Cash Value Whole Life Insurance vs. Buy Term Life Insurance and Invest the Difference into Mutual Funds Calculator (AKA BTID)
|Department of Labor's Fiduciary Rules||This BTID calculator works well with the Life Insurance Needs Calculator, which is a separate calculator||BTID Program Directions||Download the Free Buy Term vs. Whole Life Insurance Demo||Read More About BTID||Why Pick on the Life Insurance Industry?|
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This money calculator is for comparing how investing methods differ over time. It compares most all forms of investing with each other, in addition to different form of life insurance contracts.
For comparing life insurance policies - the purpose of this form of life insurance calculator is to estimate as closely as possible, how much money one would have accumulated in an investment such as a mutual fund after taking all Real World factors into account (basis, taxes, and expenses). Then it properly compares it to the VUL values shown on an insurance contract ledger.
If you're trying to decide whether to buy a cash value life insurance contract, or "buy term life insurance and invest the difference," then this investment software will estimate the amount of money you'll have left (after paying life insurance costs) annually after a certain time horizon.
If you don't die, and you end up with much more in the alternative investment compared to the cash value life insurance contract, then you should have bought term life and invested the difference, rather than buying the cash value whole life contract. This is the point of all of this.
This allows you to compare any number of alternative investment vehicles, such as mutual funds that have different characteristics (loads, commissions, taxes, 12b-1 fees, and different dividend and capital gains distributions).
You'd just input a dozen or so numbers on the "alternative investment," and then the ending year's market values on the cash value life policy from an insurance contract "ledger" provided from an insurance agent.
Then input the annual terms costs provided from a term life insurance ledger, which are deducted from the alternative investment, and it shows the investment balance at the end of every year for both the cash value policy and alternative investment (and then it makes graphs).
This life insurance calculator is unique because it accurately determines the balance of investment vehicles by considering taxes on the annual realized capital gains, dividends, original basis, and the accumulated unrealized capital gains.
"Buy term and invest the difference" is just one of many functions of the Investment Comparator software product. All other information (demo, prices, etc.), is on the Investment Comparitor Software page.
All of the assumptions in the demos are that the insured investor does not die until after age 100. Obviously, if one were to pass away, then the life insurance strategy would win (especially in the early years).
This buy term life insurance and invest the rest into mutual funds versus buying whole insurance comparison uses an average variable universal life (VUL) policy. It's not the worst, nor the most efficient, policy on the market.
The bottom-line is that just buying a level term life insurance policy and investing the difference into no-load mutual funds (not even our recommended mutual funds) usually beats VUL long-term. This difference is just profit for life insurance company shareholders (not you, the policyholder), and commissions for the selling life insurance agent.
Life insurance agents like to say Variable Universal Life insurance products will allow you to retire earlier with more money, because you can take tax-free loans instead of withdrawals, and almost never pay any taxes.
The bottom line, is that the interest the policy charges you for loaning money to yourself will usually be more than the total tax savings in a couple of years. This is because it's just deducted from the cash value - more and more every day (whereas tax savings don't change much).
So if you never pay back your loans, your money will run out about a third faster, in most cases, compared to better ways of investing for retirement.
So this "doesn't work" - there's no having your cake and eating it too.
First it estimates, closer than anything else, the balance one would have accumulated in an investment, such as a mutual fund(s), given certain Real World input parameters such as:
• Amount of initial contribution.
• Amount of annual contributions. These can be different every year.
• Growth, or inflation, rate of annual contributions. These can also be different in every year.
• Rate of return. This can be different every year.
• Annual dividend yield.
• Policy loans.
• Annual realized capital gains rate (the amount of capital gains that are distributed to the shareholder, like in a mutual fund).
• Amount of unrealized capital gains that remain in the investment to grow and compound into the future.
• Tax basis after considering the above two things.
• Ordinary income tax rate.
• Capital gains tax rate.
• Dividend tax rate.
• Front-end and/or back-end loads or sales charges on investments.
• Investment management, 12b-1 fees, and other ongoing annual fees / expenses.
• Amount of withdrawals. These can be different every year.
• Years of withdrawals.
• Tax basis of withdrawals.
• Annual inflation rate of withdrawals.
• PS58 costs of term life insurance.
Next it has an input section where the user inputs cash value life insurance information (such as VUL).
The user then inputs the comparable term insurance costs, which are deducted annually from the non-qualified alternative investment accounts described above (which can be mutual funds, ETFs, or stocks).
This information is then used to compare end-of-year market values of the regular (alternative) investment (less annual term costs) vs. the annual cash values in the whole life insurance policy.
VUL stands for Variable Universal Life Insurance, which has been state of the art in whole life insurance for over two decades.
The variable part allows one to invest in things like equity mutual funds (which are called subaccounts).
Universal means that it's flexible in many ways. Universal means you can easily tinker with the main features without having to alter the policy in writing (e.g., face value, premiums, bells and whistles, etc.).
Term life insurance does not have a "savings account" associated with it, so you're just buying pure life insurance. The most efficient form of term was ART (Annually Renewable Term), but life insurance companies rarely sell that anymore because it doesn't make enough profit. Now it's all Level Term life insurance.
This long-term great debate has been which performs best after one considers everything in great detail. The life insurance industry has brainwashed everyone into believing that VUL (and annuities) will always beat everything else because of all of the wonderful tax advantages. This is how they make their living, so it shouldn't be a mystery why they say such things that are not true.
But when one does the analysis correctly, accounting for all of the details, the strategy of buying term life insurance and investing the difference into no-load mutual funds most always wins compared to buying any form of whole life insurance.
Keeping track of basis is extremely difficult. But once one can program that, then the bottom-line is that the more you correctly meticulously account for ALL of the details, the more term with mutual funds will end up with more money than whole life - every time.
Also, the amount of life insurance one needs declines rapidly every year, as loans are paid, investments grow, and there's one less year of the breadwinner's income to replace (see the life insurance software page for details).
This alone almost makes as much of a case against VUL as running out of money 20% sooner (which is the average bottom line of most all BTID analysis).
This annual decline in life insurance needs was not illustrated in the demos. If it was, then how much the difference of buying term life insurance and investing the difference into no-load mutual funds, vs. any form of whole life insurance would be greatly magnified.
The annual escalations in term life insurance costs are the biggest item insurance agents point to when selling whole life insurance policies. When the results of subtracting one-year of the breadwinner's income that needs to be replaced annually are properly accounted for, then these escalations in term costs are negated.
Results will vary depending on dozens of factors.
Here's the shortest bottom line on all forms of annuities and all forms of whole life insurance: If you work in the life insurance business, either as an agent or an employee of a life company, or hold life insurance company stock; then annuities and whole life insurance are the greatest invention since the wheel (because they pay by far the most in immediate commissions of any financial product available today, making them by far the most profitable part of the life insurance company business model).
But if you're an investor or policyholder, then not so much.
Just "do the math" and you'll see in a New York minute.
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