If we were a life insurance company, we would assess someone’s life to discover whether they’re insurable or not.
Then we would want to sell them a lot of term insurance because if they are insurable today, the odds are very high that they are going to outlive the term of the life insurance.
In fact, less than 1% of term life insurance policies ever payout.
Buying term insurance with a financial institution is a big profit maker for them. And because they want to sell a boatload of term insurance, they also want to hire spokesmen like Dave Ramsey and the Suze Orman to sell the “buy term, invest the difference” narrative.
Now, I own term insurance because I want more death benefit on my life. The self-interest for me in doing that is that it frees mental space for me to focus on producing in my business.
We all know of people that have died at an earlier age. Two of my closest friends, and business partners, died in a tragic plane crash on June 8th, 2006. We buy life insurance as death benefit.
If you get anything out of this, do an assessment of your human life, of your whole financial plan overall, and make sure that life insurance is a part of that. Leverage the fact that you can transfer that risk to an insurance company, which frees you up to be able to produce more and enjoy more at a higher level.
That’s number one, whether it’s term insurance or permanent whole life insurance.
The difference between the two really depends on everything that you have going on financially.
Some would say that whole life insurance or permanent life insurance is a scam! Whole life insurance is a scam if it’s not purchased and leveraged with everything else that you have going on financially, and if it’s not structured properly.
The examples that Dave Ramsey uses in his text and videos fit his narrative because typical life insurance agents selling whole life insurance don’t add a “paid-up additions” rider to the policy that allows clients to put more cash into the policy while lowering the commissions paid to the agent by as much as 70%.
Now the policy becomes a replacement tool over and above a 401(k), an IRA, or a pension when leveraged with everything else that’s going on financially in someone’s life. This structured policy becomes something that’s more powerful than anything else they have going on financially. But it has to be coordinated with everything else that’s going on financially.
By itself and not structured properly, yes, I guess you could consider it a scam. If you’re not going to do anything, not going to do your research, and not going to work with a professional then yes, buy term insurance. Transfer that risk.
When people buy term life insurance and invest the difference, the goal is for the difference to get big enough that they believe they’re self-insured. For example: If I’ve got a million-dollar term life insurance policy, when my assets grow to a million dollars, I can cancel my term life insurance. I’m now self-insured.
If you had all $100,000 of equity in your $100,000 home, and you had $100,000 in your 401(k), would you cancel your homeowner’s insurance? You could always pull $100,000 out of your 401(k) to rebuild your home.
No, you’re going to keep your homeowner’s insurance. How long are you going to keep the homeowner’s insurance? For as long as you have that home.
Talk to anybody that has actually invested the difference to make $1M and ask them about the pressure that is placed on their existing assets to provide an income for them. It puts all the pressure on that million dollars of assets to provide an income. That million dollars of assets becomes their life insurance. Don’t kid yourself. You’re always going to have life insurance, whether you buy whole life insurance, term life insurance and you invest the difference, that difference becomes your life insurance for you. Have you measured that? Have you looked at that?
Whole life insurance is permanent, lasting your entire life. There are a lot of ways that you can leverage that.
Term life insurance is for a short period of time. There are ways that you can leverage that and be empowered by it.
I wrote a book a few years ago called, What Would the Rockefellers Do? We talked about Suze Orman and we talked about Dave Ramsey. There are chapters upon chapters of this for you to learn.
Click below to download a FREE digital copy of my book What Would the Rockefellers Do?
