Annoying Problems

The Truth About Cash Value Life Insurance

Jul 27, 2008 Finance

Cash value life insurance vs term life insurance

One of my friends works for MetLife.  She is a new agent, and we tried to help her by purchasing insurance policies for me and my wife.  Back then, we had no idea what we were getting into.  Everything she explained to us sounded good.  We were told that at the end of the term we can get our premium back and we can get it out any time we want.  For two policies we paid $300 every month.

After reading a number of finance books, I've started to realize that I've made a huge mistake with my life insurance;  Another poor choice made.  In this post, I will tell you everything about cash value life insurance and why should you avoid it.

What is cash value life insurance?

First of all, let's understand what cash value life insurance is.  A cash value policy is product that combines insurance and savings together. This insurance package was designed by the insurance companies to have more money in their bank.  So when you purchase a cash value policy, a small portion gose to the premium and the rest goes to your savings account.

So what's wrong with cash value life insurance?

The major problem with a cash value policy is that the returns are horrible.  Looking at my policy I've lost almost all of my cash value since the beginning.  There was not a single month where I gained money.  The wonderful projections shown by my friend was not even close to what I was getting.  I understand that I should have a long term perspective, but I don't think it's going to get any better.

Another thing you should know about cash value life insurance is that your cash value, or your savings don't go to your family upon your death.  They get paid only the face value of the policy.

Why does everyone purchase cash value life insurance?

It is pushed hard because the companies pay high commissions on cash value life insurance.  Sadly, over 70% of the life insurance policies sold today are cash value policies.

Should I buy term life insurance instead?

Yes, you will be better off with a term life policy.  It is very simple and the prices fall every year.  You can buy the same coverage for a fraction of the cost.  Buy a term life policy and invest the rest in good growth stock mutual funds that have been open for 5 years or longer.

Tags: insurance, money, personal finance