Comparing rates of return on a whole life policy

Whole life policies are not all built the same.  They do not return the same dividends and they do not all have the same expenses.  Building a policy through a top dividend paying mutually owned insurance company is the only way to go.  The other only way to go is to fund the policy through a structure that uses a lower base premium and a large amount of paid up additions. 

Using this method, you can get a policy with close to a 4% tax free return with a guarantee of about a 2.75% to 3% guaranteed tax free return. 

Of course, if you compare this to a stock mutual funds return of somewhere around 10%, it's tough to call this a good return.  However, if you remember that the 10% is taxable and not guaranteed, then there isn't such a huge difference.  That 10% could be as low as 6% over time, depending on market conditions.  The two don't stand alone though because with the whole life insurance policy, you are guaranteed the death benefit at some point, which will likely give you a return much higher than the 4% tax free. 

Most people also do not invest 100% in stock mutual funds over time.  A target allocation fund might make more like 7.5% over time.  Again, this will vary with the market.  That return could be as low as 5% or so and it's a taxable rate. 

A taxable bond fund will make between 4% and 7% over time, and now we see that a whole life insurance contract, properly structured does return about the same (after tax) as this category of investment, but remember we still have our lifetime death benefit in the whole life contract, which depending on the age at death, could increase the return by 30% or so.  This would make the policy's rate of return closer to a 5.2% to 5.5% tax free rate of return or equivalent to a 7.5% after tax return, depending on your tax bracket. 

While some may still not like the whole life policy because they would rather risk the chance of making more money, those same people are also risking the chance of making less money. 

This is where the matter of preference comes in.  Risk preferences make a big difference in who is attracted to a whole life policy.  A whole life policy used as a personal bank or line of credit can also increase the internal rate of return on the policy because by using the cash in the policy to invest in other activities or to reduce interest expense paid to banks, a person can leverage his or her own whole life policy to either increase total return or else decrease other living expenses.  These savings have to be factored in as part of the benefit of such a policy.