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What Type of Life Insurance Is “The Best”?

June 20th, 2008 · 39 Comments · Insurance & Savings, Philosophy In Financial Planning

What type of life insurance is "the best"? Well, it depends on what you mean by "the best". Term life insurance offers very low premiums relative to the death benefit being bought. But, the probability of payout is low. Permanent insurance carries substantially higher premiums, but offers a living benefit through a cash reserve account. Many people look at this as a perceived cost-benefit analysis. They look at the premiums and assume term life is the way to go. Why bother purchasing permanent insurance if it costs more? For this, a [very] brief history lesson is in order.

The idea that life insurance is a temporary need-also called the theory of decreasing responsibility- really struck a chord with A. L. Williams and his company, Primerica, in 1977. Williams interpreted the theory of decreasing responsibility as meaning "everyone should own term life insurance." Williams was a high school coach turned insurance agent who didn't like how his father's whole life policy was performing and thought that there had to be a better way. 

Williams observed that whole life insurance represented a bundled product. As such, there was no distinction between the amount of money going to pay for insurance, and the amount of money going to the cash value portion of the policy. This actually works in favor of the policy holder, but that wasn't the way Williams saw it.

For Williams, this whole life product represented a problem that had to be solved. Not trained as a professional financial adviser, Williams wanted to have costs broken down and thought in simple terms of "insurance" and "investment", ignorant of the fact that insurance and investing are intimately related. Williams saw whole life insurance as a roadblock to his vision.

Whole life, according to Williams, was a "bad investment" that had to be replaced with a "good investment." With this motive, he built his company on the practice of convincing his new customers to extract the cash values of mutual life insurance policies to fund dubious investment strategies.

By 1979 a brokerage firm called E.F. Hutton formed its own life insurance division, seized Williams' idea,  and in the early 1980s twisted his "buy term and invest the difference" philosophy into creating the first Universal Life insurance product, which was a 1 year renewable term insurance product with a separate side fund that invested in a money market mutual fund.

Universal Life insurance was initially designed under the inflationary interest rates of the 1980s, and pitched by E.F. Hutton as an alternative to investing in the financial markets. By 1984, many insurance companies followed suit fearing competition could wipe them out. But by the early 1990s, interest rates began falling to all time lows. By unbundling the cost of insurance to form Universal Life, E.F. Hutton completely overlooked the reason whole life succeeded: its built-in guarantees.

In contrast, Universal Life offered no guarantees on cash value or death benefit, shifting insurance risk back to the policy holder, and leaving the policy severely vulnerable to interest rate fluctuations. Under more conservative interest rate assumptions, these policies were not able to survive and many policy owners faced a tough decision - infuse their dying policy with more cash to try to keep it alive or let the policy lapse losing everything they had put into it. 

...and thus came the more recent attacks on life insurance companies for selling permanent life insurance that wasn't worth the paper it was written on.

Understanding The Argument for Term Life Insurance

The idea of buying term insurance is that you will invest the difference - the difference being what you would have spent for the same coverage on a permanent policy. As a practical matter, I am not convinced that most people actually do that (or do it consistently).

However, for those that do invest the difference, the investment of choice is some type of equity fund (or stock). Bonds are a moot point because if an investor were to invest in bonds, they would be mirroring a permanent life insurance product. 

The largest problem with investing in equities as a core strategy is the hypothetical returns that a financial adviser projects. The hypothetical returns, even when using Monte Carlo software to randomize the returns, is still a hypothetical projection. These hypotheticals are not based on any rational analysis but on either historical performance within a cherry-picked historical "window" or a random set of returns.

Additionally, all of the hypotheticals produced today by financial advisers and mutual fund companies use average rates of return instead of actual compound growth rates. Averages can be "massaged" higher than true growth rates. And, even if they're not, the average rate doesn't reflect the actual growth.

An investor can average 8% and only actually make 4% or 5% before taxes and fees. Likewise, they could actually make more than 8%, or they could end up with less than their principal investment. It's a total gamble because the investor is often speculating on the price of the stocks inside their mutual fund, and on the price of the fund itself, instead of actually analyzing the fundamentals that drive stock prices and the business's profits.

