Term vs. Whole Life Insurance: Finding the Right Balance for Your Financial Plan

July 3, 2024

In this episode of the FIN LYT by EWA Podcast, Matt Blocki and Ben Ruttenberg tackle the timeless debate of term life insurance versus whole life insurance. They discuss into the pros and cons of each approach, helping listeners navigate the complex decision of choosing between term policies and permanent insurance products. The discussion provides a framework for determining life insurance needs using the LIFE acronym: Liabilities, Income replacement, Final expenses, and Education.

Matt and Ben discuss how to calculate the appropriate coverage and evaluate whether to invest the difference saved from buying term insurance. They emphasize the importance of discipline in investing the difference and the benefits of layering term policies to match changing insurance needs over time. The episode also explores the role of whole life insurance for high-net-worth individuals, highlighting its advantages in providing asset protection, tax-free growth, and stability during market downturns.

Listeners will gain a deeper understanding of how to balance their insurance needs with their financial goals, whether starting out or looking to optimize an existing plan and is recommended for anyone considering their life insurance options and wanting to make informed decisions about their financial future.

Episode Transcript

Matt Blocki
Welcome to Ewa’s finlit podcast. Ewa is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome, everyone, today’s podcast. Ben and I are going to be talking about the really old question, and, you know, we hear tons of different opinions on what’s best when it comes to life insurance. Should you buy a term insurance policy and invest the difference, or should you know, go into a whole life insurance product or some kind of permanent insurance product and put all your money there?

Matt Blocki
So, just a real quick background, we did record some podcasts on how to, you know, structure our risk management plan, but just want to review that real quickly. So we. We recommend to, first of all, for everybody, and make sure you solve for the amount of life insurance that you need. And we use a life acronym for that. So, Ben, can you give us an idea of what that stands for?

Ben Ruttenberg
Yeah. So, life is an acronym we use stands for liabilities, income replacement, final expenses, and education. So, taking that one by one, l liabilities. Want to make sure that with your life insurance, you’re paying off any outstanding liabilities. Generally, that’s a mortgage, any student loans, anything that’s. That’s outstanding, I is income replacement. So, if one spouse passes away, you want to have enough income to replicate for maybe a certain amount of time. Maybe it’s ten years, 15 years, 20 years, to make sure that you’re sustaining the same lifestyle that you’re living right now. The f in life is for final expenses, maybe funeral, settling any sort of taxes or debts. And then e would be education.

Ben Ruttenberg
If you have child, couple kids, depending on your goals for how you want to fund their potential education, whether it be post grad, excuse me, undergrad, or postgrad, that goes into the actual amount of death benefits. So factor in all those things, get to an actual death benefit number that you should have. From a life insurance standpoint, general rule of thumb is this might be somewhere around ten times your income. So if you make. Make $200,000, generally around 2 million of life insurance. Could make sense, could be more, could be less, depending on your personal situation.

Matt Blocki
Yeah. So let’s just use an example. Like, a family has two kids, each spouse is making 200 grand. So, you know, they’ve got a mortgage of half a million bucks. We want to knock that out student loans are federal. Those are forgiven if you. If you die. So we don’t need to worry about, you know, including that in analysis. If there are private loans, we would obviously then for income replacement, let’s just say, you know, we wanted net of taxes. Someone was taking them ten a month. If we don’t have a mortgage or education taking care, we could probably be, okay, five a month. So we should at least have like a million to generate, you know, a withdrawal rate off of that, at least until the kids are college.

Matt Blocki
So now we’re talking half a million for the mortgage, a million for income replacement, maybe final, and some emergency funds, 100 grand. And then we put away 400 grand for, you know, two kids in today’s dollars. Education, 50 grand a year times four for each kid. So right there, we’re talking $2 million dead on to what you said. Ten times the income, ten times 200,000, be 2 million. So that’s just an idea. So then the question becomes, well, do I. Okay, that’s great. I need $2 million of life insurance. Do I go by a term policy? This is a healthy person in their thirties. They could get $2 million easily for $100 a month.

Matt Blocki
Or could they go buy a $2 million whole life policy, which would cost about $2,000 a month, assuming they want to have that structure to be paid off before retirement. If we spend dollar 100 a month, and let’s say we have 20 years for that term or maybe 30 years for that term to expire, can we invest that difference, that $1,900 a month difference, assuming it’s a level term policy, and be and self insure ourselves by that timeframe. So just real quick review term insurance, it’s like, if it’s a user, to lose it. So kind of like renting a house. Once you’re gone, you lose all the money you put in. So dollar 100 a month, over 20 years, you’d have lost 24 grand. If you die, your family gets 2 million. If you don’t, $24,000 wasted whole life is like owning the house.

