"Diversify" With Whole Life Insurance?

In response to my recent post about life insurance, a commenter said:

Great blog, thanks for your efforts. I'm curious if you think there is a diversification value in whole life insurance. That is, are there circumstances under which one is better off putting $500 per month into an S&P index and $500 per month towards a whole life policy as opposed to putting $1k into the S&P?

That's a good question.  Diversification can be powerful and sometimes whole life policies are marketed this way.  However, I think that they are often disingenuous in this regard.  For example, a policy might promise you a minimum 4%/year, but often what you get is not what you expect.  Also, the purported diversification is extremely costly in your example.  See below for more details.