This article is an adapted script from the video that you can find on our YouTube channel, LIFE180.

Term insurance or whole life insurance: which is best for you? Should you follow the advice of financial gurus like Dave Ramsey and Suze Orman, along with Prime America agents, and opt for buying term insurance and investing the difference? Or is whole life insurance the better choice?

Ultimately, if you consult with 50 different advisors, you'll not only receive varying opinions from each one, but you'll also hear diverse reasons behind their beliefs. In this article, I aim to put an end to the debate by walking you through the reasons behind my stance.

I believe there is a lot of common sense in my approach. If you have specific goals you want to achieve, you should put yourself at the center of that success and build a system that guarantees you will accomplish those goals.

Intro term vs whole life insurance

So, in this article, I will walk you through my system for mentally and emotionally processing this decision. I will also explain how to execute it tactically to achieve your goals.

We are discussing term versus whole life insurance and aiming to end the debate once and for all. I've covered this topic before, but after a recent conversation, I felt compelled to create this article to lay everything out clearly.

What is the process? How do we eliminate biases and opinions? While I will share my perspectives, the focus here is to strip away emotional reasons and concentrate purely on logic.

Let's focus on you and your goals. Why do you even want these products in the first place? Why do you want life insurance? In this article, I will walk you through the decision-making process, starting with these fundamental questions.

Question 1 - WHY Do You Want Life Insurance In The First Place?

When you listen to Dave Ramsey and Suze Orman, read their books, or watch their videos, they consistently advise buying term insurance and investing the difference. They argue that as you progress through life, the primary purpose of term insurance is to ensure your family is financially secure if something happens to you.

As you age, your need for insurance will diminish. You won't need insurance to take care of your kids, spouse, or debts as you grow older. Ideally, you should reach a point where you have everything covered and can "self-insure." I'll delve into this concept later in the article.

Ultimately, it's crucial to first understand why you want insurance. Once you have that clarity, it's equally important to recognize that your needs and reasons for life insurance will evolve as you understand how these products can impact your life in different ways.

Your needs and wants today will likely be vastly different from those 20 years from now. While it's essential to plan and address short-term needs, it's equally important not to overlook long-term considerations.

Many financial personalities, including myself at times, present strategies with the assumption that by managing your finances, paying off debts, and following certain advice, all your long-term needs will be addressed. However, the reality is that this philosophy often overlooks significant gaps and may not fully account for your future needs.

When considering why you want insurance and anticipating your future needs and wants, it's also crucial to address the financial challenges you're trying to solve. Understanding these challenges will help you make more informed decisions about which type of insurance aligns with your long-term goals.

What Financial Challenge Are You Needing Life Insurance To Solve?

Right now, your primary concern might be ensuring that your spouse, children, or other dependents are taken care of and that your debts are settled if something tragic happens. However, as you age, you will face different financial challenges.

For example, in retirement, you'll need to manage market volatility without earning income and address long-term care planning. Additionally, you need to ensure that your medical directives are in place. It's important to note that many bankruptcies in retirement are due to medical bills, so planning for these eventualities is crucial.

What if you could have a solution that addresses these challenges and helps you leave a legacy for the next generation in the most tax-advantaged way possible? While term insurance provides coverage in case of emergencies, thinking beyond the basics and considering how to enhance your family's future can be more rewarding.

By focusing on your broader goals and implementing financial principles that not only secure your family financially but also impart valuable lessons, you create a lasting impact. Isn’t that a more attractive option?

To me, this is where the real value lies. We need to move beyond the traditional death benefit mindset of life insurance and start considering the long-term advantages of living benefits, the potential for accelerating the death benefit, and the tax-efficient legacy planning that whole life insurance can offer.

You Can NOT Be Over Insured

With that in mind, there are a few key concepts I want to address, particularly those discussed by financial personalities. One common topic is the idea of not being over-insured. However, I want to make it clear before diving deeper into this topic: you cannot be over-insured.

It's important to understand the concept of "human life value." Insurance companies evaluate your situation, including your income, debts, family, and obligations, to determine your human life value. They will not insure you for more than this assigned value.

The insurance company sets a limit based on your human life value, which is an actuarial estimate of what your life would be worth if you lived a long, healthy, and fulfilling life without any improvement from your current situation.

This is one reason many people opt for multiple policies or whole life insurance, they insure their current human life value and also account for additional coverage based on their future needs.

As people progress through life, their human life value increases due to growth in their income and opportunities. To keep up with this expanded value, they often need to obtain additional insurance to ensure full coverage for their updated human life value.