Matt Blocki
You put all that money in there, but it’s there forever. Death benefits there forever. It builds cash, et cetera. However, the question could become, well, that’s a big. That’s a $1,900 a month delta. We take that $1,900 a month difference and invest it somewhere and build our own house. That’s a better, quicker building house, maybe like an index fund that would accumulate more efficiently than if we just put all the money in the whole life policy. So that’s the basic premise. And so people like Ben, who are some like personalities out there that strongly advocate for one, like really strongly for one or the other.

Ben Ruttenberg
Yeah. If you look at thinking about like just Dave Ramsey, Susie Orman, people that are would be more in the buy term and invest the difference camp. So not necessarily looking at whole life insurance, like you said, buying the term insurance, just getting the death benefit for as inexpensive as you possibly could, and then investing the difference in either index funds, 401K, IRA, things like that. Then on the other side, there’s people that have strong opinions that whole life insurance should have most of your post tax dollars for all of its advantages.

Matt Blocki
And most of the people that have that strong opinion also make a living selling whole life insurance. So if you look at books and you look at the author, usually that author is a insurance agent at a big recognizable company that makes their living. Based upon that recommendation, I would put.

Ben Ruttenberg
White code investor as well in the buy term and invest the difference camp. Another one that came to mind, it’s a blog. If you’re a physician, maybe you’re familiar with it, but a pretty good blog that describes a lot of financial planning issues that maybe physicians deal with for sure.

Matt Blocki
So let’s just set the stage. I mean, there’s definitely, I would say 90% of the population that we would recommend should buy term and invest the difference. So generally speaking, if you have not maxed out your 401k, if you haven’t maxed out Roth IRAs, if you haven’t maxed the health savings account, if you haven’t properly funded into 529 plans and just a regular healthy brokerage account for college, then buying term and investing, the difference is for you, 100%. So you shouldn’t be putting into a whole life insurance product until there’s an overflow of excess money. You’ve maxed out the 401 ks, you max out back to our Roth, you’ve maxed out 529 plans, you’ve maxed out all of those available tax efficient options.

Matt Blocki
Then if there’s excess money, that’s where a whole life insurance policy could make sense for asset protection, tax free growth, some of our safe money, so we can structure, we don’t have to own bonds in the portfolio, but for 90% of the population, they’re never going to get to that point where they’re exhausting all those available tax efficient vehicles. So the majority of people out there should just black or white answer, you should be buying term and invest in the difference.

Ben Ruttenberg
Yeah, I think of it as more of like a order of operations situation with whole life insurance. I don’t necessarily, and we’ll talk about disadvantages in a second, but we don’t have a problem with the whole life insurance product as a whole, like some of the other people that we’ve mentioned do. We just have a problem with where, what order it comes in your financial plan? So oftentimes maybe we’ll meet with someone that is doing whole life insurance, but isn’t maxing out their 401k. They don’t have backdoor Roth IRAs set up education goals are not on track. Their retirement goals are not on track.

Ben Ruttenberg
That’s where we have an issue with whole life is it sometimes gets pushed to the front of the line before some of the other things that in our opinion, and as it relates to someone’s financial plan, might be more important than the whole life insurance. So, yeah, not necessarily an issue with the product itself, but what order it is put in someone’s financial plan.

Matt Blocki
Yeah. And so just unpacking. So if someone’s going to buy a term and invest the difference, the paradox here is that most people that do this don’t end up investing the difference. So the people that shouldn’t be doing whole life would probably actually benefit from the discipline, the structure. Now, we still don’t recommend it for that 90% we just described. but you really have to have discipline. It’s like renting versus owning. You gotta, if you rent, you gotta, which is probably a better financial choice. You have to invest the difference. Because owning a house is a forced savings mechanism. Most people don’t have that discipline. So assuming you have the discipline, you buy a term product, we generally would recommend to layer it.

Matt Blocki
So, you know, your insurable needs probably going to be less than 20 years when the kids are out of the house, but it’s not going to be zero. You’re probably not going to have accumulated enough self insuredness. Maybe there’s something left on your mortgage, maybe you’re not on track for retirement. So if one that you or your spouse pass, you’re not yet there to the finish line of being self insured in 20 years. So we do recommend, if you’ve got a $2 million need, hypothetically, that person should probably split it, you know, a million of that be a level term 20 that lasts for 20 years, and then a million of that a level term 30. And a lot of times they say, well, I’ll just go reissue, I’ll go re up my coverage after 20 years. What doesn’t work like that?

