I’ve always thought the the term cash value life insurance was more of an old school term. What it refers to is the cash build up inside of a whole life policy. This cash reserve is the money that allows an insurance policy to remain in force for whole life. Somewhere along the line, the concept of a cash value life insurance policy became a no-no with some financial gurus because the financial return of the cash value inside the policy isn’t as good as investments outside of an insurance policy.
I don’t know where it started, but in an effort to sell more whole life insurance, agents felt like they had to sell it as an investment. Even when I first started in insurance, they had developed variable life insurance where you can invest the cash value of life insurance into separate accounts or mutual funds that can theoretically perform just as well as mutual funds outside the policy. Insurance agents produced illustrations of over funding the policies to create a tax free income. The fact is that most of these policies didn’t live up to the hype because it was being sold as something that it wasn’t. I think they even referred to it as a “personal pension” plan.
And that is the real fallacy of the life insurance industry. Creating products that let the consumer down and selling them through agents that don’t know what they are selling has been their worst enemy. Life insurance is an important tool for everyone’s financial plan, both term and whole life. What’s really needed is a life insurance policy that is completely guaranteed for life with a guaranteed value and premium structure. In this economy, when all else has failed, guarantees are what consumers need for the foundation of their security.
I am always amazed that you can present two products to a person. On the one hand, one that’s guaranteed to pay and the other that might pay and some will tell me that the one that has the least chance to pay is always the best option. The main reason they do this is because the face amount is more and the premium less. It’s an easy decision to pay less. And, it’s almost a subliminal thing as well because term pays so much more you feel like you are getting so much less with whole life.
While life insurance with cash value shouldn’t be the end all be all though, what’s needed is a little bit of both types. Some whole life and a bunch of term life is the ideal way to go. The reason I say that is that you are always going to have to pay some final expenses when you die. You’ll most likely live a long time and the term that might pay will almost always expire before you do. Financial experts that suggest you only need term because you can eventually self insure forget that most people will not ever get to that point. When all their term expires unpaid, and they haven’t saved anything, their families are then stuck paying the full cost of their final expenses. Don’t let this happen to you.