That’s why individuals like Nelson Nash ended up with over 70 policies throughout their lives. As their human life value increases, so does their capacity to acquire more insurance. I’ll explain why it’s important to take this into consideration in the broader context of insurance planning.

You Can NOT Be Self Insured

Another key point is that you can't truly be self-insured; you're either insured or you're not. The concept of being self-insured can be misleading. While we often focus on the death benefit, it’s essential to recognize that self-insurance doesn't replace the need for proper coverage.

When Dave Ramsey and Suze Orman suggest that you should plan to go through life with no debt once your children are grown and independent, and if you've followed their advice to pay off your mortgage, eliminate credit card and auto debt, and accumulate substantial savings in your 401(k), things may seem ideal.

Imagine reaching retirement, having paid off all your debts, accumulated savings, and feeling secure with your Social Security and 401(k). Everything seems perfect until you face a major health issue, such as a cancer diagnosis, at 66 or 67. Despite having substantial retirement funds, you might find that your health insurance doesn’t cover all your needs.

You might even discover that the treatments covered by your insurance don’t align with the alternatives you believe are best for you. In such cases, you could be left with inadequate coverage or restricted options for care, highlighting the limitations of solely relying on insurance and retirement savings.

If you face a serious health issue, you might have to choose between drawing from your 401(k), which means paying taxes and potentially liquidating a significant portion of your retirement funds, or opting for treatments covered by insurance that might not be ideal. Additionally, consider what happens if you need long-term care or become disabled.

How will these needs impact your retirement savings? Will you have enough to cover your expenses, or will you have to cut back on your standard of living or rely on your family? The concept of self-insurance in retirement often overlooks these critical variables and may not fully account for unforeseen expenses and challenges.

While disability insurance and other measures are often recommended, when you compare the costs of whole life insurance to term insurance with the additional expense of long-term care insurance, it can be substantial. Long-term care insurance, in particular, is often very costly, and this added expense needs to be factored into your overall financial planning.

It's crucial to consider your long-term goals and recognize that self-insurance is not a viable strategy. As we explore this topic, I will challenge the notion of self-insurance and emphasize that you either have insurance or you don't. Without it, you are exposed to significant risks.

The biggest misunderstanding about whole life insurance often lies in its role compared to term insurance. Term insurance primarily provides death benefit coverage, whereas whole life insurance offers much more. It encompasses additional features beyond just death benefit protection.

By the end of this article, I hope to provide a clearer understanding of whole life insurance, which may shift your perspective on its value and benefits.

Rule 1 - for Financial Success "is your money in alignment with your values and beliefs"

I have three key rules regarding your money and insurance. These rules apply to all aspects of your personal finances and are designed to help you achieve your goals and objectives in a predictable and reliable manner.

Ultimately, you should be able to achieve your goals on a guaranteed basis, with the only variable being your willingness and ability to follow these rules. The first rule is to put yourself at the center of your own success. But what does that mean?

I firmly believe that every financial decision and strategy you implement should consistently bring you closer to your goals and objectives. This belief is central to the principles we follow at LIFE180.

My question to you is: Are your current financial actions effectively moving you toward your goals? Many people invest in 401(k)s, IRAs, Roth accounts, and rental properties, but have you really stopped to reverse engineer your plan? Have you clearly defined your end goals and objectives?

I would argue that instead of focusing solely on retirement, you should consider financial freedom and independence. Think about cash flow planning and how it will help you achieve true freedom and independence. By shifting your mindset from traditional retirement to a broader perspective on financial freedom, you can better realize and overcome the limitations of your current financial strategies.

Many people focus on working until they’re 65 and then retiring, without considering a more immediate goal of achieving a specific monthly income, such as $10,000 a month. The key is to evaluate whether your current financial strategies align with this goal and whether your actions are effectively moving you toward it. Ask yourself: Am I on track to reach this $10,000 monthly income level? And if not, what adjustments can I make to align my efforts with this objective?

I recently watched a movie that emphasized the power of "what if." What if you could achieve your goal of $10,000 a month in passive income and replace your current income by age 45 or 50 instead of waiting until 65? Imagine how that could transform your life and your ability to contribute to your family, community, church, and legacy.

To me, that’s everything. So, ask yourself: Is your money aligned with your values and beliefs? Are you putting yourself at the center of your own success? That's my question to you and that's my first rule.

