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!"#$%&'()*+',%*-(./01(2%*3/0241.'()*5&01&%)'%.6!
74"8%*+',%*9%0./.*:;/<*=%0#>*-(?%.&*&4%*@',,%0%(2%A!
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By
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Jordon!Hastin
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Submitted!in!partial!fulfil
lme
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of!the!requirements!fo
r
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Honors!in!the!Department!of!Econo
m
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UNION!COLLEGE!
June,!
2013
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HASTINGS,!JORDON! Competing!Life!Insurance!Purchasing!Strategies:! Whole!Life!Versus!“Buy!
Term,!Invest!the!Difference”.!!Department!of!Economics,!June!2013!
!
ADVISOR:! Professor!Tomas!Dvorak!
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Financial!experts!have!been!conflicted!for!decades!in!regards!to!the!most!effective!
strategy!for!purchasing!life! insu rance.! Specif ically,!is!buying!an!expensive!whole!life!insurance!
policy!the!most!appropriate!solution,!or!is!purchasing!cheap!term!insurance!and!investing!the!
rest!of!the!money!in!a!side!fund!more!effective?! These!strategies!were!compared!side!by!sid e!
across!a!variety!of!scenarios!with!varying!account!allocations,!time!horizons!and!tax!treatments.!
Based!on!our!results,!buying!term!and!investing!the!difference!is!the!most!appropriate!solution!
across!the!majority!of!the!scenarios!that!were!tested.! This!was!due!mainly!to!the!higher!rates!
of!return!that!are!experienced!in!the!market!compared!to!the!modest!growth!of!whole!life
!
!
policies.!!Ultimately,!however,!it!was!still!difficult!to!claim!that!buying!term!and!investing!the!
difference!was!the!superior!solution!overall,!as!some!experts!claim.!!The!whole!life!strategy!has!
many!advantages,!especially!when!it!comes!to!leaving!bequests!which,!as!past!research!has!
indicated,!are!a!driving!force!behind!demand!for!life!insu rance.!!Whole!life!insurance!is!a!safe,!
tax!efficient!place!to!save!money!that!complements!many!of!the!side!funds!utilized!in!the!“buy!
term,!invest!the!difference”!strategy.! Many!of!these!accounts!have!contribution!limits,!so!
individuals!who!max!them!out!would!benefit!greatly!from!allocati ng!some!additional!savings!
toward!a!whole!life!insurance!policy.!
ii
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List!of!Tables!and!Figures! iii!
!
Introduction!
1
!
!
Understanding!the!Difference!Between!Term!and!Whole!Life!Insurance!
4
!
Term!Life!Insurance!
Whole!Life!Insurance!
!
Previous!Works!on!Life!Insurance!
12
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Price!Elasticity!
Demand!Determinants!
!
Buy!Term,!Invest!the!Difference!Side!Fund!Options!
14
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Saving!in!a!Tax]deferred!Account!(401K!or!Traditional!IRA)!
Saving!in!a!Taxable!Account!(Brokerage)!
Saving!in!a!Tax]free!Account!(Roth!401K,!Roth!IRA) !
!
Strategy!Parameters!
21
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Whole!Life!Strategy!
Life!Insurance!Policy!
Death!
Benef
i
t
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Living!
Bene
fit!
Buy!Term,!Invest!the!Difference!Strategy!
Life!Insurance!Policy!
Death!
Benef
i
t!
Living!
Bene
fit!
Choosing!a!“Winn
er
”!
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Results!and!Analysis!of!Strategy!Testing!
27
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Tax]deferred!Account!vs.!Whole!Life!
Taxable!Account!vs.!Whole!Life!
Tax]free!Account!vs.!W hole!Life!
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Conclusions!
40
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References!
44
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iii
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Figure!1:!Cost!of!Term!versus!Whole!Life!Insurance!
8
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Table!1:!Term!+!Tax]deferred!Account!versus!Whole!Life!
28
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Figure!2:!Years!20]40!BTID!versus!Whole!Life!Death!Benefit!
29
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Table!2:! Term!+!Taxable!Account!versus!Whole!Life!
32
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Figure!3:!Liquidity!Comparison!of!Taxable!Account!and!Whole!Life!CSV!
34
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Table!3:! Term!+!Tax]free!Account!versus!Whole!Life!
36
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Figure!4:!BTID!+!Tax]free!vs.!Whole!L ife!
38
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1
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-J* -(&0"K/2&'"(!
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In!trying!economic!times!such!as!these,!the!subject!of!pers onal!finance!is!p laced!at!the!
forefront!of!most!people’s!minds.! When!putting!together!a!sound!financial!plan!for!yourself!
and!your!family,!it!is!important!to!first!build!a!stro ng!foundation!based!on!managing!risks.! One!
of!the!most!critical!components!of!this!foundation!is!life!insurance,!an d!it!is!also!one!of!the!
most!confusing!and!controversial.! Dave!Ramsey!has!written!a!number!of!books!on!personal!
finance,!two!of!which!landed!on!the!New!York!Times!bestseller!list,!and!is!what!some!consider!a!
financial!guru.!!Ramsey!states!that!“whole!life!insurance!is!one!of!the!worst!financial!products!
available”!in!the!article!The$Truth$About$Life$Insurance$that!he!wrote!for!his!personal!webpage.!
He!is!not!alone!in!this!view,!as!many!believe!that!purchasing!a!basic!term!insurance!policy!and!
investing!the!mon ey!you!would!save!(due!to!the!much!lower!premiums!compared!to!a!whole!
life!policy!of!equal!value)!in!mutual!funds!and!the!like.!!“Gurus”!like!Dave!Ramsey,!however,!are
!
!
offering!advice!to!the!masses,!so!who!is!to!say!that!a!whole!life!policy!may!not!be!a!great!
investment!for!someone!and!their!family?!
!
Many!people!do!not!like!this!kind!of!“one!size!fits!all”!approach!that!is!often!
implemented!by!these!financiers.! It!is!for!this!reason!that!people!may!be!drawn!to!sitting!down!
with!representatives!of!insurance!companies!to!develop!a!more!personalized!plan.! These!
representatives!may!be!big!proponents!of!whole!life!policies!and!would!likely!point!out!that!the!
policy!cannot!be!outlived!(whereas!term!can)!and!that!the!cash!value!returns!are!guaranteed!at!
a!minimum!rate!based!on!company!performance.! Stoughton!and!Zechner!(2011)!provide!
evidence!to!suggest!that!utilizing!an!advisor!actually!increases!total!welfare!between!the!
advisor!and!the!consumer!even!in!the!presence!of!kickbacks.! However,!the!presence!of!these
!
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kickbacks!is!exactly!what!drives!many!away!from!using!advisors!as!pointed!out!by!Cooper!and!
Frank!(2005)!when!they!surveyed!CLUs!and!ChFCs.!!They!found!that!kickbacks!provide!incentive!
to!push!more!expensive!products,!whole!life!being!one!of!them,!so!that!they!will!be!paid!more!
rather!than!focusing!on!their!fiduciary!duties.!
!
We!are!left!with!a!dilemma!pitting!experts!like!Dave!Ramsey!against!many!personal!
financial!advisors!on!whether!or!not!whole!life!is!an!effective!strategy.! The!advisors!are!faced!
with!the!criticism!that!they!may!be!acting!selfishly!because!they!have!a!lot!to!gain!from!
consumers!purchasing!whole!life!due!to!its!large!price!tag,!but!they!are!also!the!ones!offerin
g!
the!personalized!approach!and!we!are!supposed!to!trust!that!they!would!not!suggest!it!if!it!was!
not!the!right!fit.!!The!“gurus”!do!not!directly!benefit!f rom!the!actual!purchases!of!the!
consumers,!so!it!is!safe!to!assume!that!they!are!offering!unbiased!advice!since!they!have!no!
incentive!to!do!otherwise.!!However,!they!aren’t!actually!sitting!down!and!meeting!with!
individuals!to!find!out!what!is!truly!in!their!best!interest.!To!say!that!whole!life!is!a!terrible!
investment!may!be!true!for!some,!but!the!opposite!may!be!true!for!others.! In!fact ,!renowned!
IRA!expert!Ed!Slott,!who!also!happens!to!be!a!practicing!CPA,!advocates!the!use!of!whole!life!
insurance!as!an!essential !piece!to!any!retirement!plan!in!his!book!“The$Retirement$Savings$Time$
Bomb…and$How$to$Defuse$It”.! The!Northwestern!Mutual!Life!Insurance!Company!recently!
released!(2012)!a!pamphlet!entitled!“Buy$Term,$Invest$the$Difference?”$that!displayed!the!after]!
tax!rate!of!returns!required!in!a!s ide!fund!to!equal!the!cash!value!of!their!own!whole!life!
insurance!policies!over!the!course!of!20!years!(1992] 2011)!and!30!years!(1982]2011).! The!
company!claimed!that!a!7.60%!and!an!8.66%!after]tax!rate!of!return!was!required!to!equal!the!
whole!life!policy!for!the!20]year!and!30]year!periods!respectively.! The!pamphlet!also!displayed!
3
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how!various!asset!classes!(ranging!from!low!r isk!Treasury!Bills!to!high!risk!common!stocks)!were!
unable!to!match!those!after]tax!rates!of!return!over!those!same!time!periods.!!This!evidence!
suggests!that,!at!least!within!the!past!30!years,!saving!money!outside!of!Northwestern!Mutual!
whole!life!policies!yielded!less!favorable!after]tax!returns!which!heavily!contests!the!claims!
made!by!whole!life!opponents.!
!
The!life!insurance!market!lacks!the!transparency!o f!many!other!consumer!mar kets!and!
this!can!make!purchasing!policies!a!very!confusing!process.! Not!to!mention!the!fact!that!
financial!experts!cannot!seem!to!agree!on!a!particular!strategy!for!purchasing!life!insurance.! In!
hopes!of!shedding!some!light!on!the!matter,!this!paper!will!take!an!unbiased!approach!to!
compare!the!performance!of!alternative!life!insurance!strategies.! One!strategy!is!to!purchase!a!
whole!life!insurance!policy!and!let!the!cash!valu e!accumulate!over!time,!a!strategy!someone!
like!Ed!Slott!would!recommend!as!a!component!of!a!retirement!plan.!!The!other!strategy!is! a
!
!
favorite!of!Dave!Ramsey,!and!that!is!to!purchase!a!term!insurance!policy!and!take!
t
h
e!
diff
ere
n
ce
!
in!premium!between!the!term!and!a!whole!life!of!equal!value!and!invest!it!in!a!side!fund!in!the!
market.! This!strategy!is!commonly!referred!to!as!“buy!term,!invest!the!difference”!(BTID).!!
Rather!than!trying!to!decipher!technical!jargon!and!complicated!formulas,!this!perform ance!
comparison!highlights!the!strengths!and!weaknesses!of!each!strategy!and!offers!a!very!simple!
way!to!determine!which!strategy!may!be!most!appropriate!for!you,!the!consumer.!
4
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--J* I(K%0.&1(K'()*&4%*@',,%0%(2%.*;%&L%%(*=%0#*1(K *74"8%*+',%!
-(./01(2%!
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Term%Life%Insurance:!
!
Before!evaluating!the!two!strategies,!it!is!important!to!understand!the!differences!
between!the!two!life!insurance!policies.! Term!life!insurance,!as!the!name!suggests,!provides!
coverage!for!a!specified!term!and!expires!when!that!term!is!up.!!Imagine!that!a!35!year!old!
married!man!in!good!health!has!determined!that!he!needs!$500,000!in!life!insurance.! If!h
e!
were
!to!choose!to!fulfill!this!need!through!term!insurance!he!would!have!two!options.! The!first!
would!be!to!purchase!the!most!basic!term!policy!where!the!term!only!lasts!for!one!year.! At!the!
end!of!that!year,!this!man!would!need!to!renew!the!policy!in!order!to!continue!being!insured.!
This!process!is!not!a!si mple!as!it!may!sound.! The!man!must!first!qualify!for!life!insurance,!i.e.!be
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deemed!insurable.! This!is!based!primarily!on!his!health,!both!at!the!present!time!as!well!as!in!
the!past.!!If!he!had!a!terminal!illness!such!as!cancer,!for!example,!he!would!be!deemed!
uninsurable!because!he!does!not!meet!the!health!qualifications!due!to!the!fact!that!the!
chances!of!him!dying!during!the!term!are!incredibly!high!and!the!insurance!provider!is!unwilling
!
