The 3 Rates of Return of Whole Life Insurance: Internal, External, and Eternal

The standard objection to whole life insurance is a rate-of-return objection. An entrepreneur looks at an illustration, sees a long-term internal rate in the 4 to 4.5% range, compares it to what the same dollars earn in a business or a building, and concludes the policy is a poor use of capital. On the narrow terms of that comparison, the entrepreneur is right. A whole life policy, held as a standalone investment and never touched, underperforms a well-run business by a wide margin.

The comparison fails because it measures one rate of return where there are three. The illustration shows what the policy earns internally. It cannot show what happens when the cash value is used as collateral for a loan that funds a real estate purchase or an equity stake, while the policy keeps compounding on its full value. It cannot show what an income-tax-free death benefit and a family's financial discipline are worth to the people who inherit them.

A whole life policy is a poor investment and a strong capital base, and the entire debate turns on which one you are measuring. That distinction is the substance of a conversation between Caleb Guilliams and Phil Bodine, a financial advisor who entered the business in 1989, met Nelson Nash in the late 1990s, and has borrowed against his own policies to buy real estate and fund business equity for decades.

At BetterWealth, we have structured more than 2,000 policies across all 50 states, and the rate-of-return objection is the first one we hear from nearly every entrepreneur who calls. We think it deserves a real answer rather than a sales response. This article covers the three rates of return, the capitalization phase that makes the early years look worse than they are, the step-by-step mechanics of capturing an external return, the math that decides whether a policy loan makes sense, and the version of infinite banking that Phil correctly calls voodoo math.

Phil tells the breakfast story with the attorney in full, walks through the house he and his wife bought with a policy loan and sold 90 days later, and explains the eternal rate of return in a way that does not fit in prose:

01 / The problemWhy does the internal rate of return undersell whole life insurance?

The internal rate of return undersells whole life insurance because it measures the policy as a closed box, and the policy is not designed to be a closed box. It is designed to be borrowed against. An internal rate in the 4 to 4.5% range describes what the cash value earns if you deposit premium for forty years and never use it. Almost nobody who owns a properly designed policy uses it that way.

Phil's breakfast with an attorney more than 20 years ago is the cleanest version of the problem. The attorney's son had bought a policy. The father called a meeting, told Phil that life insurance was the worst investment possible, and asked why Phil had sold it to his son. Phil agreed with him. By itself, held as an investment and never touched, a whole life policy is a poor investment, and Phil said so to the man's face.

Then the conversation turned to what the attorney considered the best investment: commercial real estate. He owned the building his firm sat in. Phil's response was that he had access to $1.2 million of policy equity that day, on demand, and could buy as much commercial real estate as he wanted with it. The attorney's next question was "how do you do that?" The objection was never really about the rate of return. It was about a man who did not know the policy could be used while he was alive.

Control and liquidity are the two words Phil's mentor, an estate planning attorney and CPA, used with every business owner. A business owner wants both, and the conventional capital stack gives neither. Bank credit lines are controlled by the bank. Retirement accounts are liquid only inside rules set by Congress. A properly structured policy is one of the few assets that gives an entrepreneur capital on demand without a lender's approval, while the underlying asset keeps growing. That is what the internal rate of return cannot measure.

02 / The frameworkWhat are the three rates of return of whole life insurance?

The three rates of return of whole life insurance are the internal rate, the external rate, and the eternal rate, and Phil's point is that every dollar you deposit carries all three at once. The internal rate is what the policy earns on its own. The external rate is what capital borrowed against the policy earns when it is deployed into something else. The eternal rate is what the death benefit, and the discipline behind it, leave for the people who come after you.

The first is the only one an illustration can show. The second is where the money is made. The third is the one Phil says has the greatest effect, because it has a multiplier that outlasts every asset on the balance sheet.