Matt Blocki
Because we’re talking about insurance that’s outside of your employer that you get to carry with you no matter what. And this kind of insurance requires you get approved. And if anything happens that 20 years of your health, you may never get the insurance again. But once you’re into that period, you’re in for good. So we recommend lock that in when you’re young and healthy. Layer that in 20 and 30 year. But you have to be disciplined because most people I described, the median net worth right now in America is under $400,000. So most people that have, if they have term at all, they’re not investing the difference. And that requires discipline and structure, accountability to do so.

Ben Ruttenberg
Yeah, really well said a couple points there. Even if, let’s say you’re 35, you have a $2 million term insurance policy for 20 years, 55, your health’s great, but you’re still 20 years older, you’re that much more of a risk to insure. So even if you’re in great health in your fifties, it’s still going to be more expensive in a significant manner than when you got your coverage in your thirties. So even if your health is still in great shape, which is awesome, you’re 20 years older, which makes you more of a risk to insure and therefore increases that premium. So like you said, a huge caveat of this is people that actually invest the difference, because too often than not, we’ll see people that have term insurance, which is great, but they’re not investing the difference.

Ben Ruttenberg
And therefore, that throws this whole equation off, no question.

Matt Blocki
Yeah. So for someone that would consider whole life policy, let’s just say like a family household income between half a million to a million dollars that both spouses have maxed out 401 ks, both spouses have maxed out backdoor roth, let’s say they have two kids, they’re maxing out their 529 plans, they have a brokerage account that’s very healthy. And now we want to discuss, we’ve got extra cash, well, cash, long term, in a whole life policy, if it’s with a reputable company, that’s a participating policy that pays dividends. The cash accumulation in there, not immediately, because there’s a break even point, usually between ten to twelve years, but we would structure it. So it’s a really sniper shot where you over fund it for like a ten year period.

Matt Blocki
The cash value accumulation over the last hundred years of data has crushed what you would get in a bank or a CD. Well, look at buy term and invest in the difference in a bond or buy term and invest in the difference in a CD. If you keep a whole life policy for long enough it’s going to get those returns but also in a tax free environment where it’s growing after tax dollars going in, but it’s growing tax free. You can take your basis out tax free. You can alone against the death benefit tax free. You have to be careful with that because you can’t overload it and do, you know, create what’s called a surrender squeeze if you’re still young and you’re never paying the interest back. But it does give you good optionality.

Matt Blocki
And so for that the client picture I just described that they’re maxing out all the avenues and they want that safe money. They want a place where it’s asset protected. They also want protection that will last forever because maybe they have some legacy goals we could build in a spreadsheet. Like what’s going to do better s and P 500 net of tax blah. The reality is this is an attractive place to put some of your safe dollars. And we don’t like comparing it to investments because it’s not an investment. I mean it’s an asset that can’t go backwards. And we see our clients that are retired right now that have half a million dollars or a million dollars of cash value like in 2022 and you’re distributing out of a portfolio and all you have is an investment.

Matt Blocki
With the bond market, interest rates skyrocketed so most bond funds were down double digits, 10%. And if that’s all you have, that’s your safe money. Even in a short term like a five year duration, you’re still down 10%. Now that you didn’t lose money if you’re able to ride that five years up. But if you have to sell that asset class, that bond that year, you’re going to realize a loss. But if someone had a cash value policy on the sidelines, there’s no interest rate risk. You can borrow from that. Well, stock markets are down, bond markets are down. Take it out tax free and then replenish it when your other assets. So it really, for us it’s not about what’s the best place to get the best rate of returns.

Matt Blocki
It’s what’s the best place to make our plan work statistically with the greatest probability. And that when you’re looking at how a plan can work with the greatest statistic probability, it doesn’t mean you’re getting the best rate of return. It means that you’re avoiding risk along the way. You’re avoiding the what ifs. You know, risk is what we haven’t seen yet, essentially, because everything that we’ve seen, we can offset that risk. But this really, for the high net worth client, gives a lot of optionality where you can pull money literally out risk free, without interest rate risk, without taxes, without stock market risk, etcetera.

Ben Ruttenberg
Yeah. One thing I’ll add, this is the analogy I like to use. This is like comparing an NFL wide receiver to an offensive lineman, and you’re asking them to do the 40 yard dash. The NFL results NFL receiver is the S and P 500 index fund. The offensive lineman is the whole life insurance policy. If you’re asking him to do the 40 yard dash, the wide receiver is going to win, the index fund’s going to win. But you’re not asking the offensive lineman to run the 40 yard dash. You’re asking the offensive lineman to block and protect. And so if they’re all working on the same team, you shouldn’t be comparing the two from a return standpoint. You should be comparing how they’re factoring into the team or how they’re factoring into your financial plan.