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to!take!that!risk.! By!utilizing!one!year!term!policies,!this!man!would!have!to!provide!proof!of!
insurability!each!year!in!order!to!retain!the!coverage.! This!means!that!if!during!one!year!he!
finds!out!that!h e!has!cancer,!but!does!not!pass!away!prior!to!the!expiration!of!the!insurance!at!
the!end!of!that!year,!he!will!not!be!able!to!renew!the!policy!and!will!no!longer!be!able!to!
purchase!life!insurance.! In!order!to!avoid!providing!proof!of!insurability!each!year!and!making!
the!renewal!process!much!simpler,!he!could!choose!to!purchase!an!an nu ally!renewable!term!
(ART)!policy.!!This!operates!nearly!the!same!as!a!normal!one!year!term!policy!but!instead!of!
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requiring!proof!of!insurability!at!the!en d !of!each!year,!thes e!policies!guarantee!insurability!
based!on!the!information!they!receive!upon!the!initial!purchase.! T his!guarantee!can!cover!
periods!from!10,!20!or!30!years!and!in!some!cases!(depending!on!the!company)!up!to!age!80!or!
even!95.! That!way,!this!man!would!not!be!at!risk!of!losing!his!coverage!even!if!he!develops!an!
illness!that!would!normally!deem!him!uninsurable.!
!
It!is!also!important!to!understand!how!these!one!year!term!insu rance!and!ART!policies!
are!paid!for.! The!costs!of!the!policies!are!paid!for!through!premium!payments,!which!can!be!
periodically!paid!for!monthly,!quarterly,!semi]annually!or!annually.!!In!this!case,!since!th e!
term!
is!only!one!year!long,!an!annual!payment!would!be!the!entire!cost!of!the!policy!and!this!cost!
gets!reevaluated!each!time!a!renewal!is!made.!!The!premiums!are!calculated!based!on!actuarial!
mortality!tables,!basically!meaning!that!the!probability!of!the!proposed!insured!dying!during!
the!term!is!allocated!a!price. !!Let’s!take!the!same!married!man!from!before!and!compare!him!to
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a!man!who!is!10!years!older!and!smokes!cigarettes!and!everything!else!is!held!constant.! The!
married!man!is!35!years!old!compared!to!the!other!man!being!45,!meaning!that!the!45!year!old!
man!has!a!higher!probability!of!dying!during!the!one!year!term!simply!because!he!is!older.!
Additionally,!the!45!year!old! man!is!a!smoker!and!smoking!has!a!negative!impact!on!health,!
thus,!reducing!this!man’s!life!expectancy!and!further!increasing!his!probability!of!death!within!
the!one!year!term.!!Having!taken!all!of!this!into!account,!the!35!year!old!man!would!have!a!
much!lower!p remium!cost!for!the!same!term!insurance!policy!than!the!45!year!old!man .!
Because!of!these!factors,!one!year!term!insurance!policies!and!even !the!ART!policies!become!
more!expensive!each!year!because!the!insured!person!is!one!year!older!than!they!were!
previously.! If!a!term!policy!were!renewed!for!20!years,!that!person!would!have!paid!increasing!
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premium!costs!throughout!that!time!period.! As!a!result!of!the!constantly!increasing!premiums,!
it!stands!to!reason!that!term!insurance!becomes!t oo!expen si ve!past!a!certain!age!when!the!
insurance!companies!begin!taking!higher!risks!in!issuing!the!insurance.!
!
The!last!type!of!term!insurance!policies!are!known!as!level!term!life!insurance.!!These!
policies!provide!coverage!for!periods!of!10!to!30!years;!therefore,!there!is!no!need!to!renew!
these!policies!annually.! For!example,!a!man!purchases!a!20!year!level!term!policy!at!age!35!and!
when!he!reaches!age!55!the!coverage!will!expire.! However,!provided!he!is!able!to!establish!
proof!of!insurability!at!age!55,!he!can!renew!that!20!year!level!term!policy!and!be!guaranteed!
insurance!coverage!until!he!reaches!age!75,!for!a!higher!premium!of!course.!!The!premiums!on!
these!level!term!policies!are,!as!the!name!suggests,!set!to!a!level!amount!for!the!entirety!of!the!
term.! They!are!also!calculated!in!the!exact!same!way!as!the!one]year!term!policies!are,!the!
probability!of!dying!du ring!the!given!term.! The!reason!that!they!do!not!increase!each!year!
during!a!20]year!level!term!policy,!for!example,!is!because!the!premium!payment!is!based!on!
t
h
e
!probability!of!dying!du ri ng!a!20]year!time!period!rather!than!a!one!year!time!period.! This!
leads!to!a!much!higher!cost!than!a!one!year!term!policy!because!the!chances!of!dying!in!
20!
year
s!is!much!greater!than!the!chances!of!dying!in!one!year,!holding!all!other!things!constant.!
Imagine!that,!somehow,!two!people!were!able!to!get!term!insurance!at!the!same!
exact!
p
re
miu
m
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costs.! If!one!person!chose!to!purchase!and!ART!and!renewed!it!for!20!years!while!the!other!
person!chose!to!buy!a!20]year!level!term!policy,!they!would!be!covered!for!the!same!period!of!
time.! The!person!who!chose!the!20]year!level!policy!would!pay!higher!premiums!that!the!
person!with!the!ART!policy!for!the!first!few!years!b ecause!the!premiums!are!based!on!a!higher!
probability!of!death!at!that!point!in!time.! However,!eventually!the!ART!policy!will!
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become!more!expensive!when!the!person!ages!while!the!20]year!level!premiums!remain!at!the!
constant!level.! Basically,!the!level!term!policies!are!more!expensive!early!on,!but!
eve
n
t
ually!
en
d!
up!being!cheaper!toward!the!end!of!the!term.!
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Whole%Life%Insurance:!
!
Whole!life!insurance,!also!commonly!known!as!permanent!life!insurance,!is!much!
different!from!term!insurance!for!a!number!of!reasons.! The!most!obvious!reason!is!that,!as!the!
names!suggest,!these!policies!remain!in!force!for!the!entire!life!of!the!insured,!meaning!that!the!
policy!is!guaranteed!to!pay!out!when!the!insured!dies.!!There!is!no!n eed!for!renewal!once!a!
whole!life!policy!is!purchased!and!there!is!also!never!a!need!to!provide!any!proof!of!insurability!
in!the!future.! If!the!insured!purchased!a!whole!life!policy!three!years!ago!and!suddenly!
develops!a!terminal!illness!that!would!norma lly!render!them!uninsurable,!the!only!thing!they
!
!
need!to!do!is!continue!to!pay!the!premiums!and!they!will!not!have!to!worry!abo ut!losing!their!
insurance.! This!is!a!huge!advantage!over!term!policies!because!once!you!get!approved!once,!
you!are!locked!in!for!life!and!the!insurance!company!is!not!allowed!to!do!anything!to!change!
that!assuming!the!premiums!continue!to!be!paid.!!The!premiums!are!calculated!similarly!to!the!
way!they!are!in!level!term!p olicies.!!In!this!case,!however,!the!probability!of!dying!is!
100%!
durin
g
!
a!whole!life!policy!since!they!are!designed!to!provide!insurance!until!that!point.!!Factors!such!as!
smoking!and!other!health!related!things!still!impact!the!premium!amounts!because!if!there!is!a!
high!probability!of!dying!in!30!years,!the!company!wants!to!make!sure!that!it!
c
an!
c
o
ver
!the!costs!
of!paying!the!death!benefit!when!only!30!years]worth!of!payments!are!made.!Just!like!the!level!
terms,!the!premiums!are!more!expensive!relative!to!the!coverage!in!th e!early!stages!of!the!
policy,!but!the!fact!that!they!remai n!level!throughout!causes!that!value!to!actually!
8
!
!
be!cheaper!as!the!insured!gets!older.!!Figure!1!highlights!the!long]term!cost!effectiveness!of!the!
whole!life!level!premiu ms!compared!to!the!increasing!premiums!of!renewab le!term!insurance!
policies.!
!
F')/0%*M6* !".&*",*=%0#*?%0./.*74"8%*+',%*-(./ 01(2%!
Source:!!Altfest!(2007)!“P er so na l$F inancial!
Planni ng”!pg.!272.!
!
As!expected,!though ,!these!premiums!are!substantially!higher!than!those!of!term!policies!and!it!
is!this!difference!in!premium!that!composes!the!“invest!the!difference”!component!of!the!term!
insurance!strategy.!
!
These!high!premiums!also!serve!an other!purpose!rather!than!simply!to!purchase!death!
benefit!of!the!insurance.! Unlike!term!policies,!whole!life!also!has!a!living!benefit!known!as!cash!
surrender!value!(CSV)!that!builds!up!over!time!as!premiums!are!paid.!!Walden!(1985)!
hypothesized!that!whole!life!insurance!policies!behaved!as!an!options!package!and!that!the!
pricing!was!a!reflection!of!the!various!options.!!He!found!that,!from!dat a!based!on!the!most!
popular!policies!from!59!North!Carolina!insurers,!his!hypothesis!was!accurate!and!that!if!cash!
value!and!dividends!are!held!constant!then!prices!vary!gre atly!depending!on!policy!provisions!
and!the!insurer’s!characteristics.!!Therefore,!assumptions!must!be!made!not!only!in!terms!of!
characteristics!of!th e!insured,!but!also!th e!characteristics!of!the!policy!itself.!!It!stands!to!reason!
that!part!of!the!premium!calculation!accounts!for!the!expected!performance!of!the!company’s!
9
!
!
general!account,!which!typically!consists!of!bonds,!some!stocks,!real!estate,!etc.! Obviously,!the!
performance!in!the!future!can!only!be!estimated!so!there!is!no!way!of!knowing!what!
w
ill!
act
ually!happen.! Thus,!there!will!be!times!during!the!duration!of!the!policy!where!the!premium!
represents!an!overcharge!(the!company!p erf o rmed!better!than!was!expected)!or!an!
undercharge!(the!company!did!not!live!up!to!expectations).!
!
The!CSV!has!two!noteworthy!aspects,!the!first!being!the!tax!treatment.!When!the!CSV!
account!is!left!untouched,!there!are!no!taxes!placed!upon!it!whatsoever,!meaning!it!is!allo
we
d!
t
o!grow!tax]free.! However,!if!a!lump!sum!is!taken!from!the!CSV!account!(in!cash),!the!amount!
exceeding!the!premiums!paid!is!taxed!as!ordinary!income,!which!makes!sense!being!that!t he!
premiums!are!after]tax!dollars.!!The!second!aspect!is!that!the!insurance!companies!actually!
provide!a!guaranteed!amount!of!cash!value!for!every!whole!life!policy!that!they!issue.! Granted,!
these!values!result!from!a!miniscule!amount!of!growth!in!the!neighborhood!of!around!2%!and!it
!
!
will!not!exceed!the!amount!of!money!put!into!the!policy!until!many!years!down!the!road.!
However,!should!someone!choose!to!terminate!their!whole!life!policy,!they!would!at!least!get!a!
certain!some!of!money!back!whereas!with!term!they!would!receive!nothing!in!return.!!Again,!
term!is!much!cheaper,!so!if!the!whole!life!is!cancelled!early!on!they!would!have!still!been!better!
off!buying!term!because!even!the!amount!of!cash!they!would!receive!would!not!make!up!the!
difference!in!premium!costs.!!This!guaranteed!amount!represents!the!absolute!worst!case!
scenario!for!the!performance!of!the!CSV!component!of!the!policy,!and!much!of!that!
performance!can!be!attributed!to!the!company!issuing!the!policy.!
10
!
!
There!are!two!types!of!insurance!companies,!stock!and!mutual,!and!the!most!notable!
difference!between!them!is!the!way!they!distribute!their!earnings.!!These!earnings!payments!
are!called!dividends!and!are!somet imes!referred!to!as!refunds!because!they!are!partially!a!
result!of!the!company!overcharging!their!policyholders!because!they!ended!up!exceeding!
expectations!with!respect!to!their!general!account.! It!is!important!to!note,!however,!that!in!
order!for!a!whole!life!policyholder!to!receive!dividends!the!policy!must!be!a!participating!policy.
!
!
Non]participating!p olicies!are!not!eligible!to!receive!these!dividends!because!these!policies!
st
ate
!that!once!the!premiums!are!established,!they!can!never!change!in!any!fashion.! These!
dividends!or!refunds!can!be!used!in!a!few!different!ways.! The!policyholders!can!simply!take!
them!in!cash!each!year,!h ave!them!be!used!to!reduce!the!premium!payment!for!that!year!(
t
his!
is!why!a!non]participating!policy!does!not!receive!dividends)!or!they!can!be!used!to!purchase!
additional!insurance!through!reinvestment!into!the!policy.!!Using!the!dividends!to!purchase!
additional!insurance!not!only!results!in!an!increase!in!the!death!benefit,!but!it!is!also!a!
particularly!effective!way!to!maximize!the!CSV!account!because!a!portion!of!the!money!used!to!
purchase!the!additional!death!benefit!gets!reinvested!into!the!company’s!general!account!and!
allows!the!CSV!to!increase!by!a!greater!amount.!Strategies!for!utilizing!the!CSV!component!of!
whole!life!policies!will!be!discussed!later!on!in!this!paper.!
