Cash value life insurance is the most widely sold life insurance product in the world today. It is also the life insurance product that is WORST for your Finances.
These products are also known as:
• Whole Life
• Universal Life
• Variable Life
• Interest Sensitive Life
• Non-Participating Life (no “dividends”)
• Participating Life (pays “dividends”)
Why are cash value products a bad choice for your insurance needs? I could write a book about this, but here are five simple reasons.
1. Too expensive. All life insurance is priced at a cost per thousand dollars of coverage. Cash value life insurance is high priced. Term life insurance is very low priced per thousand. Better to buy term life insurance to make sure you have enough coverage.
2. Borrowing your own cash value. After you’ve paid a few years of premium into your policy, it starts to accumulate some stored-up money, which the insurance company calls “cash value” or “surrender value.” It is the amount of extra premium you have paid ahead that has not been used to cover your pure insurance costs. If you want your cash value, you must either surrender your policy and lose your coverage, or borrow the money from the insurance company and pay it back.
3. The insurance company keeps your cash value when you die. Your beneficiaries can’t have both your cash value and your death benefit. So, if you had paid into your $100,000 cash value policy for 40 years, and had accumulated cash value of $25,000, the insurance company pays $100,000 and keeps the cash value.
4. Surrender and cancellation penalties. In the first 1-10 years of many cash value policies, the cancellation penalties are so high that you cannot get out any cash value at all...or only a small percentage.
5. Generally life insurance “dividends” are tax free and you do not report them on your tax return. That's because life insurance “dividends” are not true dividends at all, like what is paid when you own a share of common stock. In life insurance, the term “dividend” is used to deceive policyholders into thinking that life insurance is a comparable investment to securities. The IRS says that insurance “dividends” are a return of premiums that you previously paid for the life insurance policy.
I’ve tried to keep this as simple as possible. These five reasons should be enough to convince you that cash value life insurance is a poor product. If you need life insurance, look first at term life insurance. It is very inexpensive and allows you to buy the amount you need.