Speculation is not inherently bad. However, it's not a good core strategy. I'm also not convinced that most people are willing to learn how to invest to make investing outside of an insurance policy work better than just combining the insurance and savings component into one contract and using that approach. Even if a person were to adopt a more rational approach to investing, investing is not easy. If it were, there would be no need for professional investors. There's a really good chance that an investor could fail miserably, even if they have all the knowledge available to them to go out and start investing on their own.

Term insurance covers a short-term probability of death. When I say short-term, I mean anywhere between 10 and 30 years. Maybe I should say "temporary"; 30 years may seem like a long time, but in the insurance business, it's not. Consider that most people buy term insurance when they are least likely to die - between the ages of 30 and 45. After age 60, term insurance is very expensive and after 65, it's nearly unaffordable. At age 85, for the most part, you simply can't buy it (you're considered "uninsurable").

Some term policies don't offer a guarantee. What I mean is, the policy can be repriced before the term is up. Other term policies terminate at the end of the term while others convert to annual renewable policies at usually unaffordable rates. Unfortunately, this is the point when people usually discover that they'd like to continue coverage, but can't.

But perhaps the most telling problems of term insurance come from consumers themselves. What A.L. Williams and E.F. Hutton never realized is the reason that cash value insurance came about was not because of some evil scheme hatched by life insurance companies. Many policyholders actually had become disenchanted with their term policies.

You see, after faithfully paying their premiums for many years, they were eventually forced to drop coverage because when the term ran out, the renewal premiums were too high. Coincidentally, they had to drop their coverage just as they were nearing the age when death became likely. To add salt to the wound, term insurance didn't offer any sort of refund for premiums paid. So, policy holders paid in and many of them got nothing in return. With today's lifespans, 99% of term policy owners will never see any payout from their life insurance (and neither will their families).

To solve the term dilemma, some very savvy actuaries devised a way of increasing and leveling out the premium payments to give policy owners lifetime coverage at a slightly higher premium. The premiums could be level and guaranteed for the life of the insured and coverage could be extended out to age 100. Think of it as a budget plan for insurance (similar to how gas and electric companies offer budget plans - you overpay in the summer and underpay in the winter and pay a level, fixed utility bill). Policyholders would overpay for their insurance in their younger years and underpay as they got older.

These first "term to age 100" policies were the early attempt at whole life insurance. They were designed to earn interest and build cash value to age 100 at which point the death benefit and the cash value would equal each other. The cash value did serve a purpose when those policies were first designed.

In essence, when you bought insurance, you were going through a process of self-insuring. The older you got, the more money you built up in your cash value. The more money you built in the cash value, the less risk the insurance company took to insure your life.

When the death benefit and cash value equaled each other, there was no risk on the part of the insurance company. It's true that cash value insurance was never originally designed to act like a commercial "savings account", even though the products have evolved over the years to accommodate more and more flexibility. Whole life, as a practical matter, functions as a long-term savings product with leverage being provided by the death benefit (should you die prematurely).

In essence, you are still working towards a process of self-insuring but with a great deal of liquidity and flexibility in the policy - which is exactly what most insurance agents and financial advisers tell you that you should be doing with your savings. The problem is, many advisers are telling you to self-insure with financial products that aren't designed to do that for you (i.e. mutual funds, stocks, etc.).

While I think there are many good reasons to move towards a process of self-insuring in certain instances, I am reluctant to say that I think that an individual should absorb every risk that insurance is designed to cover. In the case of modern life insurance, being able to retain, transfer, and/or control your current and future expected savings using one simple contract has become a unique and powerful feature of cash value life insurance. 

The fact that some advisers either don't get it, or simply don't understand the benefits of such contracts, baffles me sometimes.

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39 Comments so far ↓

  • [edited by site moderator due to improper name format]

    Nice article. Few minutes ago I have read article about how “foolish” permanent insurance is. I think every product has pros and cons. Term life is cheap and easy. On the other hand, permanent helps you to save money and you don’t have to cry, when you are renewing your policy after 20 years…

  • Chris

    Universal life insurance is definitely the better long term choice given the fact that the majority of the population is living to the age of 70-90 years of age. If you think about it, term liife is definitely the better choice (yeah right), that is if you plan on dying during the lifetime of the policy. But in most cases, the majority of the population will fortunitely, yet unfortunately, live longer than the life of the “term” policy. Fortunately because they will get to enjoy life a little (hopefully a lot) longer and get to watch their family members grow up. Unfortunate because the family they’ve been fortunate enough to spend more time with will now be forced to pay for burial expenes and possibly foot the bills left behind since they couldn’t afford the renewal policy premiums. So take your pick!