!
When!a!stock!company!begins!to!distribute!their!earnings,!the!first!obligation!they!must!
fulfill!is!the!need!of!the!stockholders,!since!they!are!the!“owners”!of!the!company.! Whatever!
amount!is!leftover!from!the!stockholder!compensations!can!then!be!distributed!amongst!the!
policy!holders.! Mutual!companies!do!not!have!stockholders!to!please,!so!the!“owners”!of!these!
companies!are!actually!the!policyholders.! They!are!first!in!line!to!receive!these!dividend!
11
!
!
payments!from!the!company!each!year!and!it!is!because!of!this!that!many!people!recommend!
using!a!mutual!insurer!when!purchasing!whole!life!ins urance.!!This!notion!is!supported!by!the!
research!of! Spiller!(1972)!when!he!examined!the!performan ce!of!st ock!and!mutual!companies!
in!his!paper!by!comparing!19!stock!companies!and!27!mutual!companies!in!New!York!State.!
Spiller’s!results!indicated!that!the!objectives!of!stock!companies!were!different!than!those!of!
mutual!companies!due!to!the!focus!of!pleasing!stockholders,!causin g!them!to!perform!at!
different!levels.! James!H.!Hunt,!a!life!insurance!actuary!who!has!been!in!the!business!since!
1955,!in!2001!explained!that!whole!life!policies!issued!by!mutual!companies!tend!to!be!superio r!
to!those!issued!by!other!companies,!citing!his!experience!reviewing!thousands!of!policies!over!
the!decades!of!his!career.!
12
!
!
---J* 30%?'"/.*7 "0N.*"(*+',%*-(./01 (2%!
!
Price%Elasticity:!
!
Risk!management!is!really!the!foundation!of!financial!planning!and!one!of!the!most!
critical!components!of!this!facet!is!life!insurance.! Therefore,!it!wasn’t!surprising!that!Babbel!
(2005)!found!the!price!elasticity!of!demand,!for!all !forms!of!life!insurance,!to!be!inelastic.!!He!
studied!the!costs!of!life!insurance!policies!sold!in!the!U.S.!from!1953!and!1979!across!all!
companies.! After!regressing!different!company!sales!prices!against!the!industry,!no!evidence!
was!found!to!suggest!that!consumers!“shop!around”!for!the!best!prices!or!switch!to!a!company!
with!lower!costs.! Frees!and!Sun!(2009)!took!a!slightly!different!approach!and!looked!at!the!
household!demand!for!life!insurance,!specifically!term!and!permanent!(whole!life).! Their!
research!resu lted!in!a!conclusion!that!term!and!whole!life!are!substitutes!in!terms!of!frequency!
(owning!one!or!the!other),!but!they!are!actually!complements!with!regards!to!severity!(amount!
of!insurance!coverage!purchased).! Simply!put,!if!people!are!only!concerned!with!owning!an!
insurance!policy,!then!they!are!more!likely!to!own!either!a!whole!life!policy!or!a!term!policy,!not!
both.! This!information!indicates!that!evaluating!strategies!based!on!solely!a!term!insurance!
policy!or!a!whole!life!policy!would!be!useful,!due!to!the!f act!that!it!is!common!for!households!to!
only!hold!one!or!the!other,!while!al so!alluding!to!the!plausibility!that!one!strategy!is!not!always!
dominant.!
!
Demand%Determinants:!
!
Additionally,!the!fact!that!many!households!only!hold!either!term!or!whole!life!indicates!
that!the!motives!behind!the!purch ase!of!these!policies!probably!differ.!!Inkmann!and!
Michaelides!(2010)!examined!the!United!Kingdom!insurance!market !and!found!that!household!
13
!
!
factors!of!being!married,!having!children!and!reporting!a!positive!probability!of!leaving!a!
bequest!were!all!statistically!significant!in!determining!the!purchase!of!term!life!insura nce.!
Grace!and!Lin!(2007)!and!Fischer!(1973)!investigated!th e!life!cycle!demand!for!life!insurance!
using!different!methods!but!ultimately!ended!up!with!the!same!result.! The!former!focused!on!
household!income!as!well!as!income!volatility!and!how,!over!time,!that!impacted!the!demand!
for!life!insurance!while!Fischer!ran!multiple!simulations!accounting!not!only!for!income,!but!
also!basic!wealth!and!risky!assets.! Their!results!indicate!that!the!demand!for!term!life!
insurance!is!impacted!by!income!and!that!it!tends!to!be!purchased!early!on!in!life!when!income!
is!more!volatile!while!the!demand!for!whole!life!remains!unchanged.! The!demand!for!term!
decreases!with!age!as!income!tends!to!stabilize!and!people!begin!living!off!of!their!wealth,!
however,!there!is!evidence!that!this!is!when!the!demand!for!whole!life!insurance!increases!as!
well.! Sauter,!Walliser!and!Winter!(2010)!studied!whole!life!insurance!holdings!in!Germany!
before!and!after!the!unanticipated!tax!reform!in!2000,!which!cut!the!tax!exemption!statuses!in!
half!and,!thus,!raised!taxes!on!numerous!household s. ! Based!on!the!data,!a!10 %!increase!in!
taxes!resulted!in!approximately!a!3.3%!increase!in!probability!of!whole!life!insurance!purchase!
with!a!5.2%!increase!in!households!actually!affected!by!the!reform.!!Therefore,!tax!incentives!
appear!to!be!a!significant!driving!force!behind!the!demand!for!whole!life!insurance.!
!
Thus,!evaluating!the!whole!life!insurance!strategy!versus!the!“buy!term,!invest!the!
difference”!strategy!begs!the!comparison!of!how!a!bequest!would!be!fulfilled,!what!role!
different!taxation!methods!play!and!how!different!types!of!investment!vehicles!may!impact!
these!characteristics.!
14
!
!
-9J* ;/<*=%0#>*-(?%.&*=4%*@',,%0%(2%*5'K%*F/(K*E$&'"(.!
!
The!approach!for!comparing!the!BTID!strategy!to!the!whole!life!strategy!is!relatively!
simple,!conceptually.! The!whole!life!insurance!strategy!consists!of!the!death!benefit!to!be!paid!
out!to!beneficiaries!and!a!CSV!account!that!provides!a!living!benefit!to!the!owner.! The!BTID!
strategy!consists!of!term!life!insurance!that!will!provide!a!death!benefit!to!the!beneficiaries,!but!
also!a!side!fund!where!the!difference!in!premium!between!the!term!and!the!whole!life!policy!is!
invested.! This!account!not!only!represents!the!living!benefit!to!the!owner,!but!also !is!the!other!
portion!of!what!the!beneficiaries!stand!to!receive!upon!death!of!the!insured.! When!the!term!
policies!can!no!longer!be!purchased,!this!serves!as!both!the!living!and!d eath!benefit!
simultaneously!and!is,!therefore,!a!crucial!part!of!the!BTID!strategy.! The!following!highlights!
the!features!of!the!different!types!of!investment!accounts!that!will!be!tested!in!the!BTID
!
!
strategy!and!how!they!differ!from!one!another.!
!
!
Saving%in%a%Tax>deferred%Account%(401K%or%Traditional%IRA):!
!
Retirement!vehicles!are!a!common!method!that!people!utilize!when!they!are!looking!for!
ways!to!save!money!and!accumulate!wealth!for!the!future.! An!employer]sponsored!401k!is!an!
example!of!one!of!these!vehicles!that!most!people!are!familiar!with!and!serves!as!a!great!
example!of! a! tax]deferred!investment!account.! Another!example!is!what!is!known!as!an!
individual!retirement!account,!or!IRA!for!short.!!There!are!a!couple!of!reasons!why!these!tax]!
deferred!accounts!are!attractive.! First,!these!accounts!allow!for!pre]tax!dollars!to!b
e!
c
on
t
ribu
ted
!and!deducted!from!that!person’s!taxable!income!unlike!life!insurance!
contributions,!which!are!not!tax!deductible.! This!allows!for!immediate!tax!relief!because!that
!
!
person’s!taxable!income!is!reduced!by!the!amount!of!the!contribution,!which!would!be!
15
!
!
particularly!useful!for!individuals!in!high!tax!brackets.! Contributing!money!to!a!tax]deferred!
account!gives!the!ability!to!reduce!taxable!income!by!however!much!is!chosen!to!be!
contributed,!which!is!very!useful!if!taxes!are!expected!to!be!higher!now!compared!to!later!
when!it!is!expected!th at!money!will!be!withdrawn.! Not!only!are!fewer!taxes!paid!now,!but!the!
money!that!is!contributed!is!also!allowed!to!grow!free!of!tax.! This!is!a!huge!advantage!due!to!
the!compounding!i nterest!factor.! The!money!that!is!put!into!the!tax]deferred!account!gains!
interest!the!first!year!and!if!it!is!left!in!the!account!for!another!year,!th at!principal!amount!will!
gain!interest!again!but!so!will!the!amount!gained!due!to!interest!from!that!previous!year.!
Essentially,!interest!is!earned!on!the!previous!year’s!interest,!which!is!where!the!term!
“compounding”!comes!from,!causing!the!money!to!grow!in!an!exponential!fashion.!
!
That!is!not!to!say!that!the!tax]deferred!account!does!not!have!its!limitations.!!The!most!
notable!being!that!it!is!not!a!tax]free!account;!rather,!it!is!what!is! commonly!referred!to!as!a!
tax]deferred!account.! This!simply!means!that,!although!the!contributions!and!growth!are!all!
free!from!tax,!any!withdrawals!that!are!made!from!the!account!in!the!future!are!taxed!at!the!
ordinary!income!tax!rate!at!that!point!in!time.! Imagine!that!someone!has !let!their!401k!account!
grow!untouched!for!10!years!causing!it!to!be!worth!$100,000!and!they!have!decided!to!
purchase!a!house!and!need!to!withdraw!that!money!from!the!account.! The!entire!$100,000!
amount!would!be!taxed!as!ordinary!income,!so!if!he!made!$85,000!per!year!(25%!tax!bracket)!
he!would!have!to !pay!taxes!on!$185,000!per!year!(33%!tax!bracket).!!This!can!be!particularly!
burdensome!if!the!person!has!al ready!entered!a!higher!tax!bracket!since!making!the!
contributions.! In!addition!to!this,!if!the!person!chooses!to!withdraw!funds!from!the!account!
and!they!are!younger!than!59!½!years!old,! they!also!have!to!pay!a!10%!excise!tax!on!the!entire!
16
!
!
amount!withdrawn.! Thus,!if!that!person!was!40!years !old!and!withdrew!the!$100,000!to!
purchase!a!home,!he!would!owe!$10,000!in!excise!tax!in!addition!to!the!federal!income!tax.!
The!presence!of!this!penalty!dissuades!owners!from!using!the!401k!as!a!savings!account!for!use
!
!
before!retirement,!which!is!actually!helpful!since!not!withdrawing!prior!to!age!59!½!avoids!the!
tax!but!also!maximizes!the!biggest!advantage!of!the!account!which!is!the!tax]free!growth.! Th is!
basically!means!that!money!is!illiquid!prior!to!age!59!½,!though!borrowing!from!the!plan!is!
commonly!an!option,!but!for!the!purpose!of!this!paper!these!accounts!will!be!treated!as!illiquid!
up!to!that!point.!
!
Saving%in%a%Taxable%Account%(Brokerage):!
!
An!alternative!for!saving!money!that!may!need!to!be!used!within!a!short!number!of!
years,!contrary!to!a!401k!retirement!account,!would!be!a!basic!taxable!account!like!a!bro kerage!
account.! These!are!typically!made!up!of!various!stocks,!bonds,!mutual!funds!and!the!like!that!
can!be!custom!tailored!to!the!preferences!of!the!owner,!whereas!something!like!a!401k!is!
limit
ed
!to!what!the!employer!offers.! This!means!that!if!someone!prefer s!to!take!on!additional!
risk!in!exchange!for!higher!potential!returns,!the!account!can!be!easily!allocated!with!a!higher!
percentage!of!stocks!rather!than!bonds!in!hopes!of!achieving!large!returns!over!time.! However,!
if!later!it!is!decided!that!the!volatility!associated!with!the!potential!for!high!returns!is!too!
worrisome,!the!account!can!just!as!easily!be!reallocated!and!the!percentage!of!stocks!can!be!
reduced!while!increasing!the!percentage!of!safer!assets!like!bonds!and! Treasury!Bills.!
