After that, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy
Don't know where you are getting these figures because they are just not accurate at all. ETA: just saw the magazine report (though I still would like to see where try got their numbers. 90% of the WL products out there are complete garbage).
The 7.4% investment return is pretty good for the vast majority of people.
But to your scenario, what happens after 20 years? You lose the $125K of death benefit, and have have the $50K or so still invested. That is a $50K capital exposure, that you pay taxes on. What if you still need insurance? I would hope you could get, but lord knows I've seen enough situations of people not.
Now, say you did the WL, you have the $125K (most good policies appreciate over time though), the cash value that has accumulated has zero market exposure, and cannot go backwards. It is just, if not more liquid than your investment account, and at that point, your dividend will probably be able to pay the premiums, and you have insurance for the rest of your life.
Can buying term and investing the difference do better? Yes. Can WL do better? Yes. Why not do some of both to diversify and solidify your portfolio? Another beauty of WL is it can allow you to stay aggressive longer in your investment accounts if used as the base of your portfolio.
This post was edited on 4/2 at 8:43 am