    Term Life: Good rate but little chance for return.

    Universal Life: Not so good rate but excellent return.

  • Denise

    While there are many advantages, a universal life policy is one of the most expensive life insurance policies available. It is also subject to market fluctuations. An attractive policy for most people is a term life policy with convertability options. This type of policy provides the maximum death benefits against the cheapest premiums. It is available for term periods of 1 to 30 years and many policies offer Return of Premiums (ROP) options. And because life spans have increased, you can also avail of renewability options within a term life policy which allows you to renew a term life policy, without having to undergo the underwriting process again.

    Denise @ AccuQuote

  • David C Lewis, RFA

    Thanks for the comment Denise.

    I agree with what you are saying in certain situations. For example, there is no doubt that Universal life is the KING of permanent insurance IF what you are looking for is death benefit protection. To some extent, if it is done correctly, ULs can do the cash value thing, but I’ve moved away from that line of thinking not because I don’t think it doesn’t work, but it gets too complicated for most people.

    There are just too many moving parts. In particular, I’m getting tired of stock companies refusal to make a guaranteed column that doesn’t lapse on high cash value policies. The fact that the company can increase mortality costs at will scares a lot of people, especially nowadays.


    Yeah, a lot of folks buy into the “buy term” philosophy. It’s kind of lame for those who are 35-45 years old. I wrote a related piece on this topic that goes into much more detail:

  • Brian

    If Universal Life is such a slam-dunk, why does Suze Orman hate all forms of Whole Life? I can’t wait to hear your conspiracy theories or put-downs on her regarding that since you obviously sell Universal Life all day long.

    • Deborah

      Because Suze Orman needs viewers/callers to her show–and the majority of her audience may not be thinking long term. I disagree with much of what she says and I certainly feel that it is not an either/or thinking as far as term versus universal life and the overall financial health of a client is concerned. Financial needs within a family constantly change–a client of 25 with small children and limited finances is approached differently that a client of 35 with teenagers and a stronger interest in long range planning.

      • David C Lewis, RFC


        This is probably one of the biggest myths in financial planning–that a client’s financial needs change over time. Individual goals might change, but needs only really change in a fundamental sense when there is no purpose defined from the get go. All financial planning must be long-range to be successful. In principle, all clients are the same. Individually, the specific purpose and financial goals are different because the principles of financial planning are applied within a defined context — the client’s life. But in principle, the approach is the same regardless of age, marital status, etc..

        David C Lewis, RFC

  • David C Lewis, RFC

    @ Brian,

    When it comes to life insurance, a lot of people have a lot of different opinions.

    To begin with, universal life insurance is not a type of whole life. It is literally “term and invest the difference” combined into one contract. Interest is credited to a cash account, and then mortality charges are deducted from that cash account. As long as there is enough money in the account, you keep the term insurance. If the money ever runs out (or there is a no no-lapse provision), then the contract is canceled.

    As for your comment about UL contracts, it depends on the type of UL contract you are talking about. Not all of them are “slam dunks”. I suppose it’s like any other financial products. You have good ones and you have very poorly designed products.

    I don’t disagree with everything that Suze says, just her ideas about life insurance. I think a lot of the BTID folks are out there either intentionally or unintentionally manipulating the numbers by focusing heavily on average rates of return, comparing apples to oranges (i.e. equities to bonds), and consumers aren’t really aware of what’s going on.

    For example, you can compare a whole life contract to an equity mutual fund, but you’re not comparing apples to apples. You would be better off comparing her mutual fund suggestions to other equity based investments, and then I think you’d see there are better alternatives out there than your typical garden variety mutual fund.

    The mentality of a person who buys a good quality, intelligently designed, cash value whole life policy is somewhat different than the mentality of a person who is buying a mutual fund.

    So, I don’t “get” why pro and anti cash value folks pit these kinds of investments against each other and then proclaim that one is better than the other. The question one must ask is “better for whom, and for what purpose?”

