Isn't all cash value policies are term insurance?

Question

Whether its whole life, universal life, or variable life, when you pay your premiums, your premiums are being paid for two things: 1) Term insurance and 2) Cash value.

At the beginning, most of your premiums are paid toward the cash value. As you get older, term insurance gets more expensive, so less of your premiums goes toward the cash value.

So the notion that says cash value life insurance isn't Term insurance is not true. Both provide coverage to age 95 or 100. But cash value policies has term insurance premiums that goes up every year, even though premiums as a whole may remain level. But buying term insurance by itself remains level for awhile and only go up when you renew it.

If that's now how cash value work, then what do you make of it?

Answer 1

For the first part of your question, you are either paying for term insurance, or you are paying for permanent insurance. And with this, the structure of the cost of permanent insurance is different because of the accrued value. It may be splitting hairs to you, but what you are paying is for the cost of insurance, and saving

For the most part, in theory, what you say is true, but the answer isn't quite as simple as you protray it. There are term policies available to age 100, but they are sold infrequently.

The cost structure over time for term insurance is going to be higher than that of a permanent policy, therefore rarely are they used for the same purpose which is sort of what you imply with your question.

You also do not make a distinction between term policy premiums and permanent policy premiums, which is something you should do, since they are not the same.

For example, there are things you can do with the cash value and dividends (which are different) to where a policy holder can make premiums for five or 10 years, then put the policy in the drawer and forget about it.

On the other hand there might be a married couple where say the wife chooses to go back to school. They may want additional insurance to cover the cost of her tuition. This is an approximate amount, but for a definite period of time. This is an idea situation where a term policy may come into play.

The point I'm trying to make is that term life and permanent life are very different instruments with very different uses. With your question you are taking a very specific situation where one of the types is almost never used, then say that somehow they are both the same.

If you want to look at a basic whole life policy, then yes you are correct, sort of.. Through acturial tables, there is a estimated cost of insurance for someone. That total cost of insurance is averaged for the life of that policy. Therefore, the policy holder pays the same amount for the cost of insurance with each premium (even though the cost of insurance does increase).

Along with this, the policy holder does contribute toward the living benefit. But on the same token this is carefully regulated. There is something called a corridor between the death benifit and the policy holder's contribution to the accrued cash value. If that corridor becomes too narrow, then the instrument is considered an investment instrument and we'd either lose our licenses or require a series seven license and be stock brokers to sell them.

Answer 2

The answer given above by Long Snapp is the most accurate, the other two while well meaning are a bit misleading. While there are some life insurance products designed as investment products, most aren't intended as investment vehicles. You pay a premium to secure a desired cash payment upon your death.

It's a factual statement that agents earn a larger commission on policies which have a cash value component, however that doesn't necessarily make them a bad purchase if that policy has the flexibility to accomplish whatever you think your family might use it for thru the years (like the examples given by Long Snapp)

Using the amount of commission earned to decide which policy is best for you personally is like someone telling you a salesman earns more selling you a new car, so always buy used cars!! You may want a new car, or you may not care about it being used!

There are two problems w pure term insurance that aren't mentioned here. First while buy term & invest the difference is generally good advice, most folks don't have the discipline required to actually invest the difference, & even if they do, the money is often used for other needs & isn't available WHEN....the term premiums have reached a point where paying them is more challenging, & all too often folks then allow the policy to lapse.....& at an age when you are more likely to die & may still need the coverage...it's gone.

Answer 3

If this was term insurance, it was to be paid year by year. Each yearly premium keeping the insurance in place for another year. So, let's drop the word "term." I believe this is classified as "Limited-pay" insurance. (This is a variation of whole life insurance.) A limited-pay life insurance is one in which the premiums are paid over a specified period after which no additional premiums are due. This can be 10 years (or more) of premiums. However, it doesn't necessarily pay any more than the face value of $500 unless there was some dividend reinvestments going on. Cash values before death seem to max out at 80%. My dad had one of these. After he died, I found the letter from 30 years before that all the premiums had been paid and he'd have the policy for life. I never found out what the face value was, so I can't tell you if the check we got was more or not. Dad had forgotten he even had the policy.

Answer 4

Insurance typically has a terrible rate of return on the investment portion. Plus a fair amount of your premium is going to pay the agent's commission.

You will be much better off buying term insurance and taking the difference in your premiums (and boy will there be a difference) and investing the rest in some sort of low cost investment like an index fund.

Look at this way, the purpose of insurance is to make you whole, or replace something you've lost. Life insurance is to replace lost income for the family. If insurance is such a great investment vehicle, why don't auto or home insurance policies have cash value?

Stick with the term insurance and invest the rest in vehicles that are meant to make your money grow.

Answer 5

This is hillarious. Most people's opinions on life insurance are WAY out dated. First of all, you should ONLY buy term insurance. This is because no matter how much money you funnel into a cash value policy you will NEVER EVER get it back without canceling the policy. In order to get it before that, they charge you interest, and if you don't pay it back, they just reduce your face amount. If you die with cash value still in the policy, the company pockets it. If you dont believe me, read your policy. Only buy term.

The only reason to need insurance for your whole life is if you didnt plan on retireing in the first place. In other words, you can cancel your life insurance policy once you have enough cash saved to cover an untimely death.

"Whats wrong with your life insurance" Great book for those that dont believe me.

Answer 6

Well most people do NOT keep a cash value policy until they die. They cash it in, or cancel it, making it MONGO profitable for the insurance company.

Also, if you have ANY self control at all, and buy term and "invest the difference", it's not too hard to have MORE money than the face value of the policy, by the time you get to 100. Or actually well before.

Answer 7

OK, the only thing you can do with the cash value of the whole life, universal life, or variable life is borrow it or get it back if you cancel the policy. term insurance has no cash value, and that's why its cheaper, then the rest, even for a million dollar benefit. not to mention whole life, universal life, or variable life has a boat load of fees, and the agent makes a nice commission off it, and that's why they try to steer it to you. it is also not the best investment you can make. you can do better on your own.