Blog 107 – Anatomy Of A Whole Life Policy

Pedro Palicio On The Infinite Banking

Most of the skepticism about life insurance is pointed towards the cash accumulation features of permanent life insurance policies. Dave Ramsey is probably the well-known skeptic of Whole Life. At the core of his argument are two things that he states as fact. First, term insurance is much cheaper than Whole Life. This is true. If cost is the only metric, then every client should be in One Year Term (OYT). The most efficient way to do life insurance, therefore, is to buy OYT and invest the difference. But the problem with OYT is that the cost increases over time. Why? Because that’s the shape of the mortality table that underpins all life insurance, including OYT. As a result, the key function of a life insurance company is to levelize a non-level cost – in other words – to offer policies with level premiums. Policyholders overpay early so that they can underpay later. The overpayments are then held as a reserve. That’s as true for a 10-Year Term as it is for Whole Life. The difference is that the reserve is not liquid in Term, but it is liquid, as cash value, in Whole Life.

Ramsey’s second point against Whole Life is that the policyholder receives only the death benefit and not the cash value upon death. In his words, “when you die, they keep your money…you never get both – the death benefit and the cash value – but you’re always paying for both.” If this was true, it would make for quite a story. It would prove that whole life is a scam. But it’s not true. Not even close. The basic mechanics of any fixed permanent insurance policy are that premiums are paid, policy charges are deducted, and the remaining amount earns a stated interest rate. In Whole Life, the policy charges and stated interest rate are guaranteed. The premium is calibrated so that the cash values grow every year on a guaranteed basis to eventually equal the death benefit at the stated maturity age for the contract, usually age 100, or 121. Ramsey is right that the policyholder receives the death benefit, not the death benefit plus the cash value. But he is dead wrong about the idea that the policyholder is “always paying for both – death benefit protection and cash value.” Cost of Insurance charges are based on the Net Amount at Risk, which is, by definition, the difference between the death benefit and cash value. That’s true for all types of life insurance including Whole Life, which places the charges in the calculation of the guaranteed premium. Policyholders only pay insurance costs on pure insurance coverage, which is Net Amount at Risk, not the total Death Benefit.

These points are not a matter of subjective opinion. They are the essential laws of Actuarial Science. Mortality costs increase with age. Life insurers and their products exist to levelize non-level mortality costs. The difference between premiums paid and the actual underlying mortality cost represents a reserve that earns interest. With Term, the reserve is not liquid and is chewed up by the end of the term by mortality. With Whole Life, the reserve is liquid in the form of cash values. The premium for Whole Life is calculated based on guaranteed fixed charges, guaranteed cost of insurance charges assessed on the Net Amount at Risk (not the Death Benefit) and the guaranteed interest rate such that the cash value equals the death benefit at policy maturity. That’s the whole story. That’s how Whole Life insurance works.

If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at or feel free to email us your questions at or call us toll-free at 1-844-443-8422.

Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners

We are experts in designing high cash value dividend-paying whole life policies.

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