    By the way, where does Suze Orman put the majority of her money? Answer: In conservative municipal bonds and zero coupon bonds.

    The only reason I mention this is because the primary argument that Orman makes against cash value life insurance, and whole life in particular, is the low internal rate of return on the product. But, she is actually getting a lower net rate of return than a good dividend paying whole life policy while criticizing the life insurance industry at the same time for “low returns” on their cash value products.


  • Lyn

    Dave Ramsey really promotes term life insurance. What’s your opinion on his reasoning?

  • Tammi

    I have two questions. As stated in many of the comments and articles noted, BTID is a concept that shows people how to save their own money so they will not have to depend on the insurance companies to do it for them. They are in control of their own investments which if done properly they will no longer have a need for insurance and will have a substantial nest egg to support themselves through retirement and live debt free.

    How does UL policies justify selling anyone an insurance policy that detracts from the insureds cash value until the is nothing left andd leaving them with a $0 death benefit unless they reinvest and say that is better that BTID theory?

    How does WL justify charging double the cost of a term policy to help the insured save money but at the maturation of the policy only give the insured either the face value of the policy or the cash value built up in the policy when it is the insureds onwn moneyy they have been saving?

  • David C Lewis, RFA

    Hi Tammi,

    Thank you for your questions. I have decided to devote an entire post to answer them. You may view it here:

    I get the impression that you don’t like permanent life insurance, and I addressed that as well.

    All the best,


  • john fagan

    By far I truly believe that term life insurance is the best with todays current economy. You can save yourself some cash as well as be ready for what is coming.

  • John Fagan

    Truthfully these days term insurance is the best..People are looking for a way to save money and this is it…

  • Aaron

    David, thanks for clarifying that universal life insurance is not a form of whole life. That actually gets to my point that most people should forget about what type of life insurance they want – there is already too much confusion and bad, generalized advice out there. Instead, they should focus on their needs. Why do you need life insurance? What do you need it for?

    Once you focus on the need, it is much easier to design a plan around it. Who care what tools a carpenter uses to build your fence? You care about the quality of craftsmanship and the cost – the same could be said about life insurance. You probably know the same set of needs could be met with a variety of life insurance solutions. Why limit agents in their creativity to find you the best possible quotes?

    I understand this approach of ignoring the types of life insurance is open to abuse in the wrong hands. That is also why life insurance shoppers should get quotes from multiple agents and sources. Comparing quotes side-by-side brings clarity to an otherwise confusing situation. I’m sure you do something similar in your practice when you send out RFP’s for life insurance quotes. The public just needs a way to compare quotes on a level playing field.

  • alfie

    I am so impressed with your passion on whole life. But as you said, insurance companies are not “stupid”. They are out there to make money. They have their mortality table, they have their investment advisors that know what to guarantee without losing their shirts, and their underlying expense ratio is much higher than the index funds and ETFs(for UL). They would not charge you less on your life insurance premium whether you buy whole life or term.
    Sure, you get a peace of mind in buying insurance and if you don’t care how they charge you on all the above services and you are at peace not worry about market fluctuations. But you could achieve similar piece of mind by combining term/UL while invest the difference at financial product that fits your need and risk tolerance, without kept in the dark on how much the insurance agent being paid by the insurance company (whole life v.s. term) and the underlying expense ratios. Just like Suze Orman did. May be she got lower return but that’s her choice. She is a financial advisor, not investment genius.
    Lack of transparency is one of the prime reasons for the recent financial crisis. And the potential of abuse is also higher on lack of transparency. Warren Buffett became most successful investor by staying on the selling side of insurance business.

    • David C Lewis, RFC

      Well, a few things should be clarified here. The government regulates the maximum mortality charges that may be charged. However, even if they didn’t, I think insurers would price their products sensibly. You make money by keeping customers and charging a price the market will bear, not by charging a price no one wants to pay. By definition, you’ll make no money by doing that. You can know how much the insurance agent gets paid by simply asking him. In fact, even if the agent lies about his pay, you can still know the cost index of the policy, so costs are not hidden even for whole life. Aside from that, you can know the internal rate of return by doing a few calculations or asking the insurer how your policy works (or talking to an agent who is willing to educate you). This last piece of information gives you everything you need to know about what the policy costs and is actually easier to obtain than some of the figures you need from a mutual fund company.

