Wednesday, March 23, 2011

Term Life Insurance vs. Cash Value Insurance

Earlier this week, we took a look at the importance of life insurance and the basics of going about getting it. The right kind to get is "term life insurance", which gives you a fixed monthly cost for the term of 20 or 30 years.

There is another kind of life insurance product called "cash value life insurance", but it is most commonly known as whole life insurance, variable life insurance, universal life insurance or some mix of these words. Regardless of whatever name is presented to you, DO NOT GET IT! (Not much for mincing words today.) You may or not have been approached already by someone selling this type of life insurance. We were approached three times in our young marriage. We bought the first time. We learned the lesson the hard way. You can learn it the easy way!

Term life insurance is an inexpensive way to insure. You pick a time frame (10, 20 or 30 years) and you pay a low monthly cost to have insurance for exactly the number of years you picked. Your cost is locked in for the 10, 20, or 30 years, which is a GREAT thing since insurance only goes up as you age. (Unless you age backwards, in which case you may want birth insurance.) (That's a joke.) (There's no such thing.)

Whole/universal/variable life insurance is touted as insurance with a savings plan. This kind of life insurance costs hundreds of dollar per month, a bunch of your money goes to high administrative fees and the investment returns (the profits) are mediocre or poor. This type of insurance does not have a time frame. It is in place until you either cancel it or you die. For most of these types of cash value life insurance, the investment/savings does not even go to your loved ones when you die; the insurance company keeps it.

Whether I liked it or not, from a very young age, I have been cursed with an inherent calculator that tells me when something doesn't add up right. When cash value insurance was first presented to my husband and I, something felt completely off about the whole thing. I stated this to the salesman and my husband several times during the pitch. Of course, the salesman insisted this was a "sophisticated" investment vehicle and tried to make me feel like a simpleton. I still knew something wasn't right but couldn't put my finger on it. I finally threw my hands up and agreed to the thing I did not understand simply because I wanted the meeting to be over. That was an expensive surrender.

After two or three years of putting hundreds of dollars each month into the plan, I decided to take a fresh look at where our money was going. Know what I found? We had put in thousands of dollars but our "investment" was worth only $500, not because the investment had done poorly, but because administrative fees had eaten up the rest of our money! Cash value insurance was a great investment FOR THE SALES REP in the form of a handsome commission. I immediately called the company and canceled the rip-off.

Let's compare the two kinds of life insurance for a healthy 30-year-old male. (The following example is derived from a Dave Ramsey Financial Peace University lecture.)

You are reading that right: Cash value life insurance coverage for this individual is $275K LESS than term life insurance coverage yet costs $135 per month MORE. Why is that? Here is where a sales rep for whole/universal/variable life insurance would point out you are paying for a savings or investment plan. Well, OK, but what would happen if you take the $135 a month you save by choosing a term life insurance and invest it in a good growth stock mutual fund?

On the left side, you are seeing that at age 50, this 30-year-old will have about $27,000 saved up through cash value insurance. On the right side, you see that taking the $135 per month and investing it himself in a better plan, this person would have about $130,000. What a difference! Where do you want YOUR money growing?

(Tangent: Note that with Cash Value insurance, by age 50, this person has invested $34,800 [$145 x 12 months x 20 years], and yet only has $27,500 to show for it. By age 70, this person has invested $69,600 [$145 x 12 months x 40 years], yet the average return is $66,000. This guy would have done better to stick his money in a cookie jar. But don't you do that; invest instead in a good mutual fund.)

Always choose term life insurance and put the difference in an investment that gives you BETTER returns and has little or no fees involved. The added advantage is you can leave your investments to your loved ones.

I don't sell any type of insurance. Be assured I am only biased toward empowering women with knowledge. The agenda I have is to save families thousands of dollars and free them from our culture's ignorance regarding personal finance. Without exception, I've only met two types of people who own cash value life insurance: 1) Those who sell it. 2) Those who don't understand it.

When it comes to life insurance, keep it simple and inexpensive. Get term life insurance.


  1. Great !! I am really impressed with the information that you have shared and do have also realized the major point of differences between both the type of life insurance policy. I am in favor of term life insurance as its the best option for all those who are having up a tight budget.
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  2. Whole life insurance would be perfect for those who can afford a higher premium and want to avail of guaranteed death benefits and cash values. However if you're young, have a limited budget and only looking for temporary protection then term life insurance is probably best for you.

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  3. Most Insurance companies inflate expected returns through their agents but the return by their fund managers are at best mediocre. whole life insurance rates