!
The!main!difference!between!a!taxable!account!and!a!tax]deferred!is,!obviously,!based!
on!the!tax!treatment.! The!contributions!made!towards!something!like!a!brokerage!account!do!
not!have!any!impact!on!current!taxable!income!as!those!toward!a!tax]deferred!account!do.!
17
!
!
Therefore,!any!contribution!made!toward!a!brokerage!account!is!still!recognized!as!part!of!the!
taxable!income,!meaning!these!contributions!can!be!con si dered!after]tax!dollars.!!Also!unlike!
the!tax]deferred!account,!the!growth!in!a!taxable!account!does!not!go!untaxed!and!is,!
therefore,!unable!to!fully!appreciate!the!advantages!of!compounding!interest.!!The!
contributions!in!a!brokerage!account!gain!interest!based!on!the!allocated!asset!returns,!but!
these!assets!also!pay!dividends!and!they!are!taxed!as!ordinary!income!(Topic!409,!IRS.gov).! For!
example,!a!40!year]old!male!in!the!35%!tax!bracket!has!been!contributing!in to!a!brokerage!
account!with!a!return!rate!of!10%!each!year!and!a!3%!dividend!rate,!resulting!in!a!capital!gain!of!
!
7%.! This!account!would!grow!by!the!capital!gain!of!7%!each!year!p lus!65%!(as!a!result!of!the!
!
35%!tax)!of!the!3%!dividends.! Thus,!if!there!were!$100,000!in!the!account,!it!wou ld!grow!to!
!
$107,000!and!he!would!pay!the!35%!tax!on!$3,000!which!leaves!him!with!$1950,!making!the!
account!worth!$108,950!at!the!end!of!the!year.! If!this!were!a!401k,!it!would!have!been!worth!
$110,000!because!none!of!the!capital!gains!or!divi dends! are!taxed.
!
!
!
On!the!other!hand,!withdrawing!money!from!a!taxable!account!is!quite!different!from!
doing!so!from!a!tax]deferred!account.! For!one,!there!is!no!penalty!for!withdrawing!money!
based!on!how!old!you!are;!in!that!sense!it!is!much!more!liquid! th an!something!like!a!401k.! If!
someone!had!to!dip!into!their!savings!and!had!to!choose!between!withdrawing!from!their!401k!
or!brokerage!and!they!were!under!the!age!of!59!½,!the!brokerage!would!certainly!be!the!
smartest!method!both!because!the!10%!penalty!would!be!avoided!and!because!the!401k!would!
continue!to!grow!uninterrupted.! However,!the!brokerage!account!is!still!taxed!when!money!is!
withdrawn!and!it!differs!depending!on!the!conditions.!!If!$100,000!is!withdrawn,!that!whole!
amount!is!not!susceptible!to!tax!like!it!would!be!in!the!401k!scenario.!The!only!parts!that!are!
18
!
!
taxable!are!the!capital!gains!and!there!are!two!different!types,!unrealized!and!realized.!
Unrealized!capital!gains!are!represented!by!the!amount!that!the!brokerage!account!grows!and!
are!not!subject!to!taxation,!but!once!they!become!realized,!meaning!the!assets!are!sold,!
t
h
ey!
c
an!and!will!be!taxed.! The!reason!that!the!money!that!was!contributed!is!exempt!from!taxation!
upon!withdrawal!is!because!it!was!contributed!as!an!after]tax!amount.!!Assume!that!$60,000!
was!contributed!into!the!account!an d!h as!grown!to!$100,000;!this!means!that!$40,000!is!a!
result!of!capital!gains!and!it!is!only!taxable!(realized)!when!all!of!the!assets!purchased!by!th e
!
!
$60,000!contribution!are!sold.!
!
!
However,!there!are!two!dif ferent!types!of!realized!capital!gains,!short] term!and!long]!
term,!and!this!is!what!determines!the!tax!method.! A!short]term!realized!capital!gain!results!
from!an!asset!being!held!for!less!than!a!year!before!being!sold!and!these!gain s!are!taxed!at!an!
ordinary!income!rate.! A!long]term!realized!capital!gain!results!from!assets!that!have!been!held!
for!more!than!a!year!before!being!sold!and!these!are!taxed!at!15%,!meaning!that!it!is!in!
t
h
e!
b
est
!interest!of!the!owner!to!hold!assets!for!at!least!a!year,!especially!if!the!owner!is!in!a!high!
income!tax!bracket!(Topic!409,!IRS.gov).! Thus,!continuing!the!previous!scenario!where!$40,000
!
!
of!the!$100,000!are!realized!capital!gains,!we!will!assume!that!they!are!long]term!so!
withdrawing!$100,000!would!ultimately!yield!$94,000!after!taxes!($60,000!+!$40,000*(1]0.15)).!
In!order!for!this!same!person!to!withdraw!$94,000!after!taxes!from!a!401k,!assuming!a!35%!
income!tax!bracket,!they!would!have!to!withdraw!$144,615!from!the!account!as!opposed!to!
$100,000!from!the!brokerage.
!
19
!
!
Saving%in%a%Tax>free%Account%(Roth%401k,%Roth%IRA) :!
!
The!third!alternative!that!was!tested!for!investing!the!difference!in!the!BTID!strategy!
!
was!a!tax]free!account,!examples!of!which!are!Roth!401Ks!and!Roth!IRAs.!!These!accounts!differ!
from!their!traditional!counterparts!in!that!their!contributions!are!not!tax!deductible!and!the!
withdrawals!are!made!tax]free.! However,!these!accounts!do!suffer!from!the!10%!excise!tax!if!
withdrawals!are!made!prior!to!age!59!½,!so!they!are!also!considered!illiquid!up!to!that!point.!
However,!just!like!the!tax]deferred!accounts,!the!Roth!contributions!also!grow!tax]free!and!fully!
experience!the!compounding!interest!over!time.! A!p ractical!example!of!the!proper!way!to!
utilize!a!tax]free!account!would!be!a!young!professional!choosing!to!invest!their!savings!in!a
!
!
Roth!401k!(tax]free)!early!in!their!career!and!pay!taxes!up!front!because!they!exp ect!to!be!in!a!
higher!tax!bracket!by!the!time!they!plan!on!receiving!distributions!from!that!account.! On !the!
contrary,!if!a!man!is!saving!for!his!retirement!and!feels!that!his!tax!bracket!will!be!lower!than!it!
currently!is,!he!would!save!in!a!tax]deferred!account!and!pay!taxes!on!the!distributions!at!the!
lower!rates.!
!
The!only!difference!between!the!tax]free!accounts!and!the!tax]deferred!account!is!
when!the!taxation!occurs.! The!government!basically!understands!how!advantageous!these!
vehicles!are!in!terms!of!tax!efficiency!that!they!had!to!create!ways!to!limit!their!use!to!prevent!
them!from!being!abused.!!In!2013,!if!you!are!49!years!of!age!or!younger!the!maximum!amount!
of!money!that!you!can!contribute!t o !Roth!and!Traditional!IRAs!is!limited!to!$5,500!and!it!
increases!to!$6,500!if!you!are!50!years!of!age!or!older.! For!both!types!of!401Ks,!the!
contribution!limit!is!$17,500!during!2013.! Additionally,!there!is!also!a!maximum!income!limit!
for!qualification!to!contribute!to!an!IRA,!t raditional!or!Roth.!In!regard!to!both!types!of!IRAs,!if!
20
!
!
the!person!is!singl e!they!can!qualify!for!maximum!contribution!as!long!as!they!earn!less!than!
!
$110,000!per!year!(28%!tax!bracket)!and!can!qualify!for!partial!contribution!if!they!earn!less!
!
than!$125,000!per!year.! If!it!is!a!married!couple,!they!must!earn!less!than!a!combined!$173,000!
per!year!(28%!t ax!b racket)!to!qualify!for!full!contributions!and!for!partial!contributions!they!
must!earn!less!than!$183,000!per!year.! There!are!no!income!limitations!placed!on!either!type!
of!401k!plan.!
21
!
!
9J* 5&01&%)<*3101#%&%0.!
!
Whole%Life%Strategy:!
!
+',%*-(./01(2%*3"8'2<!
!
An!illustration!of!a!$500,000!participating!65!life!whole!life!policy!issued!by!
Northwestern!Mutual!Life!(NML)!in!November!of!2012!was!used!in!every!scenario!that!was!
tested.! The!term!65!life!indicates!that!the!policy!will!be!fully!paid!for!when!the!insured!reaches!
age!65,!meaning!that!premium!payments!will!no!longer!be!required!after!that!year.!!Attached!
to!this!policy!was!a!paid!up! additions!(PUA)!rider,!which!results!in!any!dividends!paid!by!NML!to!
be!used!to!purchase!addition al !insurance.!!The!premium!payment!is!valued!at!$8,870!per!year!
and!it!is!assumed!that!it!is!paid!annually.! This!was!cal culated!based!upon!the!insured!being!
assumed!to!be!a!35!year]old!non]smoking!male!in!perfect!health!and!based!on!the!fact!that!it!is!
designed!to!be!fully!funded!when!he!is!65!years!old,!meaning!30!annual!premium!payments!are!
required.!
!
It!must!be!noted!that!life!insurance!illustrations!are!in!no!way!a!guarantee!of! actual!
performance;!however,!the!predictions!are!based!on!current!economic!conditions!as!well!as!
past!company!performance.! Pritchett!(1998)!points!out!that!the!high!interest!rate!1980’s!
highlights!the!flaw!of!basing!predictions!on!current!conditions!because!the!life!insurance!
companies!had!a!hard!time!living!up!to!their!predictions!when!the!interest!rates!fell.!!It!is!
because!of!this!uncertainty!that!NML!was!chosen!t o!pro vi de!the!illustration.!!NML!is!one!of!the!
most!respected,!ranked!#1!most!admired!company!in!the!life!insurance!industry!by!Fortune!
Magazine!in!2011,!insurance!companies!in!the!industry!and!they!have!paid!dividends!every!year!
without!fail!since!1872.! The!company!also!b oasts!A++!and!Aaa!ratings!from!A.M.!Best!Company!
22
!
!
and!Moody’s!Investor!service!respectively,!both!highest!possible!ratings.! Therefore,!although!
the!predictions!are!not!guaranteed,!NML’s!reputation!leads!us!to!believe!that!they!are!done!in!
good!faith!and!are!accurate.! Mass!Mutual,!another!highly!rated!similar!to!NML,!recently!
released!(in!2012)!a!historical! dividend!study!that!showed!their!own!illustrated!policies!issued!
in!1980!side!by!side!with!h ow!those!policies!actually!p erformed!for!32!years!and!the!actual!
performance!wound!up!exceeding!expectations.!
!
@%1&4*;%(%,'&!
!
There!are!a!number!of!factors!that!were!analyzed!to!evaluate!the!performance!of!the!
whole!life!strategy,!the!first!being!the!amount!the!beneficiaries!stand!to!receive!at!certain!
points!during!the!life!of!the!policy.! The!PUA!rider!causes!the!death!benefit!on!the!policy!to!
increase!each!year!that!a!dividend!is!paid.! The!death!benefit!can!never!go!below!the!original!
$500,000!that!it!is!worth!in!the!first!year!and!once!it!increases!it!can!never!go!below!that!new!
level!if!premiums!continue!to!be!paid!in!full!and!the!policy!is!left!alone.! Therefore,!the!amount!
that!the!beneficiaries!on!the!policy!stand!to!receive!upon!death!of!the!insured!is!projected!to!
increase!each!year!that!a!dividend!is!paid.! This!death!benefit!is!funded!with!after]tax!dollars!
and!the!dividends!represent!re fund s!of!those!dollars,!allowing!it!to!grow!tax]free!for!the!
duration!of!the!policy.! The!beneficiaries!also!get!to!receive!that!death!benefit!upon!death!of!
the!insured!tax]free!as!well,!meaning!that!whatever!the!death!benefit!is!worth,!that!is!exactly!
the!amount!that!will!be!paid!to!the!beneficiaries!(Code!Sec.!101(a)).!
!
+'?'()*;%(%,'&!
!
The!living!benefit!is!the!amount!that!the!owner!is!able!to!withdraw!while!the!insured!is!
still!alive.!!The!living!benefit!of!this!policy!(the!CSV!account)!also!grows!each!year!as!premiums!
23
!
