The Comparison Question

There is a claim at the centre of most presentations of this strategy, and it does not survive contact with the obvious alternative. It is worth taking seriously, because it is the argument that persuades people, and because getting it wrong leads them to buy for a reason that is not true.

What the honest comparison actually looks like

Set the three alternatives side by side and the picture changes.

Pay from savings. No interest cost. The savings stop earning whatever they were earning. Simple, cheap, and for a great many purchases it is the right answer.

Borrow from an outside lender. Interest cost at the lender's rate. Savings continue earning. Whether this beats paying from savings depends on the spread between the two, which is usually unfavourable.

Request a policy loan. Interest cost at the insurer's policy loan rate. The contract's credited amount continues to be calculated on the full cash value where the contract is written on a non-direct recognition basis. The death benefit is reduced while the loan is outstanding. The loan is a disposition for tax purposes under ITA s.148(9).

The third option is not obviously better than the first. It is a different arrangement with a different cost, and for a household that would simply have paid cash, the first option is frequently cheaper.

What actually survives the concession

Something does survive. It is narrower than the usual claim, and it is structural rather than arithmetic.

Uninterrupted crediting on the full cash value. Where a contract is written on a non-direct recognition basis, the amount credited is calculated on the whole cash value whether or not a loan is outstanding. Savings withdrawn from a savings account are simply gone from it. This is a real difference. It is also not free, because the loan carries interest, and the net position depends on the relationship between the two, which changes over time and is not guaranteed in either direction.

The death benefit. It exists whether or not the strategy is being run, and it is the actual purpose of the contract. A comparison against a savings account is not a fair comparison in this respect, because a savings account does not pay a death benefit. This cuts in the product's favour and it is routinely underweighted by critics.

The tax treatment of growth. Growth inside a contract that remains exempt under Regulation 306, Income Tax Regulations is not taxed annually in the way interest in a non-registered savings account is. That is a genuine structural advantage, subject to the contract staying exempt and to the tax consequences on disposition.

Enforced behaviour. A repayment schedule you have committed to gets repaid. Savings you have quietly drawn down frequently do not get replaced. This is a behavioural argument, not a financial one, and it should be presented as such.

The corporate case is different. For an incorporated business owner the arithmetic involves how surplus is taxed while it is held and how a death benefit is credited under ITA s.89(1). That is a separate question with different inputs, and importing a conclusion reached about a personal buyer into a corporate file is exactly the error this page is about.

When the original comparison is fair

There is a case where the outside-lender comparison is legitimate, and it should be said plainly: when you genuinely would have borrowed.

A business with a recurring equipment cycle that has always been financed. A purchase too large to fund from cash. A household that has, in fact, carried consumer debt for years. In those situations the alternative really is an outside lender, and comparing one source of capital to another is the correct analysis rather than a rhetorical trick.

The distinction is simply honesty about your own behaviour. If you have never borrowed for this kind of purchase, do not accept an argument that assumes you would have.

Buy term and invest the difference

The comparison most readers arrive holding, and it deserves a straight answer rather than a deflection.

The argument. Term coverage costs a fraction of permanent for the same death benefit. Invest the difference in a low-cost portfolio, and after thirty years you hold more than the permanent contract would have produced, with full liquidity and visible fees.

Where it is right, and it is right often. Where the need is temporary. Where the household will actually invest the difference and leave it alone. Where liquidity matters. Where the objective is growth. On growth alone, over long periods, it usually wins, and any presentation claiming otherwise is overstating.

Where it is weaker than it sounds. The comparison assumes the difference is invested rather than spent, every year, through every market. Most households do not do this, and a comparison against a behaviour that does not occur is comparing against a spreadsheet.

Term expires, and at the end of it the household is uninsured at an age when replacing coverage is expensive or impossible. If the need turned out to be permanent, the strategy has ended before the need did.

The portfolio is exposed to sequence risk in a way a contractual schedule is not, and that matters at the moment of drawing.

The honest resolution. For a temporary need, buy term and invest the difference, and this practice will say so. For a permanent need, the comparison is answering a different question, because one of the two products stops.

And for many households the answer is both, in the shape described on whole life insurance, which is proposed less often because it is less decisive.

What a fair comparison requires

Four conditions. Any comparison missing one is advocacy rather than analysis.

Same period. Any two things can be made to win by choosing when to start and stop.

Same fee treatment. After-fee against after-fee, or before against before. Mixing them produces a false gap in whichever direction was chosen.

Same certainty. A contractual floor and a projected average are different quantities. Setting them side by side implies they are the same.

Everything each provides. If one pays a death benefit whenever death occurs and the other does not, that is part of the comparison rather than a footnote.

Applied honestly, most comparisons here produce a mixed result. Which is why they are so often presented otherwise: a comparison producing a clean win for whatever the presenter sells has usually failed one of the four.