Rule 2 - Insure Your Entire Human Life Value (HLV)

The second rule is to ensure your entire human life value. Let me explain what human life value means. The insurance company evaluates various aspects of your life, such as your age, family, assets, debts, and income. For example, they might assess someone like me, Chris, a 43-year-old with three kids, a spouse, a mortgage, and other assets and debts. They would calculate my annual income, say $200,000, and use this information to determine my human life value.

The insurance company will assess your situation and determine your human life value based on various factors. For example, if I'm 43 with three kids, they might estimate $200,000 per child for college, totaling $600,000. They will also consider the $200,000 per year needed to support my spouse, who isn’t working, to maintain our current lifestyle. Instead of focusing on paying off my mortgage or other debts, the focus is on ensuring the necessary cash flow to cover these needs.

Everyone’s situation is unique. For example, if you have $200,000 in passive cash flow and it meets your needs, you might argue that you don't need additional insurance. However, once you truly understand and align with this perspective, you may find that even if you don't need insurance at that moment, you still want it. This is because it allows you to maximize your human life value and fully protect your financial situation.

Let’s focus on the example of a 43-year-old earning $200,000 per year. The insurance company would typically calculate the human life value (HLV) by applying a multiplier to your annual income. In this case, they might use a factor of 30 times your income. So, 30 times $200,000 equals $6 million. This means that if you had no insurance, the company would assess your human life value to be $6 million. This is a baseline estimate; other factors could potentially allow for a higher coverage amount.

If you’re starting from scratch with no insurance and your human life value is estimated at $6 million, it's crucial to reflect on what you want to be remembered for. Consider the legacy you wish to leave and how you want to impact your family and future generations. This introspection can help guide your decisions on the amount and type of insurance coverage you may need.

Dave Ramsey might suggest that with your kids eventually finishing college and your mortgage and other debts paid off, your wife might need only $50,000 to $60,000 per year to cover living expenses. He might argue that this is sufficient for her needs, especially once all other financial obligations are met. In this view, you may not require extensive insurance coverage beyond what is necessary to cover these basics.

I’d counter that while Dave Ramsey's approach might suggest a more minimal coverage, my perspective is different. As a husband and someone committed to providing for my family, I believe it's my responsibility to ensure that my family's needs are fully met, even in the event of a tragedy.

I want to guarantee that my wife isn't forced to make life decisions based on financial need. If she remarries, I want it to be for love, not financial necessity. The idea of her having to consider such decisions under financial pressure is unsettling, and that's why I advocate for comprehensive coverage.

Dave Ramsey might argue that with a million dollars in insurance on top of your existing coverage, and considering your financial needs are met, you wouldn’t require more than $2.6 million in total coverage. His approach would suggest that this amount is sufficient to address all your family’s needs, given the income and obligations you’ve described.

The issue with that approach is it leaves you $3.4 million short of your total human life value. This shortfall represents a significant opportunity for creating a real legacy. Maximizing your human life value means striving to leave the next generation in a better position than you were given. It's not just about covering immediate needs; it’s about fulfilling a broader responsibility to improve the future for your family and future generations.

Focusing on maximizing your human life value encourages you to fully embrace and live up to your greatest potential. Human nature often leads us to become comfortable once we've paid off debts and secured our immediate needs, which can result in a sense of complacency.

While that might seem like you’ve done enough by taking care of your kids, mortgage, and savings, this approach can reflect a scarcity mindset. It’s about more than just meeting the bare minimum; it's about considering how you can optimize your life to make the most significant positive impact, should you live a long, healthy, and productive life.

To evaluate your situation, start by assessing your available cash flow. Determine how much free and clear cash flow you can save each month or year, depending on how your income is received. For entrepreneurs and real estate investors, this might be on an annual basis. Understanding your cash flow helps in planning how to address and maximize your human life value effectively.

To meet your human life value, break down your available cash flow and allocate it strategically. This involves splitting your cash flow between term insurance and whole life insurance. By combining these two types of coverage, you can work towards fully addressing your human life value and securing your financial goals.

Use Whole Life Insurance First Then Use Convertible Term To Complete Your HLV

Here's the approach: First, maximize your investment in whole life insurance. This is crucial because whole life policies offer substantial benefits, such as cash accumulation, efficient cash value growth, and valuable living benefits. We'll design the policy to optimize these features.

Next, to cover the remaining gap and achieve your total human life value, use term insurance. Term insurance will be the most cost-effective way to fill in this gap, providing additional coverage while keeping expenses down. By blending whole life and term insurance, you effectively address your human life value comprehensively and efficiently.

