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Friday, January 2, 2009

Cash Value Life Insurance -vs- Term Life Insurance

Question: PLEASE tell me your opinion about Whole Life / CV Life Insurance. I have seen [some idiot on TV] call cv policies ' terrible wastes of Money ' along with other Economic authorities. Of course there are the Career Life agents that say buy Whole Life as a ' Best Buy ' because the CV can become the foundation of a Retirement Plan , plus the death benefit . I am sooo Lost ,...and have been searching for the ' Truth ' for years !

Many thanks in advance !

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Whole life is "the insurance agent's best friend" because whole life policies usually have a "commissionable premium" in the 70% range, as opposed to universal life policies that pay the agents in the 30% range. With a big policy, it can be a huge difference for the agent.

For the owner, it can be a bid deal too. The problem with whole life is that it requires level funding. While sometimes this makes sense -- when the life insurance policy is part of some benefit plan requiring levelized funding, for instance -- it often doesn't make any sense at all for ordinary insurance purchases, where the owner doesn't know if he will really have the cash flow to fund the policy for whatever required period of time. So, universal life will almost always beat Whole in the "what is best for the client" competition.

Having said that, both Whole and universal life usually makes more long-term sense than just buying Term, which gets more expensive as you get older and doesn't build up any cash value to cover future payments. Usually, the critics of cash value life insurance and pundits of term insurance can only point to the current-year premium advantage of Term, as opposed to the total long-term cost which favors universal life and Whole.

But the bigger question is whether to buy life insurance at all. If your survivors will need life insurance, then buy it. If your estate will need life insurance to cover estate taxes, then buy it. Otherwise, you probably don't want to buy it.

While life insurance is certainly an "investment" in the same sense that buying a piece of property is an investment, it has to be measured in the long-term against other investments, including the fact that the CV grows basically tax-free against the death-benefit cost that other investments do not have.

Most of the time, the "other investments" will make more sense depending on a gazillion factors. There are a lot of really happy investors in equity-indexed annuities and life insurance right now, who have watched their friends and colleagues lose 30%+ while they will simply credit 0% for 2008. But equity-indexed strategies can be replicated outside of the life insurance or annuity context.

So, the answer is -- which will NOT clear up your confusion -- that it "depends" on the gazillion circumstances. Those who use a shallow analysis and say never buy cash value life insurance are wrong, and those who say buy nothing but cash value life insurance are wrong. In other words, the sound-bite extremists on both sides are wrong. What will make sense for YOU will depend on YOUR particular circumstances and needs. Maybe you need it, maybe you don't. Maybe it will make sense for you, and maybe it will not. But this is why good financial planners are worth their weight in gold.

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13 Comments:

At January 2, 2009 at 10:13 AM , Blogger CaptainKickback said...

Remember the old adage, "If the only item in your toolbox is a hammer, all problems look like nails."

 
At January 7, 2009 at 9:34 AM , Blogger Arthur Rubin said...

It all depends. I've heard that "whole life" is like a combination of (overpriced) level term life and an annuity, which can best be purchased separately. (And this was from a person selling whole life.)

 
At March 9, 2009 at 10:36 AM , Blogger benjamingrahamcracker said...

I sold life insurance for over 10 years; both cash value policies and term life. ALL forms of life insurance are a waste of money. The most important fact you should know about insurance that most of you don't know is that insurance IS NOT an investment vehicle and any insurance agent that represents a policy as an investment can have his license revoked permanently. Call your state insurance commissioners office to report any misleading information an agent represents to you. Find yourself a good money manager. NOT A MUTUAL FUND, but a "real" money manager. He'll teach you how to self insure yourself and save you a ton a money over the period of your life.

 
At November 4, 2010 at 12:26 PM , Blogger Larry said...

I mean, a lot of it depends on your age. You should get a life insurance quotes/quote online before making any decision, to gauge which policy is right for you.

 
At June 17, 2011 at 5:51 AM , Blogger BiancaTorres said...

yes, I would call to get a Term Life Insurance Quote before making any hasty decisions. I myself prefer term, because I'm a single mother and don't make a lot of money.

 
At June 22, 2011 at 8:17 AM , OpenID Wilson O'Doyle said...

I personally went with Universal Life Insurance
, since it makes me comfortable knowing my family will be covered after I'm gone.

 
At September 24, 2011 at 11:04 PM , Blogger Richard. said...

This is a very good, and much needed article. Most people don’t have nearly enough life insurance for their family’s needs. You make it very clear.

Buy life insurance

 
At December 21, 2011 at 10:42 AM , Blogger mike said...

This is a great article. I would recommend this to anyone looking to get a life insurance quote anytime soon

 
At January 23, 2012 at 12:11 PM , Blogger Paul Gates said...

Whole life is legalized fraud. Would you "invest" here?
1. No money in "investment" for 2 years minimum.
2. 3% rate of return over 30 years
3. 6% to borrow your OWN money!
4. The insurance company keeps the money when you die!
It's right in the whole life contracts!
Universal life is even worse. Your insurance premium rises with age, and eventually your monthly premium doesn't cover the cost of insurance. The difference is taken out of the investment portion of the policy. Eventually you have nothing--the insurance premiums deplete the investment portion and you have to start paying huge premiums to keep the insurance in force. Term is the ONLY option.

 
At July 20, 2012 at 12:41 AM , Blogger Insurance SA said...

Whole life insurance is perfect for those who can afford a higher premium and want to avail of guaranteed death benefits and cash values. However, people tend to favor term life insurance because it's the most affordable type and offers a lot of coverage for a relatively lower monthly premium. If you're stuck making a tough decision, you could seek the help of a life insurance broker who may be able to advise you on which plan would best meet your needs.

Regards,
Laura from bestlifeinsurancequotes.co.za

 
At January 14, 2013 at 3:35 AM , Blogger Amelia said...

Great post. I am pleased with the way you have pointed the difference between both these life insurance types. I would definitely prefer to buy a cash value policy because it best matches up to my requirements.
liability insurance companies

 
At September 2, 2015 at 11:39 PM , Blogger JeorgeSmith said...

Thanks for the entire information you have given here to impart knowledge amongst us?best life insurance

 
At August 1, 2016 at 5:50 AM , Blogger Ritika Shah said...



Thank you for sharing such great information. It is informative, can you help me in finding out more detail on Life Insurance Premium,i am interested and would like to know more about this field and wanted to understand the basics of Life Insurance

 

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