Comparative Interest Rate Method

The Comparative Interest Rate Method is a method for comparing a whole life insurance policy to a decreasing term policy with a side fund. For simplicity, think of the side account as a mutual fund account.

Whole life is the introductory version of a cash value life insurance policy. Premium payments pay the cost of insurance, and a portion of the premium payment goes into an investment/cash account. The cost of insurance increases as we age, and less of the premium is available to fund the investment account. Premiums need to increase to keep the cash value growing, or at some point the cost of insurance will erode the cash value to keep the policy in-force. Getting old costs money in the insurance world.

A decreasing term policy has a declining death benefit to keep the premium payment consistent, and allow investment into a side investment account. Again, think of the side fund as a mutual fund account. The premium “package” is x + y, with x being the decreasing term premium and y being the monthly investment into the side fund.

The key to the comparison is to calculate what rate of return the side fund has to achieve to equal the growth of the cash value accumulation of the whole life policy. The average annual growth of the cash value of a whole life policy is 1.5%, so it's not a high bar.

Buy term and invest the difference.