I’m a strong advocate for term insurance, but with an important caveat: always opt for convertible term insurance. I’ve seen many cases where people had term policies for 10, 15, or even 20 years, only to have their coverage expire just as they were diagnosed with a serious illness like cancer. The timing of the policy’s expiration can be devastating, both emotionally and financially. Convertible term insurance provides a safeguard, allowing you to transition to a permanent policy without needing to requalify, which can be crucial if health issues arise.

This is why I’m so dedicated to my work, I've seen the emotional and financial toll on people who’ve faced issues with non-convertible term insurance. When you buy the cheapest term insurance, it often lacks the crucial option to convert it later.

Convertible term insurance, on the other hand, offers a vital advantage: it allows you to lock in your human life value and provides a contractual right to convert the policy to whole life insurance without undergoing further underwriting. This feature is essential for protecting your financial security, especially if your health changes during the term period.

With convertible term insurance, you're not only covered during the policy period, but you also have the option to convert it to a permanent policy if you face health issues. This ensures that your full human life value is secured for the long term, regardless of changes in your health. Ultimately, a well-designed plan should ensure that your financial goals and intentions are met, whether or not you're around to see them realized.

When you truly grasp the importance of convertible term insurance and how it fits into your overall financial strategy, it all starts to make sense and align. Understanding these concepts helps you create a plan that not only protects you and your loved ones but also ensures that your financial goals are achieved, no matter what happens.

Whole Life Insurance Is NOT Just Death Insurance

Now, let's delve into the concept that life insurance is more than just death insurance. When we talk about directing our cash flow into whole life insurance and using term insurance to cover the gap, we're not just considering the death benefit. Whole life insurance offers much more: it provides living benefits, cash value accumulation, and tax advantages.

Let’s consider a scenario to illustrate the benefits of combining whole life and term insurance. Imagine someone with a human life value of $100,000 per year. If they pay $10,000 annually in premiums, their human life value would be $3,000,000, calculated at 30 times their annual income. Here’s how it breaks down:

For the $10,000 annual premium, you would see approximately $7,000 in net cash value right away. By year 10, with $100,000 total premium payments, the cash value would be around $104,000, effectively covering one year’s income for emergencies. Ideally, you’d aim to build up to two years of income for a more robust safety net.

With a human life value of $3,000,000, the whole life insurance alone wouldn’t cover the full amount. To bridge this gap, you would need $2,800,000 in term insurance. Importantly, opting for convertible term insurance ensures that if your health changes, you can convert this term policy into a whole life policy without additional underwriting, thereby securing coverage for your full human life value.

This strategy allows you to benefit from the cash accumulation and living benefits of whole life insurance while using term insurance to cover the gap at a lower cost.

By year 15, the cash value of your whole life insurance policy could potentially cover two years' worth of income, providing you with both an emergency fund and an opportunity fund. This effectively transforms your whole life insurance policy into a high-performance savings vehicle. It offers the liquidity of a savings account and the return potential similar to bonds, all while delivering additional benefits.

Throughout retirement, you can also leverage death benefit riders to enhance your coverage. This strategy ensures protection in the event of any unforeseen circumstances and provides a safeguard against inflation.

Essentially, this approach not only secures your human life value but also maximizes the benefits of whole life insurance while using term insurance to fill any gaps. As Dave Ramsey often emphasizes, starting with a solid emergency fund is a crucial first step in your financial planning journey.

This strategy provides one of the most efficient emergency funds available. By ensuring each dollar serves multiple purposes, you're not only addressing life insurance needs but also enhancing savings, covering long-term care, and securing catastrophic medical protection.

Critics might argue that whole life insurance primarily benefits the insurance company, but consider this: if you invest $10,000 and still retain nearly $7,000 in liquidity, you’re essentially paying just $3,000 for extensive long-term benefits. From a net perspective, you come out ahead starting in year 10, making this approach a clear and compelling choice once you fully grasp its advantages.

While I understand Dave Ramsey’s skepticism toward whole life insurance, it’s important to recognize that his viewpoint often stems from a broader issue: many life insurance agents lack a deep understanding of how to effectively design these policies.

Frequently, what should be a significant asset, like the $6,700 in cash value, ends up as a mere zero due to poor policy design. This underscores the importance of proper planning and knowledgeable guidance to truly leverage the benefits of whole life insurance.

A major reason for skepticism toward whole life insurance is that many agents fail to design policies correctly. They often neglect to incorporate Paid-Up Additions (PUAs), which are crucial for maximizing the policy's efficiency. Without these additions, the death benefit, which might start at $180,000, remains static and does not grow. In contrast, effective policy design includes these additions to ensure that the policy evolves and becomes more efficient over time.

