The Rate of Return Trap

The Question That Reveals Everything

Ask any financial advisor about whole life insurance and watch what happens.

They’ll pull up a spreadsheet. Show you two columns. Column A: whole life policy earning 4%. Column B: stock market “averaging” 10%.

“Would you rather have this,” they’ll say, pointing to Column A, “or this?” They point to Column B with the confidence of someone who’s just solved world hunger.

The math seems obvious. 10% beats 4%. Case closed. Whole life insurance is for suckers.

Here’s the problem: that comparison is meaningless.

It’s like comparing the speed of a pickup truck to the fuel economy of a motorcycle and concluding motorcycles are better vehicles. You’re measuring different things for different purposes.

The rate of return comparison sounds logical until you understand what whole life insurance actually does.

What Are You Really Comparing?

Let’s be specific about what’s in those two columns.

Column A (Whole Life):

• Guaranteed cash value growth
• Tax-advantaged growth (not taxed annually)
• Contractual access to capital via policy loans
• No credit checks, no qualification process
• Flexible repayment schedule you control
• Asset protection features in most states
• Death benefit that grows over time
• No volatility, no sequence of returns risk

Column B (Stock Market):

• Potential growth with no guarantees
• Annual tax on dividends and capital gains
• Must liquidate assets to access value (triggering taxes)
• Subject to market timing and sequence risk
• Volatility that can destroy retirement plans
• No contractual rights to anything

You’re not comparing like to like. You’re comparing two entirely different financial tools.

The Question Nobody Asks

Here’s what financial advisors won’t tell you.

In their “10% stock market return” assumption, they’re using historical averages that include periods when investors made no money for over a decade.

If you bought the S&P 500 in 1999 or 2000, you didn’t break even until 2013. That’s 13-14 years of zero returns despite the “historical average” being much higher.

If you needed money in 2008, you were forced to sell at massive losses.

The sequence of returns matters. The timing of when you need access matters. The ability to control when and how you access your capital matters.

None of this shows up in the rate of return comparison.

What Whole Life Actually Competes With

The real comparison isn’t whole life versus the stock market.

The real comparison is whole life versus the banking system.

Every time you need capital — for a car, a house, business equipment, an emergency — you have two choices:

1. Borrow from a commercial bank
2. Access your own capital

If you borrow from Chase Bank, you pay them interest. You qualify on their terms. You repay on their schedule. You pledge collateral they can seize.

If you access capital from your whole life policy, you pay interest to the insurance company (which you partially own if it’s a mutual company). No qualification required. Repayment schedule is entirely up to you. The “collateral” is a contractual death benefit the company controls and guarantees.

Which banking relationship would you prefer?

The Nelson Nash Experiment

Nelson Nash understood this. He ran the numbers.

He took a 21-year-old woman, funded a properly-designed whole life policy for seven years, then let it run. At retirement, she started withdrawing $50,000 per year.

He compared this to the same money earning 4% after taxes in bank CDs, also withdrawing $50,000 annually.

The CD account ran dry in five years and eight months.

The life insurance policy? Still growing. The woman could withdraw $50,000 per year forever. When she graduated at 85, having pulled out $650,000 in income, her beneficiaries received $1,365,057.

Nash’s comment: “There is no real comparison between the methods.”

Why Your Financial Advisor Hates Whole Life

Want to know the dirty secret?

Most fee-based advisors earn their income from assets under management. Every dollar you put into a whole life policy is a dollar they can’t charge fees on. They’re not prohibited from recommending it — they’re economically incentivized NOT to.

Some advisors hold insurance licenses and could sell you a policy. Most don’t bother. Why would they recommend something that shrinks their fee income?

This creates a massive conflict of interest. When your advisor tells you whole life is a “bad investment,” ask yourself: does their business model benefit from that advice?

Would you ask a Toyota dealer for an objective comparison between a Toyota and a Honda?

The Risk Nobody Talks About

Here’s what really should keep you up at night.

Sequence of returns risk.

This is the risk that bad market years align with when you need the money most. If you retire in 2008 and need to start drawing from your portfolio, you’re selling at the worst possible time. Your “10% average return” becomes meaningless.

Wade Pfau, a professor at The American College of Financial Services, has done extensive research on this. His conclusion: withdrawal rates that seemed safe historically become dangerous when sequence risk is properly understood.

Meanwhile, whole life insurance has no sequence of returns risk. The cash value cannot go down. The death benefit cannot decrease. The dividend scale might fluctuate, but the guarantees hold regardless of what markets do.

Which would you rather own during the next financial crisis?

The Tax Reality

Let’s talk about those “10% stock market returns.”

That’s before taxes. In a taxable account, you pay taxes on dividends every year whether you need the money or not. You pay capital gains taxes when you sell. In high tax states, combined federal and state rates can approach 40%.

A 10% return becomes 6-7% after taxes.

Meanwhile, whole life cash value grows tax-deferred. Policy loans are not taxable events if structured properly. The death benefit is tax-free to beneficiaries.

When you include taxes, the comparison gets much closer.

What You Should Actually Compare

Stop asking: “What’s the rate of return?”

Start asking: “Compared to what?”

Compared to banking: Would you rather pay interest to Chase Bank or access your own capital?

Compared to bonds: Would you rather own corporate bonds (taxable, volatile, callable) or whole life cash value (tax-advantaged, stable, accessible)?

Compared to CDs: Would you rather lock up money for a fixed term at today’s rates, or build capital you can access flexibly while maintaining growth?

Compared to 401(k)s: Would you rather have money locked up until 59½ with early withdrawal penalties, or capital you can access at any time for any purpose?

The question isn’t whether whole life beats the stock market. The question is whether it solves problems that the stock market can’t.

The Banking Function

Nelson Nash wrote: “Your need for finance during your lifetime is greater than your need for death benefit.”

Think about what you’ll finance over your lifetime:

• Cars (multiple)
• Homes
• Business equipment
• Education
• Emergencies
• Opportunities that require quick capital

Every purchase is financed. Either you pay interest to someone else, or you give up interest you could have earned.

The rate of return on capturing that financing function for yourself is often much higher than any stock market return.

That’s what you should be calculating.

The Uncomfortable Truth

Here’s what rate-of-return comparisons miss entirely.

The stock market doesn’t provide:

• Guaranteed access to capital
• Flexible repayment terms
• Asset protection
• Tax-advantaged growth and access
• A banking function you control

You can’t call Vanguard and say “I need $50,000 for a business opportunity” and have it in your account within a week without selling assets and triggering taxes.

You can do exactly that with a properly-funded whole life policy. One phone call, a simple form, and the money hits your account in 3-5 business days. No credit check. No committee. No liquidation.

What’s the rate of return on never missing an opportunity?

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Questions to Think About

• If your financial advisor earns fees on assets under management, how objective is their comparison against a product that moves money off their books?

• What’s more important: chasing maximum returns, or having guaranteed access to capital when you need it?

• Would you rather be forced to sell stocks during a market crash, or access your own capital without affecting your long-term growth?

• What’s the rate of return on never having to qualify for a loan again?

In the next article, we’re going to examine Dave Ramsey’s specific claims about whole life insurance — and count how many factual errors he makes in a single radio call.

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This is educational content only and not meant to serve as financial advice. Rate of return comparisons depend on time horizons, tax treatment, and individual circumstances.