Where infinite banking ends and The And Asset begins

The external rate of return is the territory of infinite banking, and it is where BetterWealth parts ways with how the concept is usually taught. Nelson Nash pioneered the use of whole life insurance as a personal banking system. His insight in Becoming Your Own Banker holds: you either pay interest to an outside lender, or you pay the opportunity cost of capital sitting idle. We respect that foundation. The And Asset, our own framework, builds on it and operates on different principles.

IBC says you can use a whole life policy as a personal banking system for any purchase. The And Asset says you only deploy capital from the policy when the borrowed dollars will produce a return greater than the carrier's loan cost. Anything less is an expensive way to spend money. Phil's house and Phil's equity stake in a healthcare business clear that bar. A car does not.

Many IBC marketers also say you pay yourself interest when you borrow. The And Asset says no. The interest goes to the carrier, because the carrier is the one lending you money against your cash value. Your return is the external rate: what the deployed capital earns while the policy keeps compounding, net of mortality and expense charges, on its full value.

Your dollars doing two jobs at once. That is the And.

03 / Internal rateWhat the policy earns on its own, and why year one looks bad

The internal rate of return is the growth of the cash value itself: guaranteed accumulation plus dividends, net of the carrier's mortality and expense charges. Over a long horizon on a policy from a strong mutual carrier, that number lands around 4 to 4.5% on current projections. Dividends are declared annually and are not guaranteed, so treat the figure as illustrative. The guaranteed cash value does not decline with markets, which is the "safe" answer in Phil's five-way test, with one caveat covered below.

The capitalization phase

In the early years, the surrender value trails cumulative premium. Phil's explanation is the one we use as well: your deposits are credited to the contract in full, but the carrier limits how much you can access while the policy capitalizes. On a $100,000 annual premium, the carrier will not let you touch the whole $100,000 in year one, even though the whole $100,000 is working inside the contract.

For a healthy individual on a policy designed for cash value, total cash value first exceeds total premium at year five or later. Not year one. Not year two. Any illustration or agent that promises otherwise is selling something other than a whole life policy. Phil's own answer is that he would not write a policy for anyone planning to cancel it inside five years, and he would say the same of thirty. A policy is a long-term purchase, in the same category as a building or an equity stake, and the only way to lose money in it is to surrender early.

Surrender early and you lose. Hold and you do not.

04 / How it worksHow do you capture the external rate of return, step by step?

You capture the external rate of return by structuring the policy for cash value, funding it through the capitalization phase, and borrowing against it only for an activity that beats the carrier's loan cost. Phil's own examples run from a house he and his wife bought for cash to an equity stake in a behavioral healthcare business, both funded by loans against his policy. Here is the sequence we use.

1. Structure for cash value. A low base premium and a heavy paid-up additions rider, for example a 30/70 base/PUA split, funded to the limit without triggering a Modified Endowment Contract. The PUA rider is what pulls early cash value forward. We cover the design decision in detail in our guide to how to structure a whole life policy.
2. Fund through the capitalization phase. Expect surrender value to trail cumulative premium for three to four years, with break-even at year five or later. Do not plan any surrender inside that window. Loans are available much earlier, typically within the first year, but the base has to be built first.
3. Identify a deployment that beats the loan cost. Run Phil's five-way test on the opportunity, not just on the policy. Is it liquid? Is it safe? What is the rate of return? What are the tax benefits? What is the exit? If the expected return does not clear the carrier's loan rate with room to spare, stop here.
4. Borrow against the policy. The carrier lends you money collateralized by your cash value. You do not withdraw the cash value. It stays in the contract and keeps compounding, net of charges, subject to the carrier's recognition method. The interest goes to the carrier. Phil's phrase is that the loan is a permission slip, available on demand, with no underwriting and no bank.
5. Deploy and repay. Put the capital to work and repay the loan from the cash flow or the exit the activity produces. Phil paid cash for a house, avoided closing costs on financing, put $20,000 to $30,000 into it, and sold it in under 90 days for roughly $180,000 of profit. The sale repaid the loan. The discipline of repayment is the whole strategy.
6. Keep the capital base intact. Leave the policy in force. The death benefit was covering Phil's family the entire time the house was being renovated. When the loan is repaid, the cash value is available again for the next deployment. The cycle is repeatable because the base never left.