Do Banks Keep The Cash Value In WL When You Die?

Critics often argue that with whole life insurance, you don’t keep the cash value, the insurance company retains it while you only receive the death benefit. However, let’s clarify this with an example.

Suppose you have a policy with a death benefit of $180,000 and a cash value of $7,000. If the policy grows to $104,000 in cash value, the total death benefit would be $349,000. In this scenario, upon death, the insurance company keeps the $104,000 cash value, but you still receive $349,000 minus $104,000, which equals $245,000 in death benefit. Therefore, you end up with a greater death benefit than what you initially had. In reality, you end up with about $75,000 more in death benefit than when you started.

Although the insurance company retains the cash value, you receive a greater death benefit overall. The reason they keep the cash value is to ensure that you receive the full $349,000 as a tax-free benefit. If the cash value were distributed separately, you would get $245,000 as a death benefit plus $104,000 in cash value, but the latter could be subject to taxes, similar to a savings account. This structure maximizes your benefit and minimizes tax implications.

When considering long-term financial strategies, it's crucial to address both short-term and long-term needs. Many people in their 30s don't yet envision what their lives will look like in their 60s. By using whole life insurance effectively, you not only meet immediate liquidity and emergency fund needs but also create a structured, forced savings mechanism. This approach ensures that you’re preparing for future financial requirements, whether or not you’re consciously planning for them.

I often remind people that you cannot solve long-term problems with short-term thinking. The buy term and invest the difference strategy exemplifies short-term thinking. While this approach focuses on investing for retirement, it overlooks the broader spectrum of issues you'll inevitably face throughout your life. It doesn't adequately address or mitigate the risks that could arise, leaving you exposed to potential financial uncertainties. Understanding this distinction is crucial for effective long-term financial planning.

Living Benefits In Whole Life Insurance

I want to reiterate the importance of living benefits, also known as Accelerated Death Benefit Riders (ABRs). These riders allow you to access a portion of your death benefit tax-free if you become critically, chronically, or terminally ill. This provides you with valuable financial resources that can be used for any purpose while you're still alive, giving you greater flexibility and security in times of serious illness.

I've had clients diagnosed with pancreatic cancer who, facing such a difficult situation, chose to use their living benefits to create meaningful experiences for their loved ones. One client decided to take his family on a two-month trip around the world, fully embracing the time he had left. By accessing his benefits, he was able to enjoy this precious time with his family and still leave behind a financial legacy.

I’ve also shared the story of my father-in-law, who faced a similarly devastating diagnosis. He was diagnosed with pancreatic cancer, with a seven-and-a-half-centimeter tumor on his pancreas that had spread to his liver. The prognosis was terminal, and the doctors estimated he had only three months to live. They suggested that the best available radiation and chemotherapy might extend his life to a year, but with a significantly reduced quality of life.

Remarkably, two years later, he’s still alive and playing golf four days a week. This turnaround was possible because he had access to the necessary capital to afford alternative treatments, rather than relying solely on traditional medical advice. I’m not suggesting this is the outcome for everyone, but having control over your financial resources can make a significant difference.

When considering all the variables that life presents, it's crucial to think long-term, not just about the immediate needs while raising a young family. As you navigate these years, focusing on how to make each dollar stretch is important, but don’t lose sight of the future. Life will continue after your children have left the nest. You’ll have grandchildren and will need to consider how to leave a lasting legacy and begin building it now.

Start thinking about your long-term goals now. If you approach it from this perspective, you’ll realize that relying on self-insurance or assuming you won’t need to leave anything to your children isn't the best strategy. Instead, you’ll likely want to leave a meaningful legacy for your kids. Planning for this future ensures that you can provide them with substantial support and make a lasting impact on their lives.

That’s my mindset, and if it resonates with you, consider this: I’m not suggesting that you must leave everything to your children. Instead, think about locking in your human life value, whether it’s six million, three million, or whatever amount is appropriate for you. Set up a trust as the beneficiary, appoint a trustee, and establish rules to manage your legacy. This approach allows you to continue guiding and managing your wealth and legacy even beyond your lifetime.

We also have excellent relationships with estate planners, trust attorneys, and other professionals who can help set up these arrangements for you. If you’re interested, I’d be happy to make an introduction to these experts.

Clarity Call

Hopefully, this article has clarified the confusion surrounding the "buy term and invest the difference" strategy and provided insight into what might be best for your unique situation. If you found this information valuable, please share this article with others who might benefit from it.

Till next time, have a blessed, inspirational day.