!
and!dividends!are!paid!and,!ju st!like!the!death!benefit,!can!never!decrease!at!any!point!if!it!is!
left!untouched!and!premiums!continue!to!be!paid.!!The!reason!this!is!referred!to!as!a!living!
benefit!is!because!the!beneficiaries!have!no!stake!in!the!CSV,!only!the!owner!of!the!policy!has!
access!to!that!money!while!the!insured!is!alive.! If!the!insured!dies,!NML!would!take!the!CSV!
and!pay!the!beneficiaries!whatever!amount!the!death!benefit!is!worth,!regardless!of!the!
amount!of!CSV!had!grown!to.!!There!are!a!couple!of!options!to!consider!when!withdrawing!
funds!from!the!CSV.! The!first!option,!and!the!option!that!was!used!in!all!of!our!testing,!allows!
the!owner!to!make!a!cash!withdrawal!up!to!the!total!amount!of!premiums!paid!in!t o!the!policy!
tax]free,!while!any!amount!exceeding!the!total!premiums!paid!gets!taxed!as!ordinary!income!
(tax]deferred!growth).! This!is!what!would!happen!if!someone!decided!to!terminate!their!policy,
!
!
but!withdrawing!from!the!CSV!will!not!impact!the!insurance!coverage!so!long!as!the!premiums!
keep!getting!paid,!which !we!assume!they!do!during!our!testing.!!The!other!option!allows!the!
owner!to!get!tax]free!cash!up!to!the!amount!of!CSV!by!taking!it!out!in!the!form!of!a!policy!loan!
at
!an!interest!rate!that!may!b e!higher!or!lower!than!the!market!rate.! This!is,!essentially,!
borrowing!your!own!money,!which!is!why!taxes!need!not!be!paid,!and!the!other!advantage!is!
that!you!do!not!actually!have!to!pay!the!loan!back.! The!dividends!can!be!used!to!pay!back!the!
interest!and!a!portion!of!the!death!benefit!can!be!used!to!do!this!as!well.! However,!this!can!be!
dangerous!if!the!policy!does!not!pay!back!the!loan!quick!enough!by!itself.! This!can!lead!to!
changes!in!coverage!and!can!require!the!owner!to!pay!higher!premiums!to!pay!back!the!loan.!
Due!to!the!uncertainty!associated!with!this!option,!it!would!require!professional!consultation!to!
determine!if!it!would!be!a! useful!strategy;!therefore,!it!was!not!considered!in!the!testing.!
24
!
!
Buy%Term,%Invest%the%Difference%Strategy:!
!
+',%*-(./01(2%*3"8'2<!
!
The!policies!used!for!the!BTID!strategy!were!$500,000!20]year!level!t erms!issued!by!
Northwestern!Mutual!Life!and!the!premiums!were!calculated!based!on!the!same!35!year!old!
non]smoking!male!in!perfect!health.! The!premium!came!out!to!$487!per!year,!making!the!
difference!between!that!and!the!whole!life!premium!$8,383!and!that!is!what!gets!invested!into!
the!various!side!funds.! !Since!the!term!policy!expires!after!20!years,!it! must!be!renewed!and!to!
do!this!the!same!person!needs!to!be!used.! The!only!thing!that!changed!was!his!age,!which!is!55!
for!the!second!20]year!term!policy;!because!we!assume!that!he!is!still!in!perfect!health!and!has!
not!taken!up!smoking.! This!causes!the!premium!to!increase!to!$1,757!per!year!for!the!next!20!
years,!dropping!the!difference!down!to!$7,113.! No w,!being!that!the!whole!life!policy!is!paid!up!
at!age!65!of!the!insured,!the!difference!in!premiums!need!only!be!invested!until!that!point!in!
the!term!strategy!as!well !since!the!whole!life!strategy!no!longer!requires!payments.!!Again,!we
!
!
are!assuming!that!all!p remiums!and!the!differences!are!paid!each!year!in!full.!!Once!that!20]!
year!term!expires,!however,!the!insured!man!that!the!premiums!have!been!based!upon!will!be!
75!years!old.!!No!matter!what!his!health!status,!he!is!deemed!uninsurable!purely!due!to!his!age!
and!no!longer!has!the!ability!to!purchase!any!life!insurance.!
!
@%1&4*;%(%,'&6!
!
Evaluating!the!performance!of!BTID!is!a!bit!more!complicated!than!it!is!for!whole!life.!
First,!the!amount!the!beneficiaries!receive!depends!not!only!on!the!$500,000!of!insurance!
during!the!first!two!20]year!term!policies,!but!also!on!the!value!of!the!side!fund!that!the!
premium!differences!were!invested!in.! Per!the!discussion!of!the!side!fund!options,!the!tax!
25
!
!
implications!associated!with!paying!out!the!side!fund!varies!depending!on!the!type!of!side!fund!
it!is!and!in!some!cases!the!40%!estate!tax!needed!to!be!taken!into!account!as!well.!!Therefore,!
during!the!period!when!the!term!policies!were!in!force,!the!$500,000!death!benefit!is!added!
tax]free!to!the!value!of!the!side!fund!at!that!point!in!time!with!the!appropriate!taxes!and
!
!
penalties!accounted!for.!!When!the!insured!reaches!age!75!and!no!longer!has!the!insurance,!
then!the!amount!paid!at!death!to!the!beneficiaries!is!equal!to!the!value!of!the!side!fund!with!
the!appropriate!taxes!accounted!for.! It!is!assumed!that!these!accounts!will!be!cashed!out!upon!
the!death!of!the!insured!because!the!whole!life!strategy!yields!a!cash!payment!to!the!
beneficiaries,!so!it!stands!to!reason!that!the!same!be!done!in!the!BTID!strategy.!
!
+'?'()*;%(%,'&!
!
The!living!benefit!of!the!BTID!scenario!can!be!defined!as!the!value!of!the!side!fund!in!
each!of!the!scenarios!after!accounting!for!taxes!that!would!be!required!upon!withdrawal!from!
the!specific!fund.!!However,!there!are!a!number!of!assumptions!that!must!be!made!throughout!
this!process.! First,!the!income!tax!rate!is!assumed!to!remain!constant! at!35%!throughout!the!
entire!duration!of!the!testing!(60!years!total).! Assuming!high!tax!brackets!makes!sense!because!
the!strategies!requi re!a!large!sum!of!money!be! contributed,!due!to!the!fact!that!the!policies!are!
for!$500,000,!which!would!most!likely!be!paid!by!someone!in!one!of!the!top!brackets.!!We!are!
also!assuming!that!the!contributions!are!made!at!the!beginning!of!the!year!and!that!any!
withdrawals!are!made!at!the!en d!of!the!year,!which!keeps!the!timing!consistent!and!makes!the!
values!comparable!to!each!other.! Additionally,!there!are!some!scenario]specific!assumptions!
that!will!be!discussed!upon!their!evaluat ion.!
26
!
!
Choosing%a%Winner:!
!
Both!the!death!and!living!benefits!of!each!strategy!will!be!taken!into!account!when!
determining!which!strategy!is!superior!given!a!certain!scenario.! On!the!death!benefit!side,!the!
amount!that!the!beneficiaries!stand!to!inherit,!in!cash!after!taxes,!determines!which!strategy!
“wins”.!!Basically,!if!BTID!provides!$3!mil lion!after!taxes!to!the!beneficiaries!and!whole!life!only!
pays!out!$2!million,!then!BTID!“wins”!that!category.!!Th e!same!goes!for!the!living!benefit!
category.! The!CSV!after]tax!(paid!on!the!excess!of!the!total!premium!contributions)!withdrawal!
value!and!the!after]tax!withdrawal!value!on!each!of!the!three!types!of!side!funds!will!be!
compared.! Whichever!fund!provides!more!money!to!the!owner!of!the!account!at!a!given!
period!in!time!would!“win”!that!particular!scenario.! However,!in!the!event!that!the!values!are
!
!
relatively!close!liqui dity!serves!as!the!tiebreaker!of!sorts.!!It!was!established!that!whole!life!is!
illiquid!in!the!early!stages!of!testing!(first!20!years)!and!then!relatively!liquid!thereafter!(income!
tax!paid!on!growth!only).!!The!tax] deferred!account!has!similar!liquidity!to!the!whole!life!
strategy,!while!the!taxable!account!is!more!liquid,!meaning!that!in!the!event!of!a!tie!a!taxable!
account!would!take!the!advantage.!!Obviously,!there!are!multiple!aspects!being!tested!and!this!
makes!it!difficult!to!declare!one!a!“winner”,!rather,! one!strategy!may!prove!to!have!an!overall!
advantage!in!a!certain!scenario,!but!it!may!not!“win”!each!aspect.!
27
!
!
9-J* C%./8&.*1( K*B(18<.'.*",*5&01&%)<*=%.&'() !
!
The!three!side!funds!(tax]d eferred,!taxable!and!tax]free)!were!allocated!in!
t
h
ree!
diff
ere
n
t
!
ways;!aggressive,!conservative!and!safe!by!using!historical!market!data!gathered!by!Ibbotson!
Associates!for!the!Stocks,$Bonds,$Bills$and$Inflation$Yearbook.! The!aggressively!allocated!
accounts!have!a!rate!of!return!of!9.78%!as!that!has!been!the!mean!return!of!large!company!
stocks!from!1926!–!2011.! The!conservative!allocations!have!a!rate!of!return!of!6.05%,!which!
represents!the!mean!return!for!long]term!government!bonds!from!1926!–!2011.! Finally,!the!
safely!allocated!accounts!were!assigned!a!rate!of!return!of!3.58%,!the!mean!return!of!U.S.!
Treasury!bills!from!1926!–!2011.! This!gives!u s!nine!scenarios!spread!evenly!over!three!
investment!vehicles!and!each!of!them!is!tested!over!a!60]year!period!that!is!broken!up!in
t
o!
t
h
ree
!20]year!periods.! This!enabled!the!evaluation!of!the!short,!med ium!and!long]term!
effectiveness!of!each!strategy!over!the!nine!scenarios,!providing!a!thorough!analysis!of!the!
performance!of!each!scenario.! Due!to!the!complexity!of!the!analysis!of!each!scenario,!it!is!likely!
that!both!strategies!will!come!out!on!top!at!various!points.! This!helps!illustrate!the!strengths!
and!weaknesses!of!each!strategy.!
!
Tax>deferred%Account%vs.%Whole%Life:!
!
Table!1!summarizes!th e!results!of!the!comparison!of!whole!life!to!the!BTID!strategy!that!
utilizes!a!tax]deferred!account,!such!as!a!401k,!as!a!side!fund.! The!contributions!were!made!
with!pre]tax!dollars,!so!investing!the!difference!was!a!bit!more!complex!than!it!may!seem.!
During!the!first!20]year!period,!the!level!term!annual!policy!premiums!were!$487!while!the!
whole!life’s!annual!premium!was!$8,870,!leaving!a!difference!of!$8,383!to!be!invested!for!the!
first!20!years.! However,!$8,383!represents!a!post]tax!difference,!since!whole!life!insurance!
28
!
!
premiums!are!paid!with!after]tax!dollars,!whereas!contributions!toward!a!401k!are!tax!
deductible,!resulting!in!an!equivalen t!investment!that!is!actually!larger.!!A!35%!income!tax!
bracket!is!assumed,!meaning!that!in!order!for!the!$8,383!to!be!represented!in!pre]tax!dollars!it!
must!be!divided!by!(1]0.35)!=!0.65,!resulting!in!$12,896.! This!value!represents!what!should!be!
contributed!to!the!account!for!the!first!20!years!because!it!has!the!same!impact!on!income!as!
an!$8,383!after]tax!contribution.! The!same!method!must!be!done!for!the!second!20]year!
period!when!the!p olicy!is!renewed.! The!new!term!pre mium!is!$7,113!and!when!that!is!divided!
by!0.65,!because!of!the!35%!tax!bracket,!we!are!left!with!$10,943.! This!amount!is!contributed!
toward!the!account!for!only!10!years,!instead!of!the!full!20!years,!because!at!that!point!the!
whole!life!policy!has!been!paid!up!premiums!are!no!longer!being!paid.!!From!this!point!on,!and!
beyond!the!expiration!of!the!term!policy,!the!amount!in!the!account!is!left!to!grow!as]is,!tax]!
deferred!of!course.!
!
=1O8 %*M6 * =%0#*P*=1QRK%,%00%K*B22"/(&*?%0./.*74"8%*+',%!
!
;/<*=%0#>*-(?%.&*@',,%0%(2%
!
!
BK?1(&1)%!
Return
!
Year
!
Side$Fund:
!
401k
!
Withdraw
!
Value
!
Pay$at
!
Death
!
CSV
!
Withdraw
!
Value
!