The interval between funding and first loan is shorter than most people assume. We walk through the timing in our article on how soon you can borrow against a whole life policy.

05 / The mathDoes the deployed capital clear the loan cost?

The deployed capital must earn more than the carrier's loan rate, or the external rate of return is negative and you should not borrow. This is the whole test. Policy loan rates vary by carrier and rate environment. At the time of writing, many carriers fall in the 5 to 6% range, but treat any specific number as a variable to verify with your carrier, not a constant.

The structure of the decision has three parts. You borrow at the carrier's loan rate. Your policy keeps compounding on its full cash value, net of charges, with the borrowed portion treated according to the carrier's recognition method. Your deployed capital earns its own return. If that return exceeds the loan rate, the same dollar has produced two returns. If it does not, you have borrowed money to lose it slowly, and the uninterrupted compounding of the policy does not rescue the decision.

Phil frames the loan itself against a margin loan on a brokerage portfolio, which his firm arranges for clients regularly. The two are mechanically the same: a loan collateralized by an asset you still own. The margin loan carries a higher rate and a real risk of being called and liquidated in a downturn. The policy loan cannot be called, the guaranteed cash value does not fall with markets, and you set the repayment terms. Same mechanism, lower cost, no forced liquidation.

If the deal does not clear the loan rate, do not borrow.

06 / Where people get it wrongWhy "pay yourself interest" is voodoo math

You do not pay yourself interest on a policy loan, and the belief that you do is the single most damaging error in how infinite banking gets sold. Phil met Nelson Nash in the late 1990s and found much of what Nash said persuasive. What never added up, when he ran the numbers, was the claim that the interest he paid on a loan went back into his own account. It does not. The carrier lends the money against the cash value, and the carrier collects the interest.

Phil's phrase for the version of the concept that circulates online is voodoo math: double dipping in one place, double dipping in another, percentages that do not reconcile. The mechanics that got lost in translation are simple. If the carrier charges an illustrative 6% and you choose to pay 8% into the loan, the extra 2% accelerates repayment. If you keep paying after the loan is gone, the surplus can fund paid-up additions. That is real, and it is a discipline worth having. It is not the same as the interest coming back to you, and almost nobody selling the concept explains the difference.

Nash, to his credit, was trying to make the idea simple. Simplicity opened the door to marketers who turned a capital discipline into a promise about buying cars and boats through your policy and coming out ahead. Marketers have ruined the way this should be explained, which is why Phil's framing of "sound advice versus sounds-good advice" is the right filter. Infinite banking sounds good. The question is whether the specific version you are being sold is sound.

The honest version, which is the one The And Asset teaches, is that the interest is a cost. The return is the external rate: what the borrowed capital earns somewhere else, while the policy keeps compounding. Anyone who has to hide the cost to make the strategy attractive is not describing the strategy. They are describing a sale. Our full assessment of where the concept holds and where it fails is in our infinite banking pros and cons review.

07 / The five-way testWhy choose whole life over a 5% savings account?

A whole life policy beats a 5% savings account over a long horizon on tax treatment, safety, and the benefits attached to the contract, even though the savings account wins the first four years on raw liquidity. Caleb put the hypothetical to Phil directly: a fully liquid account paying 5%, taxable, with no capitalization phase. On the math alone, in isolation, that account is attractive. The five-way test is how Phil answers it.

