111: The Real Costs of Term vs. Whole Life Insurance

Hello, everyone.

I'm John Montoya, and I'm John Perrings.

We're authorized Infinite Banking Practitioners and hosts of the

Strategic Whole Life Podcast.

Episode 111, How to evaluate the costs of term versus the costs

of whole life hello, everyone.

Welcome to Strategic Whole Life.

John Perrings here with John Montoya, and today we're going to dig into

some math, the real math behind How to evaluate the costs of term

versus the costs of whole life.

And we're going to hopefully in this episode, finally slay that

myth that whole life insurance is expensive, quote unquote.

So the first thing we got to do is talk about math versus financial math.

And when it comes to looking at costs for whole life insurance, the premiums

of term insurance It's true that they are about 10 times less than the

premiums of a whole life insurance policy, all other things equal.

So most people will compare the premiums of term versus whole life and they'll

come to the easy conclusion that term is much less expensive than whole life.

Um, and that's true.

We have to get into the idea of math versus financial math.

When it comes to financial math, it's inappropriate to just

add up the numbers and compare them to other added up numbers.

Life insurance is a product That is a financial product, and so it needs

to be analyzed with financial math, and the variable that's often left out

with, regular math and just adding up the numbers is the variable of time.

This is time value of money very common in the financial world, but for whatever

reason it often gets left out when talking about term insurance premiums

versus whole life insurance premiums.

And you'll notice that I'm saying premiums and when I talk about

premiums, I actually talk about the price of the premium because the

premiums are not a cost, necessarily.

Term insurance, if the death benefit doesn't pay out, is a true cost.

Whole life insurance premiums are a price because whole life insurance is

an asset, which we'll get into later.

But let's just stick with this part first and I'll kick Montoya here.

John, what are your thoughts about the math versus the financial math?

When we start comparing some of these costs

something you said made me think that whole life actually if you don't own

whole life, it's probably one of the most expensive decisions that you'll make.

And especially with regards to life insurance, because we're going to do the

math here in this episode and you're going to break out your whiteboard which will

be great for all those that are listening.

And if you want to head out.

To our YouTube channel, definitely, you'll see John's whiteboard there.

But when when you look at the numbers, it should be crystal clear

how how much you're actually going to benefit in the cost savings.

of owning, not leasing, your life insurance.

And I don't want to necessarily badmouth term insurance.

It is absolutely a worthwhile product and you want to make sure that you own it

you buy it for the right reasons and you have the right type which, we always talk

about having the convertible option that way you have that sitting in your pocket.

When you're ready to go from leasing that death benefit to owning

the death benefit, which you can only do in a whole life policy.

So looking forward to this episode.

that's awesome.

And just getting back to the costs to wrap that up, when you compare costs, you

have to compare the net compound costs.

And so this gets into buying assets versus buying liabilities.

The cost of term insurance, those are true costs, those are expenses.

Unless that death benefit actually pays out, which it's highly likely not to,

that's, that money is just going out.

It's like paying rent.

insurance, yeah,

Real quick.

Why is it not likely to pay out for those people that are new to life

insurance and maybe don't know the difference between term or whole life.

And you say it might not pay out or likely not to pay out.

What are the odds of that happening?

And why is that?

Going back to, to Norm Baker a la Todd Langford there are no

deals in the insurance business.

Everything's a trade off between cost and risk.

So the reason term insurance premiums are so low comparatively is because

you're owning the life insurance during a time when it's statistically

highly unlikely that you'll die.

And then the life insurance goes away during.

A time when it's guaranteed you will die.

And so it's important to have the insurance coverage during the

time when we have term insurance.

And so like Montoya is saying, we sell term insurance.

Term insurance is good.

But we usually sell it as a supplement to increase the initial, the current

death benefit and protection for families while the whole life

insurance is being built up.

And what happens when you have both is when that term insurance does finally

drop off, assuming you were never able to even convert it, when it does drop

off, the whole life will have built up to a level at that point that it will,

Cover for the lost term piece of it.

And so you have that permanent guaranteed death benefit, but that's the whole

reason term insurance is so quote unquote cheap is because there's very

little risk for the insurance company.

And if you look at the statistics around term insurance, I think it's like.

Maybe 1 percent of them actually pay out because that's how it's designed.

Perfect.

Going back to costs, net compound costs includes time.

And so if we're in the market Over the course of our financial

life, to buy financial assets, is it better to focus our dollars on

buying liabilities or buying assets?

And so, when we compare the two types of life insurance, again,

term insurance is not an asset.

But whole life insurance is.

Whole life insurance, with every premium payment, you build equity in the death

benefit, also called the cash value.

No one blinks an eye at buying a house and building equity in their house.

Why on earth would anyone have a problem buying a permanent death benefit and

building equity in that death benefit?

It's it's just another asset class.

RighT?

That's the other thing is it's like this whole buy term, invest the difference,

Why are we investing the difference?

It's because we want to buy assets that grow.

What about the term costs?

It doesn't grow.

We don't get anything out of that during the time if it's not needed.