  • John

    Looking at investing 100k lump sum for my 84 year old mother into a single premium life ins. policy. Does anybody have any good options to consider for a safe investment with decent return? Life ins. seems to offer a better return than an annuity with tax-free death benefit.

    Considering a Flexible Premium UL policy from JH. She just passed underwriting and can obtain a policy with a 100k initial investment that pays our 140k as death benefit.

  • David C Lewis, RFC

    >>>Looking at investing 100k lump sum for my 84 year old mother into a single premium life ins. policy. Does anybody have any good options to consider for a safe investment with decent return? Life ins. seems to offer a better return than an annuity with tax-free death benefit.

    Considering a Flexible Premium UL policy from JH. She just passed underwriting and can obtain a policy with a 100k initial investment that pays our 140k as death benefit.


    Thank you for the question.

    Make sure that you and your mother understand what her wants are. Single premium life insurance is probably the best financial product for estate planning. It’s simple, and the costs are really very low.

    JH (assuming you mean John Hancock) is a solid company with decent products from what I understand, so you shouldn’t have a problem there. New York Life’s custom whole life product is also very good and has guarantees that JH won’t have (No, I don’t work for NY Life).

    With that in mind, if you go with the UL product, make sure that you fully understand the UL contract you’re buying. Pay special attention to the guarantees. Universal Life operates entirely on assumptions. If it isn’t explicitly guaranteed, then assume there are no guarantees.

    Also, if your mom plans on being able to access this money, there are typically surrender charges that come with it if you are pulling out more than I believe 20% (don’t quote me on that). You’ll also have to deal with the fact that it’s a modified endowment contract so she won’t have the same tax benefits when she withdraws money from it.

    All that aside, a single premium UL is a pretty simple product. They’re made for money that you don’t envision ever needing, but still want access to in an emergency-hence the free withdrawal provisions.

    Hope that helps.

  • Stan Buyer

    It’s important to understand which advantages each type of insurance have. However I see a lot of the “don’t buy this plan” arguments online, and I am always tempted to respond – if those plans you are opposing still exist today, it means there are people out there who need them. There wouldn’t be supply if there was no demand.

  • David C Lewis, RFC

    Thanks for the comment Stan. Yes, I agree. There is a demand for various types of insurance. There’s a huge market for term life, if there wasn’t, the product would exist. There’s also a pretty large market for whole life, universal life, etc. It doesn’t automatically make any one of them “the best” (which, without context, I think is probably an improper way to look at it to begin with).

    With that said, there’s a huge market for Pepsi, but that doesn’t automatically make it good for the people buying and consuming it. So, I think there is a difference between a product having demand, and that product being in the best interest of the consumer.

    There’s a gap there where education needs to be fit in.

  • Barry Johnson

    What is the best way to look up a old Policy my mom and dad had whol life????????over 60 yrs

  • Paul Gates

    A.L. Williams had it right. Whole life promotes saving and insurance. The problem with it is it generally doesn’t cover either need very well. For example, the purpose of insurance is to cover debt and replace income for the surviving partner . A term policy can provide a far higher amount of coverage for a much lower premium than a whole life policy. As for the savings component: Would you invest in this type of product: 1) no savings for 2 years (it goes to the commission of the agent), 2) a 3% or lower rate of return, 3) 6% to borrow from your own money, and 4) the insurance company keeps the savings portion of the policy when you die. You pay for two things but receive only one. Mutual funds and seg funds are a form of speculation, but from 1950 until today averaged anywhere from 10.7% to 13.7%. Therefore buying term and investing the difference makes perfect sense. As for the term insurance expiring, what do you need insurance for if you are already financially secure through investing? That’s why whole life should never be bought. Universal life is about as close to fraud as a contract can get.

  • a kovar

    opinion on equity indexed life insurance. It uses dow jones, s & p indexes to determine the return with a cap of 10 to 12% and a minimun of 2% each year. is’nt this better than risking money in the market with no basement. Putting the maximum premium allowed for the amount of life insurance therefore upon death the death benefit is guaranteed.

