Whole Life vs High Yield Savings Part 3

Welcome to part three with your very own personal finance geek of the 21st century, Denzel Rodriguez here bringing you a case study using a whole life insurance contract as a savings vehicle versus a high yield savings account with Capital One360 Performance Savings Account over the last three videos. If you haven't watched part one and two, I encourage you to go watch that. It's going to give you full context. But you, but as a little summary here, we're looking at a 28 year old male saving $20,000 a year. And he's deciding, he's trying to figure out where should I put this money where it can grow efficiently and it can be liquid and available and I'm going to earn something every single year regardless of the environment, the marketplace. So we're looking at a whole life insurance contract with a company called MassMutual. In part one and part two, we compared apples to apples. We compared performance cash and we, we found out that the performance of a whole life insurance contract underperforms the high yield savings account with Capital One over the first 10 years. We saw taking a look at the board here, that in year 10 in terms of the living benefit, which is called cash value, you've got $231,587 in total cash value. Over on year 10 with capital 1360 savings, you've got $252,585.81 and that's an average earning of 3.13%. So then what I did was say, okay, let's look at the next 10 years saving. So now we're looking at 20 years of saving starting from 2015 all the way to 2035. And we saw first 10 years 231, first 10 years 252. I'm using a 22% tax rate on the growth, the interest earned and moving forward, I'm using 3.13% earnings every single year over the next 10 years from 2025 all the way to 2035. As you can see, again contributing 20,000 a year, we would end up with somewhere around 550 grand net after tax by 2035. Let's take a look at the whole life started off at 231. Ten years later it's 2035. We're looking at $607,000. 63 and we now see a gap. So I did the math for you and we saw that, okay, 607 minus 550, the gap is now 56,000. That's interesting because initially whole Life was underperforming in the first 10 years 231 to 252 by over $10,000. You'd have more money here compared to the whole life. And then we also showed, well, let's try to get a little more apples to apples. Let's see what it would look like if I took $900 out of the 20 and bought term insurance convertible term for a million bucks at $75 a month. And the number was around 240,000 that you would net. So it's still outperformed Whole Life. The gap was about 10,000 plus to the, on the, on the liquid cash value side of things. And Whole life was only outperforming on the death benefit by about 334 grand. So now we've got an increase over here of 56 grand. And look at the gap in death benefit, how it increased. By the end of year 10 it's at 1.3 million. Now we're at 1.9 in year 20. So there's a $919,000 gap in death benefit. Assuming that on the savings side we contributed to a term insurance policy, had a million bucks. In this example, there's no death benefit. So all you have is the 550, which would mean you're in the whole 1 million 9 million of potential money you could have had in death benefit. And also living benefits, meaning cash value use of your money. But also in the event of a terminal illness, chronic illness, some, some disease, and you have a period of time left on earth to live, you're actually able to access that money tax free while living before that person would end up passing away. Compared to the person that just Simply saved for 20 years at $20,000, all they have is the 550 to work with, which could get easily burnt out with a major medical procedure or multiple visits, multiple surgeries. That can happen. I've actually personally witnessed it in family going through medical procedures and just taking a look at some of the bills that I think I forget whether it's Medicaid or Medicare that pays. Picked it up and pretty detrimental to somebody's finances. Or what about long term care as well. That can play a major factor where a whole life insurance contract can help cover some of those costs. So you've got to compare now that you have a more fuller picture here where you can confidently look at both opportunities. And obviously here are some variables to keep in mind. Obviously both of these numbers are inaccurate in terms of what it actually will do. We don't know what either side will do. So we're looking at historical performance, we're looking at averages, we're looking at the potential. So it's pretty fair in terms of both sides, I would argue. Really fair. And you let me know in the comments if I didn't be fair in any particular example here. I think I'm pretty fair on the whole life, very fair on the high yield savings. I'd say I'm even more lenient, more fair on the high yield savings side. And here's why. I'm assuming a 22% tax rate. What if the person's tax rate is 28%, 30, 35, 37 being the max? What if that's your tax rate on the growth of this money? Then obviously that hinders performance that much more. So the number is less. So we know that for a fact. In this variable of unknown variables, taxes go up. Over the next 20 year period, taxes can potentially go up and increase. Is that likely to happen? So this again boils down in this series. It's not really numbers, it's actually your values and beliefs. Which product do you value more and more? Which product do you believe will actually perform according to what I illustrated here? What may help you make that decision is some of these unknown variables such as taxes. Will it go up? Will it go down? According to history, do taxes go up or do they go down? Typically they go up. Why? Because the more money you make, think about it. If you have the ability to save $20,000 every single year, chances are you're making above average income in America, which means chances are you're at higher tax brackets and you absolutely put yourself in a higher tax bracket just by earning more and more money in your high yield savings account. So we can definitely say, okay, my taxable expense will go up, which means my net amount of money in cash will go down more than likely. How much faith, belief do I have that Capital One will still be around 10 years from now? Could they potentially go out of business? Maybe. We see banks fail. When's the last time you heard of a life insurance company failing? Very, very rare. A company like MassMutual is one of the biggest private, mutually held life insurance companies in America today. Massive organization. And they've been around much, much longer than Capital One. They've been around longer than the irs. So you then factor in, okay, these are some facts. Use some variables. I don't have to worry about on the whole life side, I