Pay$at
!
Death
!
Stocks!
9.78%
!
20!
$790,929!
$435,011!
$1,014,103!
$248,583!
$223,668!
$744,096!
!
BTID!
40!
$5,593,785!
$3,635,960!
$3,981,974!
$863,820!
$657,722!
$1,260,850!
60
!
$36,155,165!
$23,500,857!
$15,400,514!
$1,960,048!
$1,370,270!
$2,178,049!
Bonds!
6.05%
!
20!
$505,836!
$278,209!
$828,793!
$248,583!
$223,668!
$744,096!
!
BTID!
40!
$1,913,536!
$1,243,799!
$1,743,799!
$863,820!
$657,722!
$1,260,850!
60!
$6,195,128!
$4,026,833!
$3,716,100!
$1,960,048!
$1,370,270!
$2,178,049!
Bills!
3.58%
!
20!
$380,898!
$209,494!
$747,584!
$248,583!
$223,668!
$744,096!
!
Whole!Life!
40!
$959,438!
$623,634!
$1,123,634!
$863,820!
$657,722!
$1,260,850!
60!
$1,938,809!
$1,260,266!
$1,260,266!
$1,960,048!
$1,370,270!
$2,178,049!
!
!
In!the!aggressively!allocated!account,!BTID!came!out!as!a!clear!winner!at!all!points!
during!the!60]year!period ,!accumulating!millions!of!dollars!in!both!the!taxed!withdrawal!
amounts!(living!benefit)!as!well!as!the!p ayments!to!the!beneficiaries!at!death!(death!benefit).!
29
!
!
The!value!of!the!account!itself !was!worth!more!than!the!entire!death!benefit!that!whole!life!
provided!at!the!end!of!the!first!20!years,!but!the!account!took!a!huge!hit!with!respect!to!the!
35%!income!tax!and!the!10%!ex cise!tax!(due!to!being!only!55!years!old)!when!calculating!the
!
!
withdrawal!value.! This!indicates!that!the!account!is!relatively!illiquid!during!this!time!period,!
though!whole!life!is!equally!illiquid!due!to!the!fact!that!the!CSV!takes!so!long!to!exceed!the!total!
contributions.!However,!the!term!insurance!death!benefit!allowed!for!BTID!to!make!u p!the!
difference!lost!due!to!taxation!and!exceed!that!of!the!whole!life.! I!would!actually!argue!that,!in!
this!particular!scenario,!the!performance!of!the!tax]deferred!account!actually!eliminated!the!
need!for!the!renewal!of!the!20]year!term!policy!as!the!value!of!the!account!more!than!covered!
the!value!of!the!death!benefit!in!comparison!to!what!whole!life!had!to!offer,!as!Figure!2!
displays.!
!
!
!
!
!
!
!
!
!
!
!
918/%!
F')/0%*S6* T%10.*SURVU*;=-@*?.J*74"8%*+',%*@%1&4*
;%(
%,
'&
!
$6 ,000,000.00 !
!
$5 ,000,000.00 !
!
$4 ,000,000.00 !
!
$3 ,000,000.00 !
!
$2 ,000,000.00 !
!
$1 ,000,000.00 !
!
$0 .0 0 !
21!!!23!!!25!!!27!!!29!!!31!!!33!!!35!!!37!!!
39
!
T%10.
!
!
!
Pre!Tax!
Value!
!
!
After!
Tax!
Value!
!
WL!
Death!
Ben!
!
BTID !
Death!
Ben!
!
!
The!withdrawal!value!of!BTID!in!the!40
th!
year!(insured’s!age!75)!was!more!than!what!the!whole!
life!death!benefit!was!projected!to!be,!rendering!the!term!death!benefit!essentially!
unnecessary.! Although!that!value!is!nearly!$4!mi llion!and!the!pay!at!death!in!the!60
th!
year!
30
!
!
(insured’s!age!95)!is!more!than!$15!million,!it!is!worth!noting!that!these!values!were!a!result!of!
the!40%!estate!tax!in!addition!to!the!35%!income!tax!(assuming!the!beneficiaries!are!also!in!
that!tax!bracket)!because!the!overall!value!of!the!account!exceeded!the!$5!million!exemption!in
!
!
both!cases!(the!estate!tax!only!applies!to!the!amount!that!exceeds!$5!million,!not!the! value!of!
the!total!account).! If!nothing!else,!it!is!unnerving!to!see!the!value!of!the!account!cut!by!more!
than!half!when!it!is!passed!on!to!the!beneficiaries.!
!
The!story!is!similar!with!respect!to!the!conservatively!allocated!account,!though!to!a!
smaller!degree!of!magnitude!due!to!the!lower!rate!of!return.! Just!like!with!the!aggressive!
account,!the!BTID!exceeded!whole!life!in!both!living!and!death!benefits!at!each!time!period!and!
even!accumulated!enough!cash!to!fall!victim!to!the!estate!tax!in!the!60
th!
year!before!paying!out!
to!the!beneficiaries!(though!it!still!more!than!doubled!the!whole!life!death!benefit).!!The!first!
20]year!period!is!evenly!matched,!though!BTID!proves!superior!in!the!withdrawal!value!by!more!
than!$50,000.! The!death!benefit!of!the!term!policy!combined!with!this!withdrawal!value!allows!
BTID!to!narrowly!exceed!th e!payment!the!death!benefit!of!the!whole!life!strategy.! During!the!
next!20]year!period,!with!the!renewed!term !policy,!the!withdrawal!value!in!BTID!nearly!doubles!
the!withdrawal!value!of!the!whole!life!CSV!account.! However,!unlike!wit h!the!aggressive!
account,!the!withdrawal!value!does!not!exceed!the!death!benefit!of!the!whole!life,!meaning!the!
death!benefit!of!the!term!policy!was!needed!to!make!up!the!difference.! With!that!being!said,!
BTID!ends!up!paying!out!more!than!$480,000!more!to!the!beneficiaries!than!whole!life!does.!
By!the!time!the!60
th!
year!is!reached,!the!withdrawal!value!for!BTID!is!more!than!$4!million
!
!
compared!to!whole!life’s!$1.37!million.!!However,!if!the!insured!were!to!pass!away!the!
!
beneficiaries!would!only!get!$3.7!million!due!to!the!combination!of!the!35%!income!tax!and!the!
31
!
!
estate!tax!on!the!value!of!the!actual!account,!which!was!upward!of!$6!million.!!However,!the!
whole!life!strategy!o nly!provides!$2.17!million!to!th e!beneficiaries!at!that!point!so!BTID!still!has!
an!advantage,!even!after!the!taxes!on!the!account!are!considered.!
!
When!the!tax]deferred!account!is!allocated!conservatively,!with!a!return!rate!of!3.58%,!
the!whole!life!strategy!is!found!to!be!superior!over!each!of!the!criteria.! The!withdrawal!value!of!
the!whole!life!strategy!after!20!years!is!slightly!larger!than!that!of!the!BTID!strategy!and,!being!
that!each!are!equally!illiquid,!the!advantage!leans!toward!whole!life.!!Since!beneficiaries!do!not!
need!to!pay!the!10%!early!withdrawal!penalty,!the!term!death!benefit!plus!the!value!of!the!
account!taxed!at!35%!does!pay!slightly!more!than!whole!life!at!this!time!period!though!not!by!
as!much!as!the!whole!life!exceeds!BTID!in!the!living!benefit.! For!the!first!20]year!p eriod,!whole!
life!has!a!slight!advantage,!though!it!would!be!just!as!fair!to!call!it!a!tie.!!The!results!are!not!that!
close!for!the!remainder!of!the!periods!where!we!see!whole!life!actuall y!become!more!
advantageous!due!to!the!margin!between!the!living!and!death!benefits!widening!over!time.!
This!scenario!also!highlights!the!difference!between!withdrawing!funds!from!a!tax]deferred!
account!like!a!401k!and!the!whole!life!CSV.! Although!whole!life!comes !out!ahead!in!terms!of!
after]tax!consideration!each!time,!the!pre]tax!value!of!the!BTID!account!is!greater!than!the!CSV!
of!whole!life!at!every!time!period!(excluding!the!60
th!
year).! The!fact!that!whole!life!CSV!is!only!
taxed!on!the!amount!that!exceeds!the!contributions,!compared!to!the!tax]deferred!account!
being!taxed!at!face!value!including!contributions!(since!they!were!not!taxed!up!front),!pro vi des!
the!leverage!needed!to!shift!the!advantage!toward!the!whole!life!strategy.!
32
!
!
Taxable%Account%vs.%Whole%Life:!
!
Table!2!summarizes!th e!results!of!the!comparison!between!BTID!strategy!when!investing!
in!a!taxable!account!and!the!whole!lif e!strat egy. ! Again,!the!same!20]year!level!term!policies!and!
the!same!whole!life!policy!are!present!in!these!scenarios!as!well.!!The!difference!in!premiums!
between!the!whole!life!and!level!term!for!the!first!20!years!remains!$8,383,!just!like!th
e
!p
re
vious!
scenario,!and!the!difference!following!the!level!term!renewal!during!the!second!20!years!is!still!
$7,113!(wh ere!it!is!invested!for!10!years,!wh en!the!insured!reaches!age!65).! Just!
like!whole!life!premiums,!contributions!to!brokerage!and!other!taxable!accounts!are!made!with!
after]tax!dollars.!!This!means!that!the!investing!the!difference!is!as!simple!as!it!sounds,!in!that!
the!two!differences!in!premiums!are!equivalent!to!what!will!be!contributed !in!the!BTID!
strategy.!
!
!
=1O8 %*S6 * =%0#*P*=1Q1O8 %*B22"/(&*?.J* 74"8%*+',%!
!
;/<*=%0#>*-(?%.&*@',,%0%(2%
!
!
BK?1(&1)%!
Return
!
Year
!
Account:
!
Brokerage!
Withdraw
!
Value!
Pay$at
!
Death!
CSV
!
Withdraw
!
Value!
Pay$at
!
Death!
Stocks
!
9.78%!
20
!
$472,038!
$466,988!
$966,988!
$248,583!
$223,668!
$744,096!
!
BTID!
40
!
$2,966,796!
$2,935,055!
$3,435,055!
$863,820!
$657,722!
$1,260,850!
60
!
$16,872,921!
$16,692,405!
$11,943,236!
$1,960,048!
$1,370,270!
$2,178,049!
Bonds
!
6.05%!
20
!
$268,619!
$268,213!
$768,213!
$248,583!
$223,668!
$744,096!
!
BTID!
40
!
$761,085!
$759,936!
$1,259,936!
$863,820!
$657,722!
$1,260,850!
60
!
$1,766,524!
$1,763,856!
$1,763,856!
$1,960,048!
$1,370,270!
$2,178,049!
Bills
!
3.58%!
20
!
$247,584!
$219,610!
$719,610!
$248,583!
$223,668!
$744,096!
!
Whole!Life!
40
!
$623,634!
$488,939!
$988,939!
$863,820!
$657,722!
$1,260,850!
60
!
$1,260,226!
$902,723!
$902,723!
$1,960,048!
$1,370,270!
$2,178,049!
!
!
In!the!aggressively!allocated!account,!where!the!rate!of!return!is!9.78%,!BTID!had!a!clear!
advantage.! At!the!end!of!the!first!20]year!period,!the!living!benefit!(withdrawal!value)!in!the!
BTID!strategy!was!nearly!double!that!of!the!whole!life!strategy.! On!top!of!that,!it!is!clearly!more!
liquid!(as!we!have!established!that!whole!life!is!illiquid!in!the!first!20!years!and!mildly!liquid!
33
!
!
after!that)!than!whole!life,!as!indicated!by!the!rather!small!difference!between!the!full!value!of!
the!account!and!its!withdrawal!value.! This!is!due!to!the!fact!that!the!money!is!t axed!up!front!
and!the!growth!is!taxed!each!year!in!the!form!of!d ividends!being!treated!as!ordinary!income!
(dividends!in!this!case!were!assumed!to!be!2%!each!year,!resulting!in!a!capital!gain!of!7.78%!
annually).!!Unlike!the!previous!scenario,!th ere!is!also!no!excise!t ax!for!withdrawal!made!prior!to!
age!59!½.!!The!only!thing!taxed!at!withdrawal!is!the!realized!capital!gain!(resulting!from!sto cks!
being!sold),!which!is!done!so!at!15%!as!we!assume!all!stocks!to!be!held!for!more!than!a!year!
prior!to!being!sold.!!BTID!also!paid!nearly!$225,000!more!to!the!beneficiaries!than!whole!life!
was!able!to!provide.! The!values!at!the!end!of!the!40
th!
year!indicate!that!the!renewal!of!the
!