    • David C Lewis, RFC

      “a kovar”,

      Indexed life insurance, what you are referring to, can be a good contract. A 10 to 12 percent cap, however, is quite low. The better companies will have caps upwards of 14 percent or more. When I was researching index life insurance, I talked to an actuary who helped design the first indexed life insurance products for Aviva (a very well known company in the index life market). These products will work great if the company doesn’t lower the cap rates or increase the internal cost of insurance.

      As to the death benefit. The death benefit is never guaranteed in those policies unless you happen to own an ultra-rare indexed whole life. Most indexed life policies are universal life-which operates entirely on insurance company mortality and investment assumptions, not guarantees.

      I hope that helps.

      • a kovar

        thank you for the comments. from what you described, the company has the right to lower caps and also change the cost of insurance. what would cause them to do that and would they do that on existing policies? thank you.

        • David C Lewis, RFC

          “a kovar”

          An insurance company can change the caps for any reason. Usually, it’s because the cost to purchase the options contracts gets more expensive (that’s actually happening to some extent due to the demand of the contracts). If the insurer starts losing money (because the underlying index isn’t performing as they expected), they might also decrease the caps.

          As for cost of insurance, that usually doesn’t change unless the insurer is in dire straights, though they may increase costs to meet profit targets at any time. There’s ways to work around that issue (to some extent). If you want a review of your policy, feel free to give me a call.

  • Henry

    Hi David,

    I have been following your comments here, and they are very informative. I am presently looking into UL, WL and Term insurance. I was leaning towards UL but reading that at some point, there might not be anything left even at death is rather confusing.

  • a kovar

    why do several of the largest insurance companies not offer indexed life insurance?

    • David C Lewis, RFC

      I’m not sure which companies you are referring to, but the some of the largest ones do (i.e. Aviva, Allianz, etc.). Others do not because they either don’t have the back-end support to monitor the additional complexities of the policy or they just don’t want to sell a product like that (usually, this is the mutual life insurers, but not always).

  • a kovar

    New york life for one do not offer index life!

  • Bryan

    Those are some very well written facts, totally agree.


    I would agree with you David, term life insurance is generally the cheapest type of policy out there but that doesn’t always mean its the best for everyone.

  • a kovar

    I understand that term life insurance ever sold that 98% either converted to permanent or lapsed without paying a claim. insurance companies are not stupid

  • Jose luis

    I have a variable life insurance. I am 60 years old male in good health, no smoking and a bussines owner
    I have some cash value in my policy, I have been recomended to roll over to an UL $1000,000 death benefit paying $1000,00 montly for 10 years. Cash value should be able to keep paying the policy until I die assuming a 6% return (historical value of the company for the last 30 or 40 years has been 7.5%)
    I was told too to use my policy as a retirement tool even if I do not have the benefit of time by my side.
    I can fund my policy heavy and 6 or sever years from now start making withdrawals.
    Any opinion or advice will be greater appreciated.

    • David C Lewis, RFC

      This is reaching the level of complexity such that the only way I can really walk you through this is if you wish to hire me as your consultant/coach. we would have to review your existing policy and a proposed policy from your agent and I could walk you through it with as much detail as you want (right down to the construction of the policy if you’re interested) and also perhaps tell you a few things that your agent may or may not tell you depending on how honest he or she is.

  • a.kovar

    I question your agents knowledge and honesty, frankly. looks like a lateral move with little or no value.

  • Marita

    My father had a term life policy. He lived until age 78. When he went into a nursing home 4 months before he died in 2000, my mother ended up having to cash in his IRA so that the government wouldn’t seize it to pay for his long term care (they had no ltc insurance), and when he died, she was left with $2,000 dollars from his term policy (because the benefit had dwindled as he aged), and was forced to give up his NYC Police pension (they had turned down the annuity option), his federal pension was cut in half, and she had to give up one of their Social Security benefits – fortunately, she could choose to keep my dad’s, since it was more than hers, but the end result was that at the age of 74, her income was cut in half. She put all the money she had left from his IRA into an immediate annuity, and when she died six years later, she was upset that she didn’t have more of a legacy to leave to her grandchildren. As a result, my husband and I decided to get a whole life policy, because we want the guarantee that whoever outlives us will be taken care of. We have had people try to convince us that other plans are the way to go, but after watching my sweet mom struggle in her last years, I am taking no chances. I am just curious what your thoughts are.

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