don't have to worry about a tax rate hindering my performance on the Cash value because the money grows tax deferred and can be used tax free via loans or withdrawals up to the cost base. On the high yield side, in addition to the tax rate changing over time, what else performance will I earn 3.13% every single year? Well, historically we show it in part one and two that the earnings was up and down. It went as low as below 1% and it went as high as above 4.2, almost 4.35%. So we can go up and go down, go up and go down. On the whole life side, you've got a guaranteed rate of 3% or more in this example here, guaranteed 3% or more every single year, no matter what happens to the economy. No. 22, 28, 29% tax pullings from your performance. And you also get a non guaranteed dividend rate which could increase your guarantee to a total GROSS Rate of around 6, 6.5%. And when you look at the net rate after expenses, because you are purchasing life insurance, right, the death benefit, you're now creating about four and a half, 4%. After year 10, you're earning consistently above 3. Net 3.8, 3.94%. Four and a half goes all the way up to almost 5% or more on a net performance after expenses. There's no tax. We say after expenses on whole life insurance contract. And then finally you got a $1.9 million death benefit. How does that also phase into your decision making process as an individual? On this? As we look at the whiteboard, we can see how, okay, we started at 28 years old and 20 years from now we're 48 years old. What could have happened in that time? Could have made more money, could have also got married, had kids. How much more important does having a death benefit become when you now have a family, when you now get married? Too many people think about death benefit protection insurance when they already have kids that are toddlers or young teenagers, when they're already been married 10, 15 years, when they're already in their late 40s and 50s. Where we benefited or where you could potentially benefit on this side of whole life is you're locking in the healthiest and the youngest you're ever going to be. In this example, 28 year old male, that comes at a cost, does it not? We see that the first 10 years totally underperforms on the cash performance side. Not on the death benefit, we see the saving side outperform us. But then if we take a closer look and say, okay, where's the turning point? Right, we can see how, okay, year 11, 261 to 279. Year 12 is 292 to 306. Thirteenth year, 324 to 334, 359 to 363 and oh, by year 15 it's 2030. Maybe I've got two kids by then. Maybe I've been married for eight years, seven years, whatever the case may be, now I got 394. I'm starting to outperform if I would have kept my money in the bank. Here's another variable to keep in mind. What happens when you reach your FDIC limit, which probably occurred by the 10th year? You now have reached FDIC's limit of 250,000 protection on your money. So now you've got to decide, okay, I'm going to have to store 250 grand at Capital One, but now I need to open up another savings account at another bank. And I don't know what that rate of return might be. It might be less, might be more. Let's say you move it to American Express, which is probably neck and neck. So now every single year you got more manual work, right? Because you got to pull the profits out of Capital One because it's always going to be breaching above 250. You know, pull out of there and put it into American Express, let's say, and have your money now grow there and you're now saving 20 grand over there. And now you got two accounts to manage, keep in mind, and the risk that a capital One could potentially go out of business, get swallowed up by a different bank, who knows, right? You don't know. So there's just a lot of unknown variables compared to on the whole life side, you have much less unknowns to worry about. You can have as much money in one whole life insurance contract and all of your money is guaranteed because it's secured by what the death benefit, really all cash value is, is access to a portion of your death benefits. That's why they call it a living benefit, because you're able to access some of that cash value today. So we can see that the crossover point where this, where the whole life starts to outperform the high yield savings around year 15. So if you're a long term thinker and you also just think about all the other areas of your life, you might lean more toward the whole life product in terms of helping you make a good decision as to where to store your savings. Whereas if you're thinking more short term. You're trying to earn as much as you can in a short period of time. You can make an argument maybe I just store that savings over in a high yield savings. And for the sake of having some death benefit, we proved that even if you took at least $900 out of your 20 and purchased convertible term insurance, you would still outperform the cash value performance in the first 10 years. So you'd have about a million dollar death benefit at 28 plus. You had the high yield savings. Where that person starts to lose is after year 15. What happens when the convertible term or just term insurance, what happens when it is ready to expire? Are you now going to convert that into whole life permanent and then start redirecting the 20 there? That could have been a scenario as well, no doubt about it. So hopefully this helps you make a really good decision as to where to store your money. And if you never even thought of potentially storing your money in a properly structured whole life insurance contract with a privately held mutual life insurance company that's paid dividends for over 100 plus years and has strong guarantees, this might be another option to consider. So we're going to keep going on with this series where I just present whole life compared to CDs compared to bonds, compared to high yield savings compared to money markets. And we're just going to keep seeing the potential performance of these things over time. Again, my name is Denzel Rodriguez, your personal finance geek of the 21st century. If you'd like me to run your numbers, you want coaching one to one accountability support, you can run your numbers on the whiteboard. We can even have a recorded case study send that to you and your family and you guys can build and you can also partner up some of my content creators, some fellow content creators that I know that are very, very good at retirement planning, helping you make more money, save money, get out of debt, all these wonderful things. We can build an entire financial dream team around you to help you achieve all your financial goals and dreams, ultimately creating financial independence and financial freedom. With that being said, God bless you, have a wonderful day and talk soon.