!
level!term!policy!was!unnecessary,!as!we!saw!with!the!tax]deferred!account.! The!withdrawal!
value!of!the!BTID!strategy!was!worth!nearly!$3!million!compared!to!the!whole!life!CSV!
withdrawal!value!of!$657,722.! The!death!b enefit!of!whole!life!was!just!over!$1.26!million!
compared!to!BTID’s!nearly!$3.5!million!payout,!which!is!well!over!the!$500,000!difference!the!
term!policy!is!designed!to!account!for.!!BTID!widens!the!margin!in!each!category!by!the!end!of!
the!60
th!
year,!even!with!the!presence!of!the!40%!est ate!tax.!
!
With!a!conservatively!allocated!taxable!account,!where!returns!closer!to!bo nd!rates!are!
expected!(which!is!where!the!6.05%!rate!was!calculated),!the!two!strategies!are!evenly!
matched.! BTID!does!get!the!advantage!for!the!first!20]year!period,!as!indicated!b y!the!greater!
living!and!death!benefit.! The!term!policy!was!an!essential!component!to!the!BTID!strategy!in!
providing!the!extra!funds!needed!to!exceed!the!death!benefit!of!the!whole!life!policy!during!
this!period.!!At!the!end!of!the!40
th!
year,!whole!life!edges!out!BTID!in!the!death!benefit!category
!
!
by!less!than!$1,000.! However,!the!withdrawal!value!of!the!taxable!account!exceeded!that!of!
34
!
!
the!whole!life!strategy!by!more!than!$10,000!and!combined!with!the!superior!liquidity,!BTID!
!
has!an!advantage!during!this!period!as!well.!!By!the!end!of!the!60
th!
year!the!living!benefit!of!the!
BTID!strategy!is!worth!nearly!$400,000!more!than!that!of!the!whole!life!strategy,!while!
t
h
e!
w
hole!life!provides!nearly!the!same!amount!more!in!death!benefit!than!BT ID.!!Being!that!
bequests!are!a!driving!force!behind!demand!for!life!insurance,!it!wou ld!seem!that!that!would!be!
the!more!important!category!in!this!particular!case,!especially!considering!that!the!insured!is!95!
years!old!at!that!point.!!This!gives!whole!life!the!edge!during!that!time!period,!though!BTID!
appears!to!have!th e!overall!advantage!when!using!a!conservatively!allocated!taxable!account,!
due!mainly!to!the!liquidity!and!performance!of!the!living!benefit,!which!is!illustrated!nicely!by!
Figure!3.!
!
!
!
F')/0%*W6* +'X/'K'&<*!"#$10'."(*",*=1Q1O8%*B22"/(&*1(K*74"8%!
$2 ,500,000.00 !
+',%*!59!
!
!
!
!
!
918/%!
$2 ,000,000.00
!
!
$1 ,500,000.00
!
!
$1 ,000,000.00
!
!
$5 00,000.00
!
!
Account!Value!
Withdrawal!Value!
WL!CSV!
CSV!Withdrawal!
!
$0 .0 0
!
!
1!! 5!! 9!
13
!
17
!
21
!
25
!
29
!
33
!
37
!
41
!
45
!
49
!
53
!
57
!
T%10.
!
!
!
If!the!owner!was!particularly!concerned!with!leaving!a!bequest,!which!is!not!an!unreasonable!
assumption!given!past!research;!it!would!not!necessarily!be!unfair!to!shift!the!verd ict!toward!a!
tie.!!Additionally,!it!is!important!to!note!that!the!growth!in!the!conservatively!allocated!account!
is!much!less!than!that!of!the!aggressively!all ocated!account,!even!more!so!than!the!difference!
in!return!rates!would!indicate.!!This!is!due!to!the!fact!that!a!5%!coupon!rate!was!assumed!(this
!
35
!
!
is!taxed!as!ordinary!income,!as!the!dividends!were)!which!leaves!only!a!1.05%!annual!capital!
gain!compared!to!the!7.78%!in!the!aggressive!account.! The!rest!of!the!taxation!is!handled!
equivalently,!but!the!lack!of!growth!is!a!result!of!the!difference!in!capital!gains!rather!than!the!
assumed!rates!of!return.!
!
With!a!safely!allocated!taxable!account,!the!whole!life!comes!o ut!with!a!clear!advantage.!!
The!end!of!the!20
th!
year!shows!the!living!and!death!benefits!of!whole!life!to!be!slightly!greater.!!
The!fact!that!the!taxable!account!is!mo re!liquid!during!this!period!can!make!up!for!the!small!
(roughly!$4,000)!difference!in!living!benefit!and!be!called!a!tie,!but!the!whole!life!strategy!
provides!nearly!$25,000!more!death!benefit!than!BTID,!which!gives!it!the!slight!advantage!over!
this!time!period.! From!this!point!on,!however,!whole!life!is!clearly!a!more!appropriate!strategy.!!
The!value!of!the!death!benefit!of!BTID!n ever!exceeds!$1!million,!something!that!whole!life!does!
comfortably!by!the!end!of!the!40
th!
year.! The!living!benefit!of!
BTID!is!also!still!worth!less!than!$500,000!at!the!end!of!th e!40
th!
year,!while!whole!life’s!CSV
!
!
withdrawal!value!is!upwards!of!$650,000,!and!still!is!not!worth!$1!million!by!the!end!of!the!60
th
!
!
year!when!whole!life’s!is!worth!nearly!$2!million.!!Regardless!of!the!fact!that!the!taxable!
!
account!is!considerably!more!liquid!than!the!whole!live!CSV!account,!the!margins!are!simply!too!
wide!for!that!to!make!up!the!difference!for!BTID.!!Additionally,!the!total!value!of!the!t axable!
account,!before!taxes!are!taken!at!withdrawal,!never!exceeds!the!value!of!the!whole!life!CSV!
account!at!any!point!in!time!following!the!20
th!
year.!
!
Tax>free%Account%vs.%Whole%Life:!
Table!3!summarizes!th e!scenario!in!which!BTID!involves!the!20]year!level!term!policies!
with!the!difference!invested!in!a!tax]free!account,!such!as!a!Roth!401k,!competes!with!the!
largely!the!same!as! what!was!experience!with!the!aggressively!allocated!tax]deferred!account.
!
BTID!has!the!clear!advantage!across!all!criterions!throughout!the!time!periods.! The!10%!excise
!
36
!
!
whole!life!strategy.! Again,!all!of!the!life!insurance!policies!are!the!same!as!in!the!previous!
scenarios!tested,!meaning!that!the!difference!to!be!invested!in!the!first!20!years!is!$8,383!and!
the!difference!invested!for!the!first!10!years!of!the!next!20!years!is!$7,113.! Both!whole!life!
premiums!and!contribut ions!made!towards!tax]free!accounts!are!paid!for!with!after]tax!dollars,!
just!like!the!previous!scenario!involving!the!taxable!account,!meaning!that!the!difference!in!
premium!represents!the!equivalent!amount!invested!in!the!BTID!strategy.! Unlike!the!previous!
scenario!with!the!taxable!account,!the!after]tax!contributions!toward!the!tax]free!account!grow!
free!from!taxation!and!no!taxes!are!taken!out!upon!withdrawals!after!age!59!½!.!!It!is!worth!
noting!that!due!to!the!assumption!that!income!t ax!is!constant!at!35%,!the!performance!of!the!
tax]free!account!is!very!similar!to!that!of!the!tax]deferred!account,!which!is!to!be!expected,!
though!the!slight!differences!make!investigating!both!scenarios!worthwhile!and!will!be!
highlighted.!
!
=1O8 %*W6 * =%0#*P*=1Q R,0%%*B22"/(&*?.J*74"8%*+',%!
!
;/<*=%0#>*-(?%.&*@',,%0%(2%
!
!
BK?1(&1)%!
Return
!
Year
!
Account:
!
Roth $401k
!
Withdraw
!
Value
!
Pay$at
!
Death
!
CSV
!
Withdraw
!
Value
!
Pay$at
!
Death
!
Stocks!
9.78%
!
20!
$514,103!
$462,693!
$1,014,103!
$248,583!
$228,651!
$744,096!
!
BTID!
40!
$3,635,960!
$3,635,960!
$4,135,960!
$863,820!
$696,458!
$1,260,850!
60
!
$23,500,857!
$23,500,857!
$16,100,514!
$1,960,048!
$1,485,742!
$2,178,049!
Bonds!
6.05%
!
20!
$328,793!
$295,914!
$828,793!
$248,583!
$228,651!
$744,096!
!
BTID!
40!
$1,243,799!
$1,243,799!
$1,743,799!
$863,820!
$696,458!
$1,260,850!
60!
$4,026,833!
$4,026,833!
$4,026,833!
$1,960,048!
$1,485,742!
$2,178,049!
Bills!
3.58%
!
20!
$247,584!
$222,825!
$747,584!
$248,583!
$228,651!
$744,096!
!
Whole!Life!
40!
$623,634!
$623,634!
$1,123,634!
$863,820!
$696,458!
$1,260,850!
60!
$1,260,266!
$1,260,266!
$1,260,266!
$1,960,048!
$1,485,742!
$2,178,049!
!
!
The!outcome!with!an!aggressively!allocated!tax]free!account!in!the!BTID!strategy!is!
37
!
!
tax!placed!on!early!withdrawals!prior!to!age!59!½!creates!illiquidity!for!the!tax]free!account!
during!the!first!20]year!period!and!for!a!part!of!the!second!20]year!period,!but!this!is!the!only!
tax!taken!out!upon!withdrawal.! However,!the!withdrawal!value!in!the!BTID!strategy!was!more!
than!double!that!of!the!whole!life!CSV!withdrawal!value!while!the!pay!at!death!exceeded!$1!
million!compared!to!whole!life’s!$744,096.!!The!withdrawal!value!of!the!tax]free!account!is!
actually!slightly!larger!than!what!was!experienced!in!the!tax]deferred!account.! This!is!due!to!
the!fact!that!the!tax]deferred!account!pays!an !income!tax!on!the!entire!amount!withdrawn!
(which!results!in!a!value!equal!to!the!value!of!the!total!tax]free!account!at!that!time)!but!also!
has!to!pay!the!10%!penalty!on!the!total!value!of!the!account.! This!10%!penalty!is!larger!in!the!
tax]deferred!scenario!due!to!the!fact!that!the!larger!contributions!(because!they!were!pre]tax)!
caused!the!total!value!of!the!account!to!be!higher.!! This!outcome!holds!true!for!the!next!two!
allocations!of!the!tax]free!account!as!well,!and!once!the!10%!penalty!no!longer!applies!the!
withdrawal!values!of!the!tax]free!and!tax]deferred!accounts!are!identical,!as!expected.! The!
margin!of!victory!for!BTID!continues!to!widen!over!the!next!two!20]year!periods!and,!just!like!
with!the!aggressive!tax]deferred!and!taxable!accounts,!the!performance!of!the!tax]free!account
!
!
during!the!second!20]year!period!rendered!the!renewal!of!the!term!policy!irrelevant.!!By!the!
time!the!60
th!
year!arrives,!BTID!has!turned!out!far! superior!to!the!whole!life!strategy!even!when!
taking!into!account!the!estate!tax!of!40%!on!the!amount!greater!than!$5!million!in!the!tax]free!
account.! It!is!also!worth!noting!that!this!version!of!BTID!pays!out!more!at!death!than!the!tax]!
deferred!version!because!the!beneficiaries!need!not!pay!income!tax!in!addition!to!the!estate!
tax.!!The!pay!at!death!is!only!greater!when!the!estate!tax!comes!into!play!and!this!holds!true!for!
the!next!two!scenarios!as!well.!
38
!
!
As!for!the!conservatively!allocated!tax]free!account,!we!have!largely!the!same!story!but!
to!a!lesser!degree.! At!the!end!of!the!first!20!year s,!the!withdrawal!value!of!the!tax]free!account!
is!worth!nearly!$70,000!more!than!the!CSV!withdrawal!value.!!However,!being!that!it!is!worth!
less!than!$300,000,!the!presence!of!the!term!policy!allows!for!the!BTID!strategy!to!take!the!
advantage!in!amount!payable!to!the!beneficiaries!as!well!by!edging!out!the!whole!life!death!
benefit!by!just!over!$84,000.! By!the!end!of!the!40
th!
year!the!tax]free!account!falls!only!about!
$7,000!short!of!the!entire!whole!life!death!benefit!at!that!time.! This!represents!a!landsli de
!
