Whole Life Insurance is often hated upon and called a scam because there are many different ways to ‘invest’ your money. Notice how I said many different ways and not many better ways. This is because everyone’s situation is going to be entirely unique and it is simply too difficult (and naive) to think that everyone should be the same.
In this article, we are going to dive into the debate as to what is better… Structuring a proper IBC policy or buying term insurance and investing the difference?
Don’t want to read? Check out the YouTube video I made on the topic:
It should be noted that comparing these two ideas is NOT an apples-to-apples comparison. The allure of whole life is that it provides predictable, safe returns. Whereas investing in the stock market comes with some fairly extreme volatility. This would be like comparing the risk profiles of a GIC to stocks.
For this debate, I have created two scenarios. The first – Buy Term + Invest The Difference, and the second is a properly structured IBC whole life policy.
Both illustrations use a 30y/o male with the desired death benefit of $250,000.
|Term + Invest||~$350 per year||$250,000|
|IBC Whole Life||$10,000||$250,000|
The difference between the two premiums is $9,650. The assumption we are going to make is that the individual who invests the difference is going to earn a 6% return. While this may seem low, it is 3x higher than the 30-year annualized average the average investor experienced according to Dalbar’s Quantitative Analysis of Investor Behavior (QAIB). While the stock market has an average of 8-10% over its life, this just doesn’t seem to be the average investor’s experience.
Let’s see the results.
As you can see, the individual who saved $9,650 per year and invested the difference has a grand total of $762,911.50 at the end of the 30 year period.
Comparing this to the IBC policy – you are left with $617,358 in cash value at the end of 30 years. You also end up with a death benefit of $1,323,364. In your term example, you no longer have any insurance.
While Term + Invest is indeed ~$145,000 larger than the IBC policy cash value, the biggest difference between the two examples is that if structured properly your whole life policy can be accessed entirely tax-free. Whereas only some of your Term + Invest may be tax-sheltered, and some may be tax deferred.
When you factor in taxes this gap starts to shrink drastically. Based on current TFSA limits, approximately $180,000 would be taxable if you used your TFSA as your investment vehicle. Depending if you used an RRSP or a non-registered account to invest the rest, you would be on the hook to pay taxes on $180k as regular income, if withdrawn from an RRSP or pay capital gains. This would shrink the gap by a fairly large margin.
My suspicion is the net difference at the end of the day would be in the tens of thousands, and not $100k+ as the gap looks on paper.
The key point to remember is that with the whole life policy you have taken essentially zero risks with your money. On the investment side, you have.
I don’t like playing with my money – that is why I like the certainty of my IBC whole life policy.
Let me know your thoughts regardless if you agree or dissagree. And as always – I am not an insurance agent nor a financial advisor. Just a guy who likes personal finances.