Comparing against what you would actually do

The condition that decides most of these arguments and is almost never applied.

A comparison against an idealised alternative is not a comparison. The portfolio in most presentations is held perfectly for thirty years, rebalanced annually, never sold in a downturn and never raided for a vehicle or a renovation. Very few households behave that way, and the ones that do are usually not the ones being shown the comparison.

The reverse applies with equal force. A permanent contract in most presentations is funded uninterrupted for decades at a level that a strong year supported. A household that stops funding in year four has not achieved the illustrated outcome either.

So the honest comparison is between two realistic paths, not two perfect ones, and it usually narrows the gap in both directions.

The question worth putting to yourself. What did you actually do with surplus money over the last five years? That answer, rather than an assumption about discipline, is the alternative any comparison should be run against.

The comparisons that are simply wrong

Four constructions that appear regularly on both sides of this argument.

Comparing a policy's cash value against a portfolio's total value while ignoring that one includes the cost of a death benefit and the other provides none.

Comparing gross investment returns against net policy values. The direction varies with who is presenting; the error does not.

Quoting an internal rate of return on a policy as though it were an investment return. A figure can be calculated. It is not measuring the same thing as a fund's return, because it includes the price of coverage.

Comparing against a period chosen after the fact. Any two products can be made to win by selecting the start and end dates, and a comparison that begins in a market trough or ends at a peak has chosen its answer first.

None of these requires bad faith, and each produces a conclusion the underlying facts do not support.

Why this page exists on a practice website

A comparison page published by a practice that sells one of the products being compared is worth explaining rather than leaving to be noticed.

Because the reader will make the comparison anyway. They arrive holding it, and they will find it made elsewhere by someone with the opposite commercial interest.

Because the honest version is not damaging. Permanent insurance is more expensive as a way to grow money and provides something a portfolio does not. Both halves are true, and a practice unwilling to state the first has told you what its description of the second is worth.

And because the four conditions are checkable. A reader who holds them can test any comparison, including every one on this site.

What this page cannot tell you

Whether any of it applies to you.

That depends on your cash flow, your existing coverage, your marginal tax rate, whether you are incorporated, whether registered contribution room is unused, and your time horizon. Those are the inputs, and no page can supply them.

What this page can do is make sure the argument you evaluate is the real one. A participating whole life contract is an insurance product and it is not an investment. Judged as an investment against a market portfolio it usually compares poorly. Judged as a place to hold capital that also pays a death benefit and grows without annual taxation, it is a different proposition with its own costs, and the comparison it is usually sold on is not the one that should decide it.

For the mechanics of the contract itself, rather than the argument about it, see how a participating policy works, year by year.

The comparison a household can actually run

Not against a market index, which requires assumptions nobody can defend, but against its own recent history.

What did you do with surplus money over the last five years? That answer is the realistic alternative.

What did you finance, and at what rate?

What did you spend that you intended to save?

A household that consistently invested the surplus should compare against that. A household that consistently spent it is comparing against spending, and the comparison changes materially.

Neither answer is a moral judgement. It is the input that decides which alternative is real for that household, and no presentation can supply it.

Why comparisons in this field are so often dishonest

Because a mixed result does not sell. An honest comparison usually shows one product cheaper for growth and the other providing something the first does not, and neither side finds that useful.

Because the audience cannot check quickly. A household without both sets of figures cannot test a claim in the room.

And because the errors look like methodology. Choosing a period, mixing fee treatments or omitting the death benefit each produce a clean answer that appears rigorous.

The four conditions are the defence, and they are checkable by anybody.

The honest summary

Permanent insurance is expensive as a way to grow money.

It provides something a portfolio does not.

Both are true, and every dishonest comparison in this field consists of offering one of them.

A presentation offering only one half has chosen its conclusion before it began. Recognising that is the whole skill this page is trying to hand over, and it applies to everything on this site as much as to anything you are shown elsewhere.

Test this site by it too. Every comparison published here should survive the four conditions, and where one does not, it is a fault worth writing to us about. A practice that publishes the standard has accepted being measured against it, which is the only reason publishing it means anything.

Write to us if one fails. A standard published without a way to report a breach is decoration, and the contact details sit at the foot of every page for exactly that reason.

A standard nobody can invoke against its author is not a standard, and we would rather hear about a failure than have it sit unread.

A note on worked examples

There is no numerical illustration on this page, and that is deliberate.

A side-by-side calculation would require an assumed dividend scale, an assumed loan rate, an assumed savings rate and an assumed tax position, and the conclusion would follow from whichever assumptions were chosen. Illustrations of that kind belong in a document that states every assumption and carries the date its figures were current, prepared for a specific person. An illustration built to win an argument on a web page is not evidence. It is the argument wearing a table.