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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 !


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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