So why not make your life insurance also an asset, so just kind of

looking at the principles of things, it just seems like a weird.

disconnect from a principles perspective to say, Hey, yeah, I

want to invest all this money and buy assets, but I'm going to buy this

other thing and make it not an asset.

It's like, what?

Why?

Yeah, I think that's why Nelson's book, Becoming Your Own Banker is so

pivotal in understanding how finance truly operates, especially in a

manner where you can really take back your ability to make choices freely.

That's what sovereignty really is all about.

The ability to make choices freely.

And when you have the ability to.

Create a financial plan that allows you the freedom to make choices to

separate your your financial life from the traditional banking system.

And do so in a way where you're wrapping up guaranteed cash values with a future

cashflow, which is that death benefit.

You're accomplishing something that So unheard of that you have to unlearn

all the conditioning you've been you've been thrown at your entire life.

And Nelson's book in 90 pages, you have more eureka moments.

By reading his book than any other traditional book on finance

that you'll come across it.

It's just mind blowing to me what you're able to pick up from his

book that, I've read a number of financial books in my lifetime and

even just rereading Nelson's book.

It highlights just the financial ignorance that unfortunately is prevalent everywhere

because to get back to sovereignty, we make choices that put us in a position

to rely on Wall Street to rely on banks and we don't put ourselves first.

We we aren't our own best advocate.

We don't think long term for, what it's going to mean to us in retirement.

What it means for us as far as a permanent legacy for our kids, you made a great

point, term is cheap to paraphrase what you were saying, essentially when we

don't need it or when it's less likely to actually have a payout, between ages 20

and 60, and then what happens if you have the, a term policy in that timeframe it's

most likely going to be set to expire, Because that term period is going to end

and in order to replace it, you're going to have to buy a new policy at a time when

your health is going to be compromised.

The cost is going to be exponentially higher than what you originally

paid for your term policy.

And the life insurance, you hear financial entertainers out there

and don't have to mention any names.

And when they talk about how you won't need any life insurance once, once you

get into your 60s, and that's the exact opposite of reality, because if you

understood the full benefits of having a permanent policy, you'd realize that it

actually complements your 401k and IRA.

It actually gives you more options back to sovereignty to, to choose freely.

And just.

Really have a more abundant lifestyle and allow you to have a more abundant mindset.

And back to again, Nelson and teaching us, how we think is the most important thing.

And really relating it all back to becoming your own banker and finance.

Not going to be able to accomplish any of that just by having

term insurance, by itself.

No, it's huge.

It's if you're going to buy life insurance, would you rather buy it as a

liability or buy it And it's an asset.

It's like super simple.

And, to your point about reading Becoming Your Own Banker and what Nelson Nash

was able to do from a personal finance perspective is what he did is he brought

the Corporate accounting for decisions, the concept of economic value added.

He brought that to personal finance and that's exactly what we're talking

about right here, where the net compound cost of comparing different things.

We have to take into account the time and we take into account what ends up

In our pocket after everything's done.

And so you can't really compare term insurance which is by far in

most cases, a complete outflow to whole life insurance, which is an

outflow that creates a future inflow.

So there are two completely separate types of products.

And so that's the important thing that we need to get

across when comparing these two.

Okay, so we talked about the principles.

Do you want to buy an asset or do you want to buy a liability?

We talked about the principle of net compound cost and understanding

what that's going to do.

We're going to have a couple other at least one other Episode on this today.

We're going to focus on just the true price of what we're actually paying.

Not even the net compound costs.

We're just going to take the, the math-math of this,

not even include the time.

And so what I want to show you is that even using.

High school math or grade school math, we can show you pretty easily that whole

life insurance is a pretty darn good deal in terms of what you get out of it.

So I'm going to share my screen.

And what I have here, this is a real client.

This is a 40 year old male.

He's paying 700 a month and building equity in his whole life insurance.

And what we know is that the early years of the policy is what we

call the capitalization period.

And so what we're going to do is we're going to analyze the costs.

So if we look at this, here is in year one, he's paying 700 a month and

his annual premium outlay is $8,400.

And we see that his change in cash value is only $3,400.

So this is a negative.

So we go over to this negative column or the change in cash

value, less premium outlay is a negative $4,966, roughly $5,000.

Okay.

Year two, same thing.

He pays $8,400 and it's still a loss of $4,500, not much better in year two.

Year three.

Gets quite a bit better.

That loss is cut in half down to a little over $2,000.

And then in year four, he pays $8,400 and it's a negative $666.

So what I want to show you is that in year five, this becomes cashflow positive.

He pays $8,400.

And his change in net new cash value is $9,200.

So this is like taking $8,400 from your left pocket.

And by the time you put it in your right pocket, it's not, it's now $9,218.

That's a plus $818.

So at this point, if you pay $8,400 and you have.

$9,000 of new cash value.

Is there any more cost to this policy?

So this is where I would say that this policy becomes cashflow positive.

There's no more cost to this in terms of the actual cashflow operation.

