What it means
The problem the method solves is that life policies are not directly comparable. A whole of life policy costs far more than a term policy but builds a cash value, so comparing premiums alone tells you almost nothing.
The method equalises the two offers before comparing them. Term cover is added to whichever arrangement has the smaller death benefit until both would pay the same amount, and the premium saved on the cheaper arrangement is treated as invested in a side fund.
You then project both forward to a chosen date, often 10 or 20 years, and compare the cash value of the permanent policy against the balance in the side fund. Whichever is larger represents the better financial outcome on the assumptions used, with the insurance protection held equal throughout.
The answer depends heavily on the assumed investment return, and that is the honest weakness of the method. A side fund assumed to earn 8% will usually beat the policy, while the same comparison at 3% often will not, so the assumption should be stated openly and tested at more than one rate.
Several real-world factors sit outside the calculation. The tax treatment of policy cash values, the guarantees inside a permanent policy, rising term premiums as the insured ages, and the simple human tendency to spend a side fund rather than keep adding to it all affect what happens in practice.
A close cousin is the Linton yield, which asks the same question from the other direction. Instead of comparing balances, it calculates the investment return the side fund would need to earn in order to match the policy exactly, which some advisers find easier to explain.
In practice
Real-world examples.
Example
A business owner aged 42 is shown two policies by different advisers and cannot compare them. Running the cash accumulation method at an assumed 5% return shows the term route ahead at year 10 and behind at year 25, which lets her decide on the basis of how long she actually needs the cover.
Example
A company considering a whole of life policy to fund a shareholder buy-out agreement runs the comparison and finds the permanent policy wins once the guaranteed death benefit beyond age 70 is counted. The term alternative becomes unaffordable at exactly the age when the risk is highest.
Example
An adviser reviewing a client's 15-year-old policy uses the method in reverse to work out what the policy has effectively earned. The result shows it performing acceptably, so the client keeps it rather than surrendering it on the strength of a sales pitch for a replacement.
Formula
Calculation
Side fund balance = the sum of each year's premium difference grown at the assumed rate to the comparison date
A buyer is offered a whole of life policy with a $500,000 death benefit for $6,000 a year, which has a cash value of $9,500 at the end of year three. The alternative is a term policy with the same $500,000 death benefit for $1,000 a year, leaving a premium difference of 6,000 - 1,000 = $5,000 a year to invest at an assumed 5%. Paying at each year end, the first $5,000 grows for two years to 5,000 x 1.1025 = $5,512.50, the second grows for one year to 5,000 x 1.05 = $5,250, and the third is still $5,000. The side fund totals 5,512.50 + 5,250 + 5,000 = $15,762.50, against the policy's cash value of $9,500, a difference of 15,762.50 - 9,500 = $6,262.50 in favour of the term arrangement on these assumptions.Case study
Seen in the real world.
Tollgate Joinery is an illustrative, fictional cabinet maker whose two owners each wanted $1,000,000 of cover so the survivor could buy out the other's family. One owner favoured permanent cover, the other wanted term cover plus an investment account.
Their accountant ran the cash accumulation method with the death benefits equalised at $1,000,000 and a 5% assumed return. Over 15 years the term-plus-side-fund route came out roughly $70,000 ahead per owner, but the projection also showed the term premium rising sharply in the final five years and ceasing altogether at age 75.
Because the shareholder agreement had no end date, the illustrative conclusion was a mixture: term cover for the next 15 years, when the business debt was highest, plus a smaller permanent policy for the long-term buy-out obligation. The method did not so much pick a winner as show where each design genuinely worked.
Watch out
Common mistakes.
- Comparing a whole of life premium with a term premium directly, without equalising the death benefits, which makes the term policy look better than any fair comparison would show.
- Choosing a flattering investment return for the side fund and presenting the result as a fact rather than as the output of one assumption.
- Forgetting that term premiums rise at each renewal and eventually stop being available, so a 10-year comparison can mislead badly for a 40-year need.
Questions
People also ask.
What investment return should be assumed?
There is no correct figure, so the sensible approach is to run the comparison at two or three rates, one cautious and one optimistic, and see whether the conclusion changes.
Does the method prove that buying term cover and investing the difference is better?
No, it shows which option is better under stated assumptions over a stated period, and the answer frequently reverses over long horizons or where guarantees matter.
Is the cash accumulation method the same as the Linton yield?
They answer the same question from opposite ends, because the cash accumulation method compares end balances while the Linton yield calculates the return a side fund would need in order to match the policy.
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