The Disadvantages of Cash Value Life Insurance Explained
When considering life insurance options, one of the very popular, yet markedly flawed, types is cash value life insurance. This type of insurance includes Whole, Universal, Variable, and Indexed Universal life insurance. While some people may find it appealing due to its potential for building cash value over time, there are several significant disadvantages that most people understate or overlook.
The Myth and Reality of Cash Value Growth
Many agents market cash value life insurance as a financial investment. This marketing strategy can be misleading as it tends to overlook the core function of life insurance, which is to provide a death benefit to your beneficiaries. Cash value growth is often presented as a guaranteed return, but it grows very slowly and the advantage is always with the life insurer. The numbers you control over time are minimal, making it a poor investment compared to other financial instruments.
A Personal Testimony from Experience
I had the unfortunate experience of participating in the sales of cash value life insurance while I was a medical student. Although it would have been financially advantageous to sell this product, I declined due to its mathematically poor returns. It is far better, not only financially but also strategically for your loved ones, to purchase term life insurance and invest savings in a Roth IRA or other suitable investment opportunities. Using a simple interest calculator can demonstrate the significant difference in returns.
Why Cash Value Life Insurance is Expensive and Inefficient
One of the largest drawbacks of cash value life insurance is its high cost. The extra premium paid to fund the cash value portion is not as profitable as investing in more traditional financial vehicles. Over time, this can lead to a lower amount of coverage than needed, which often results in insufficient protection for your family. Additionally, whole life insurance policies can be very expensive, often making them unaffordable for many individuals and families.
Historical Example of Cash Value Life Insurance
A few years into our marriage, a friend approached us about purchasing a life insurance policy that would build up a cash value over a ten-year period. At that time, I did not fully understand the intricacies of the product. My work in Human Resources further emphasized the importance of providing financial security, especially during the exit process from employment. We decided on a policy that would build cash value and pay its own premiums in ten years, but the time frame stretched beyond our expectations, resulting in a twenty-year commitment. Through auto-deducted premiums, we managed to use the cash value to pay for our daughter's wedding and even purchase a used tractor. This demonstrates the product's usefulness but also highlights the risks and inefficiencies.
In conclusion, while cash value life insurance may seem like a good investment at first glance, it often fails to deliver the returns and coverage needed for long-term financial security. It is crucial to carefully consider your options and whether term life insurance paired with smart investments might better suit your needs.