So understanding this, if we just take these numbers and add them

up, we have $4,966, we have $4,595, we have $2,175, and we have $666

If we add all that up, that's $12,402 of cost for this policy.

So how do we compare this?

Let's compare this to a 30 year term policy.

What does this look like over 30 years?

We only actually had to pay for this for the first four years.

So if we take $12,402.

And divide that by 30 years, 30 years is 360 months.

So $12,402 divided by 360 months is $34 a month.

This is for a half a million dollar death benefit.

That half a million dollar death benefit never goes away.

We paid for it for four years and it never goes away.

We have a half a million dollars worth of coverage for the rest of

our life, no matter when we die.

And we can always recover the costs of what we put into that at any time.

So there's no more cost to this policy.

We pay 34 a month for a half a million dollar policy.

If I calculate a term insurance policy, a 30 year term insurance policy for the same

amount of death benefit, It's 50 a month.

So even just adding up the numbers, it still doesn't make sense to buy

term insurance when you look at it from a pure cost perspective.

So this is pretty black and white.

In terms of just really backing into what is whole life insurance really costing us?

What is it really costing us?

Because remember all along the way, every time we pay a premium, the

premium price is higher, but the cost is less, especially over the longterm.

And all along the way, we're building equity in this death benefit, also

called the cash value, that we can use in a strategic way, using the policy

loan provision, we can use the equity we're building up in this policy.

All along the way to hopefully buy more assets so that we can end up

with more by the time we get there.

So it's truly possible using whole life insurance to end up with the

exact same amount of money you would have gotten just doing investing and

at least that amount in death benefit.

Because if you look at this, the death benefit is continuing

to go up and increasing and it actually starts to accelerate.

I think when he's around 60 years old and this starts to create a much,

much bigger death benefit over time.

So you're actually getting more than a half a million

dollars at the end of 30 years.

So,

I just wanted to show that quick math to help people understand that this is not.

It's not a true comparison to just say the, premium price is

lower than whole life insurance.

If you look at the full 30 year cost, just using a regular math, not even

including lost opportunity cost I think the numbers are pretty clear that whole

life insurance is a much better deal.

Yeah.

For anyone that was in that camp where they believe term is cheaper than whole

life, just got one thing to ask you.

How do you like them apples?

If only you had a note to just smack against your camera

I think your whiteboard is that note.

there you go.

Yeah.

That, that was impressive, John.

Thanks for sharing that.

Yeah..

And so now that we've seen the true comparison in cost from having a term

policy versus a whole life policy, I think it would be important to

delve into the unseen costs of term.

And really that what that is not having a permanent legacy for the

people that are most important to you.

If you have a spouse, you have kids you're, you have a responsibility

to your family, to your loved ones.

And by having something that is really impermanent, that, that term policy.

For a set period of time, it gives you a false sense of security because, in

the here and now, you're thinking, okay I'm covered for this period of time.

And you don't go out far enough and think about what happens when I eventually

do get to the expiration of that term?

Are you going to be.

In good health to qualify for another policy.

I've had the conversation multiple times with people who are in their

fifties and sixties, and they bought a term decades ago and their

time is coming up and, they're interested in buying another policy.

And they've looked at the cost and they've reached out to me and say, what can I do?

And I hate to be the one to point out well, you know, this

unfortunately is what it is.

And we can try to, mitigate some of what's transpiring here by being creative

but the unseen cost of term is that you're really just leaving your loved

ones with potentially an empty bag.

It's hard to convey this to people, but I've never heard anyone say,

man, I'm glad my term insurance is expiring next year or next week.

I mean, Imagine having, what's essentially a half a million or 2

million or 5 million there for you.

And then it just evaporates in a day.

It reminded me of an old saying from when I used to sell shoes, I

was an Al Bundy type character over at Nordstrom's in my college years.

But we used to say price is what you pay value is what you get.

And when you buy good quality dress shoes they're going to last you a very long

time versus the knockoffs that you have to replace every six months to a year.

That was really important for me to understand at an early age,

and it applies to life insurance.

Lastly I learned this from the great Trent Fortner, who, if you want to

go and check out episode number 73, that's my conversation with Trent,

who's a legend in this business.

And so that he's got a lot of other great stuff on that one.

So I just wanted to point you to episode 73, if you want to check that out.

All right.

I really liked this episode.

I think it's a great one to talk about.

And so if any of this was resonating with you and you want to learn more about how

it could apply in your life specifically, head over to StrategicWholeLife.Com.

You can book a free 30 minute consultation with us right there and

see how these could work for you.

And if you're the type of person that likes to just learn as much as you can

before talking to anyone, we created an online course just for you, and you

can get that at StrategicWholeLife.Com right at the top banner there.

All right, Montoya, thank you as always.

Yeah.

Thanks, John.

Thank you for the whiteboard and everyone out there go pick up a copy

of Nelson's book, do your homework.

And if you found value in this episode, please share it with someone that

you know and love because it's really important that they understand the

real math between term and whole life.

All right.

Thank you everyone.

Take care.