Ben Ruttenberg
So leave the, you know, the s and P 500 and the index funds, like, those are your 40 yard dash. Those are seeking the high returns. Those have a place in your financial plan. Same thing with the offensive linemen. The whole life insurance that’s seeking to protect you from a down market, to help make sure that your death benefit lasts forever, to help cover any long term care, which we can talk about in a little bit. Just a totally different purpose than what the receiver is doing and what the S and P 500 index fund is doing in this example. So it doesn’t mean that one’s necessarily better than the other. They just have totally different places in a financial plan.

Matt Blocki
No question. No question. Let’s just walk through an example of that. Let’s say two spouses are each making half a million bucks. And let’s say we did do that, needs analysis where we’ve come back and it ends up being that they each need $5 million. We’re not saying in this household, like, go buy everything in whole life. We’re typically recommending make sure 401 ks, Roth’s, 529s, all these hsas, all these different avenues are maxed out. And then, okay, we have access, cash flow. We’re funding a brokerage account. That’s great. How much do we want to have safe money by the time your kids are in college by the time you’re in retirement.

Matt Blocki
And typically we’re backing in where maybe it’s out of that 5 million of life insurance need, maybe they’re each getting 1 million in a permanent product that’s going to last forever and then 4 million in a level term policy. Because obviously in 20 years or 30 years from now, their insurance needs will have gone down. If they’ve accumulated assets and they paid down debt every year as they go forward, they should becoming more and more self insured and less of a need to have insurance. So it naturally, even with inflation, a level terminal insurance policy doesn’t grow with inflation that naturally decreases over the time. So it works well with someone that’s really rapidly accelerating their net worth as well.

Matt Blocki
So generally, if you were to say, where do we stand with the people that Ben described, the people that are buy term, invest the difference, run for the hills and the people, the insurance agents that make a living selling whole life insurance, let’s say the Dave Ramsey is a one on a scale of one to 100, and then the person selling is 100. You know, we’re probably like a 20. Like we’re mostly recommending the population as a whole buy term and invest the difference, but have a really disciplined and then we happen to work with a lot of high net worth clients. So, you know, when it makes sense, whole life insurance can be that safe asset that’s not trying to beat any investment, it’s just complimenting to let an investment do what it does best, which is grow over long periods of time.

Matt Blocki
But then add that into the context of a financial plan. A financial plan doesn’t work where if you’re looking at a computer screen, what your accounts are doing every day, where you’re deciding, I’m going to go on vacation, based upon what the S and P 500 want, to have a plan that supports your life by design every single day of every single year. And to do that, we need to have different levers to pull safe, some aggressive, so we can make sure that your life by design is respected and honored every again, every year. So Ben, any closing remarks?

Ben Ruttenberg
No, I think that’s a really good overview. It’s not a black or white answer because everyone’s situation’s different. Legacy goals are different, spending goals are different, your health is different than your neighbor. This is all going to be totally individualized based on your personal circumstances and situations. So a tough thing to Google on the Internet and feel like you have a. A defining answer because everyone’s answer is going to be a little bit different depending on what’s going on in your life.

Matt Blocki
Yeah, but I would say even for the people that have whole life, usually it’s always a mix of also having some term life that disappears over time. And then just to get a little bit into the weeds here, just to close, you know, there’s many different permanent insurance products out. I would just recommend, in generality, steer clear of anything that has a universal life or index universal life attached to it. We’d recommend stick with a participating whole life policy that has dividends every year, and go with a company that has 100 plus year track record of never missing those dividends, because that’s where you can get returns above and beyond historically what bonds have without interest rate risk, and also tax efficiency and also asset protection. Again, steer clear of these products that are too good to be true. This index, universal Life.

Matt Blocki
And make sure you’re with a reputable company, just about five out there. So the majority of whole life insurance products or any permanent life insurance products are completely garbage, you know, in essence. But if you find the right company and you have a advisor that will structure it in a really short time frame, which is kind of like paying off a mortgage, you know, instead of 30 years, paying it off in maybe ten or 15 years, you’re going to save a lot of fees, you’re going to save a lot of expenses, etcetera. So you gotta have the right company, the right design, the right product, and make sure it’s fit in the context of a right financial plan if you’re going that direction.

Matt Blocki
And then for the majority of the population, the term insurance, you just have to have a reputable company that’s gonna be there for 2030 years. Then it’s really just about price. You need to make sure you get in most favorable health rates and pay as little as possible, hoping that you never use that term policy. That about wraps it up and look forward to catching everybody next week. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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