!
victory!in!terms!of!living!benefit!but!also!indicates!that!the!combination!of!that!and!the!term!
policy!death!benefit!also!means!that!BTID!easily!overcomes!whole!life!in!terms!of!what!the!
beneficiaries!stand!to!receive.! By!the!end!of!the!60
th!
year,!BTID!has!nearly!three!times!the!
living!benefit!of!the!whole!life!strategy!and!close!to!twice!the!death!benefit.!
!
The!safely!allocated,!tax]free!account!in! the!BTID!strategy!does!not!perform!well!enough!
!
to!keep!pace!with!the!whole!life!strategy,!as!Figure!4!illustrat es.!
!
!
$2 ,500,000.00
!
!
!
$2 ,000,000.00
!
918/%!
$1 ,500,000.00
!
!
!
$1 ,000,000.00
!
!
!
$5 00,000.00
!
!
F')/0%*V6* ;=-@*P*=1QR,0%%*?.J*74"8%*+',%!
!
!
CSV!
!
CSV!Withdrawal!
!
Tax! Free!
Account!
Tax!Free!
Withdrawal!
WL!Death!Ben
!
!
!
$0 .0 0
!
!
!
1!! 4!! 7!
10
!
13
!
16
!
19
!
22
!
25
!
28
!
31
!
34
!
37
!
40
!
43
!
46
!
49
!
52
!
55
!58!
BTID !Death!Ben!
!
T%10.!
!
At!the!end!of!the!first!20!years,!the!tax]free!account!gets!hit!with!the!10%!early!withdrawal!
penalty!causing!it!to!fall!short!of!the!whole!life!CSV!withdrawal!value!by!about!$6,000.! Both!
39
!
!
accounts!are!considered!illiquid!at!this!point!in!time,!meaning!the!advantage!in!living!benefit!
goes!to!the!whole!life!strategy.! The!death!benef it!of!the!term!policy!is!able!to!make!up!the!
difference!between!the!withdrawal!value!of!the!tax]free!account!and!the!death!benefit!of!the!
whole!life!policy!with!about!$3,000!to!spare.! Therefore,!BTID!gets!the!advantage!in!terms!of!
the!death!benefit!which!leaves!the!strategies!split!for!the!first!20]year!time!period;!though!it!
would!be!fair!to!give!BTID!a!slight!advantage!given!that!bequests!have!a!large!influence!on!the!
demand!for!life!insurance.!!The!whole!life!strategy!begins!to!take!the!full!advantage!beyond!this
!
!
point,!however.! The!CSV!withdrawal!value!is!worth!approximately!$73,000!more!than!the!
withdrawal!value!of!the!tax]free!account!at!the!end!of!the!40
th!
year!and!is!more!than!$225,000!
greater!at!the!end!of!the!60
th!
year.! Even!with!the!greater!liquidity!of!the!tax]free!account!
(distributions!after!age!59!½!are!completely!tax]free)!the!advantage!still!lies!with!whole!life!due!
to!the!sheer!magnitude!of!the!differences.! The!term!policy!at!the!end!of!the!40
th!
year!falls!
short!in!making!up!the!difference!between!the!value!of!the!tax]free!account!and!the!whole!life!
death!benefit!by!about!$137,000!(notice!the!sharp!decrease!in!Figure!4!representing!the!
t
oll!
B
TID!death!benefit!takes!upon!expiration!of!the!term!policy)!and!at!the!end!of!the!60
th!
year,!the!
whole!life!death!benefit!is!worth!almost!$1!million!more!than!that!of!the!BTID!strategy.!
40
!
!
9--J* !"(28/.'"(.!
!
In!general!the!BTID!strategy!had!the!advantage!over!a!vast!majority!of!the!scenarios!
tested!and!was!only!at!a!disadvantage!when!the!account!was!allocated!safely,!returning!3.58%!
on!the!invested!difference.! Of!the!three!account!types!ch osen!for!the!BTID!strategy,!utilizing!a!
tax]free!account!like!a!Roth!401k!had!a!slight!advantage!over!a!tax]deferred!account!
(traditional!401k)!due!to!the!living!benefit!being!greater!when!the!insured!was!less!than!59!½!
years!old.! However,!this!only!applies!based!on!the!assumptions!we!made!considering!taxes,!
specifically,!income!tax.! When!the!income!tax!bracket!remains!the!same,!a!tax]free!and!tax]!
deferred!account,!assuming!growth!still !remains!untaxed!and!estate!taxes!are!a!non]factor,!will!
perform!at!the!same!level.!!Table!1!and!Table!3!from!the!previous!section!illustrate!
t
his!p
erfect
ly!
by!displaying!the!same!withdrawal!values!at!years!40!and!60!(insured!is!older!than!59!
½!so!there!is!no!excise!tax)!of!the!tax]deferred!and!tax]free!account,!respectively,!across!all
!
!
three!allocations.! If!the!tax!bracket!in!the!beginning!of!the!period,!when!the!contributions!are!
being!made,!is!lower!than!when!withdrawals!are!being!made!a!tax]free!account!will!have!the!
advantage!because!taxes!were!paid!up!front!at!a!lower!rate.!!On!the!other!hand,!if!taxes!are!
greater!up!front!and!are!lower!at!the!time!of!withdrawal!the!t ax]deferred!account!would!have!
the!advantage!because!taxes!would!be!taken!out!at!the!lower!rate.!
!
The!main!reason!that!the!taxable!account!was!unable!to!keep!pace!with!the!tax]!
deferred!and!tax]free!account!was!due!to!the!fact!that!the!time!horizon!tested!was!so!large.!
This!large!time!horizon!gives!the!tax]deferred!and!tax]free!accounts!a!huge!advantage!over!a!
taxable!account!because!the!growth!is!not!taxed!at!all !and !compounding!interest!takes!full!
effect.! Taxing!the!gro wth !each!year!in!the!taxable!accou nt!causes!it!to!fall!behind!over!the!run!
41
!
!
because!it!does!not!benefit!from!compounding!interest!like!the!other!accounts!do.! However,!at!
the!end!of!the!20
th!
year!in!the!testing,!the!taxable!account!was!much!more!comparable!with!
regard!to!withdrawal!value!(actually!performed!the!best!in!the!aggressively!allocated!account)!
due!to!the!fact!that!it!is!only!subject!to!ca pital!gains!taxes!and!does!not!experience!the!
10%!early
!
withdrawal!penalty!(it!is!more!liq uid ).!!This!indicates!that!a!taxab le!account!is!a!more!
appropriate!solution!for!saving!a!portion!of!money!that!would!be!used!in!the!short]term!where!
tax]deferred!and!tax]free!accounts!provide!a!long]term!solution.!
!
Although!BTID!was!gen erally!the!most!appropriate!strategy!given!the!scenarios!
t
h
at!
were!
tested,!it!wasn’t!outright!superior!to!the!whole!life!strategy.!!This!indicates!that!the!whole!life!
strategy!would!be!appropriate!for!certain!people!and!ought!to!be!considered!when!evaluating!
savings!plans!and!fulfilling!life!insurance!goals.!!Based!on!the!results!from!the!tests,!whole!life!
appears!to!perform!in!between!the!conservative!and!safe!allocation!of!potential!investment!
accounts.!Th is!is!n ot!surprising!as!the!whole!life!CSV!account!earns!about!4.52%!when!you!take!
the!average!return s!of!the!60]year!period,!excluding!the!first!7!years!as!that!is!
t
h
e
!period!where!
a!bulk!of!the!expenses!are!being!paid!on!the!policy.!If!the!BTID!side!fund!were!to!achieve!a!
4.52%!rate!of!return!each!year,!just!like!the!whole!life!policy,!two!things!would!happen.! First,!if!
the!side!fund!were!tax]deferred!or!tax]free,!BTID!would!have!an!overall!advantage!in!living!
benefit!especially!after!age!59!½!due!to!the!whole!life!premiums!being!taxed!up!front!and!then!
the!CSV!gains!being!taxed!as!income.! Whole!life!gets!hit!with!t wo!types!of!taxes!which!decrease!
liquidity!relative!to!the!other!accounts.! In!terms!of!death!benefit,!however,!whole!life!comes!
out!on!top!after!the!insured!reaches!age!75!and!is!no!longer!insurable.! The!other!accounts!will!
only!be!accumulating!toward!the!CSV!of!whole!life,!which!is!
42
!
!
much!lower!than!the!death!benefit.! Without!the!term!policy!there!to!make!up!the!diff
ere
n
ce!
fo
r
!
BTID,!the!beneficiaries!are!only!able!to!receive!the!side!fund,!which!is!equal!to!the!whole!life!CSV!
and!not!the!death!benefit.!
!
Another!noteworthy!point!about!whole!life!CSV!is!that!it!is!guaranteed!to!only!increase!
and!will!never!decrease!if!it!is!left!alone!and!premiums!continue!to!be!paid.!!In!2008!when!the!
market!experienced!huge!losses,!th e!value!of!accounts!such!as!the!ones!tested!in!the!BTID!
strategy!dropped!significantly,!whereas!the!value!of!whole!life!insurance!CSV!accounts!did!not!
lose!any!money.! The!safety!net!that!the!whole!life!strategy!provides!in!that!sense!would!serve!
as!a!nice!compliment!to!the!BTID!strategy!to!mitigate!some!of!the!risk!asso ciated!with!having!
funds!tied!to!the!market.! For!an!individual!who!has!maxed!out!contributions!toward!their!401k!
or!Roth!IRA!and!is!looking!to!save!more,!utilizing!a!whole!life!policy!as!a!vehicle!for!those!
savings!would!contribute!t o!the!portfolio!nicely.! The!liquidity!of!whole!life!is!similar!to !the
!
!
other!tax]free!or!tax]deferred!accounts!so!it!would!certainly!still!be!a!place!for!long]term!
savings.! Assu ming!it!is!treated!as!such,!placing!savings!in!a!whole!life! policy!would!be!far!more!
efficient!than!just!lettin g!it!sit!in!a!savings!account.!!Obviously,!it!provides!a!tax]free!monetary!
bequest!at!a!significant!discount!to!be!passed!on!to!one’s!children!or!even!their!favorite!charity.!
The!sheltered!growth!and!untaxed!payout!is!very!attractive!to!wealthy!families!in!high!tax!
brackets!who!easily!exhaust!the!other!tax!efficient!savings!vehicles.!!It!also!provides!a!nice!
option!for!a!young!professional!in!a!low!tax!bracket!who!will!get!cheaper!premiums!due!to!their!
age!and!will!also!pay!the!taxes!now!before!entering!higher!brackets.!
43
!
!
Testing!these!two!strategies!using!actual!re sults!would!provide!more!concrete!evidence!
to!support!or!refute!the!conclusions!drawn!in!this!study.! The!best!way!to!evaluate!the!whole!
life!strategy!is!through!the!analysis!of!an!existing!policy!rather!than!simply!an!illustration.! The!
same!can!be!said!for!BTID!in!that!using!real!time!market!returns!is!far!more!accurate!than!
assuming!constant,!compounded!growth.! Practicality!becomes!an!issu e!with!this!due!to!
t
h
e!
f
act
!that!a!thorough!comparison!of!the!two!strategies!requires!at!lea st!a!few!decades!worth!of!
data.! This!study!also!did!not!account!for!human!behavior!in!that!commitment!to!the!strategies!
was!fully!assumed.! Whole!life!CSV!typically!takes!a! number!of!years!before!it!begins!to!exceed!
the!amount!of!premiums!that!have!been!paid,!due!mainly!to!the!premiums!paying!the!up]costs!
of!the!company!as!well!as!th e!insurance.!!This!makes!whole!life!somewhat!of!a!forced!
commitment!veh icle!due!to!the!fact!that!getting!rid!of!the!policy!would!cost!the!owner!a!
considerable!amount!of!money!if!done!within!the!first!few!years!of!owning!it.!!BTID!does!not!
reinforce!the!need!to!save!as!well!as!the!whole!life!strategy!because!there!are!no!immediate!
consequences!to!not!contributing!to!one!of!the!various!side!funds,!so!consumer!discipline!
becomes!an!issue.!!According!t o !the!Bureau!of!Economic!Analysis!(March!1,!2013),!the!2012!
personal!saving!rate!in!the!U.S.!was!3.9%!and!was!only!2.4%!in!January,!2013!which!indicates!
that!most!consumers!are!not!saving!much!on!their!own!accord.!!A!true!case!study!of!these!two!
strategies,!pu tting!actual!consumer!and!market!behavior!to!the!test!would!complement!the!
results!of!this!analysis!nicely.!
44
!
!
9---J** C%,%0%(2%.6!
!
ALTFEST,!L.J.!(2007).! Personal!Financial!Planning.! McGraw]Hill/Irwin,!1221!Avenue!of!the!
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5.!