Liquidity, safety, rate of return, tax, exit

On liquidity, the policy loses the early years and matches or beats the account afterward, because a policy loan is available on demand without a bank. On safety, the guaranteed cash value does not decline with markets, and the only loss scenario is early surrender. On rate of return, the policy's internal rate is modest, but the carrier is also taking mortality risk off your balance sheet, which the savings account does not do. On tax treatment, savings interest is taxed as ordinary income every year. Policy growth is tax-deferred, policy loans are not taxable income, and the death benefit passes to heirs income-tax-free under IRC Section 7702. In a high-tax state, that gap widens every year. On exit, the policy's exit is the death benefit, which the savings account does not have at all.

Add the items the savings account cannot carry: an income-tax-free death benefit, potential creditor protection depending on your state, and optional chronic illness or long-term care riders. A 5% account earning ordinary income for a 37% bracket earner nets roughly 3.15%. A policy earning an illustrative 4.25% net of charges, tax-deferred, with a death benefit attached, is a different asset class. The comparison is not close once the horizon is long enough, and the horizon is the whole point.

Higher yield is not the same as better capital.

08 / The tradeoffsBenefits and the honest tradeoffs

The benefits of treating a whole life policy as a capital base are real and so are the costs, and any presentation that shows only one side is a presentation you should walk out of. The benefits: capital on demand without a lender, uninterrupted compounding on the full cash value while borrowed against, tax-deferred growth with loans that are not taxable income, a death benefit that covers your family while the capital is at work, and a loan that cannot be called in a downturn.

The tradeoffs are four. First, the capitalization phase: surrender value trails premium for three to four years, and surrender inside that window loses money. Second, the internal rate of return is modest, and the policy will never compete with a good business on that metric alone. Third, the loan carries real interest paid to the carrier, and the external return has to clear it every time. Fourth, the strategy requires discipline, because the same access that funds a building can fund consumption, and nothing in the contract stops you.

Phil's own accounting of the house deal captures both sides. The loan cost was real, and low at the time. The policy kept earning dividends on the borrowed money because it was a participating loan. The death benefit covered his family the entire time. The house carried its own risk, as every real estate deal does. What carried no market risk was the capital base underneath it. That is the trade: a modest internal return in exchange for a base that does not move when everything else does.

Modest inside. Uncalled, uninterrupted, and yours.

09 / The eternal rateHow the third rate of return fits a capital strategy

The eternal rate of return is what the policy and the discipline behind it leave for the next generation, and Phil argues it has the greatest effect of the three. Financially, it is the death benefit passing to heirs income-tax-free, at a multiple of what was paid in, regardless of whether the entrepreneur died at 52 or 92. Every other asset on the balance sheet, in Phil's words, will eventually burn out. The death benefit is the one designed to arrive on time.

Phil takes the idea past the money. The eternal rate, as he describes it, is also the wisdom a family inherits about capital: how to hold it, how to deploy it, when not to. His book opens with the question of how to tell sound advice from advice that merely sounds good, includes a ten-question true-or-false quiz to gauge the reader's financial mindset, and closes on forgiveness, which he calls the currency that outlasts every balance sheet. We are not in the business of telling readers what to believe. We are in the business of pointing out that an asset which protects a family, funds a business, and passes a tax-free benefit to grandchildren is doing three jobs, and that the third one has no rate on the illustration.

In a broader capital strategy, the policy sits underneath the two investments Phil ranks highest for an entrepreneur: their own business first, real estate second. It does not compete with either. It feeds both. The internal rate keeps the base growing, the external rate is captured by what the base funds, and the eternal rate is what remains when the entrepreneur is gone. That is the integrated structure Phil has been describing for more than 25 years, and it is the reason we call the framework The And Asset rather than an investment.

10 / Head to headPolicy loan against the alternatives, on $100,000 deployed

Compared with the other ways an entrepreneur can access $100,000 for a deal, a policy loan trades early-year access for a lower cost of capital, no risk of the loan being called, and an asset that keeps growing while the money is out. The table sets it against a high-yield savings account, a margin loan, and a home equity line of credit on the dimensions that decide the external rate of return. Rates are illustrative and vary by carrier, lender, and rate environment.

FAQWhole life insurance rate of return questions