The Pros and Cons of Cash Value Policies

The main advantage traditionally associated with cash value policies is that the premium normally remains level for as long as the insured keeps the policy. (Some modern cash value policies give the insured the flexibility of, within certain limits, changing the amount of money to be deposited into the cash value side fund.) Because of this level-premium feature, cash value policies, which are also known as "permanent insurance policies," have lower lapse rates than do term policies. Once you get used to paying the specified amount each year, you're more likely to keep paying and thus keep the policy in force.

Who favors cash value policies? Cash value policies are usually favored by people who fall within one or more of the following categories:

• people who believe that their need for life insurance will remain throughout their lives
• people who have trouble saving money on their own
• people who can afford the larger cash outlay for a cash value policy
• people in high income tax brackets who want to take advantage of some of the additional tax sheltering aspects of cash value insurance

The biggest disadvantage of cash value insurance is its higher cash outlay when compared to term. Also, the investment return on cash value policies has typically been rather low, particularly for the first five to 10 years after purchase. Some modern cash value policies give policyholders the right to choose from several mutual-fund-like investment options into which to invest the cash value funds. Although these policies offer the possibility of higher returns within the policy, they require the policyholder to make the decisions about policy investments.

Another fact about cash value policies that should be remembered: Most of these policies are written so that the lifetime cash values are applied to partially pay off the death benefit, when it becomes due.

Example Gloria Gotrocks owns a cash value life insurance policy that will pay $100,000 at her death. The policy now has a cash value of $25,000. If Gloria dies tomorrow, her beneficiary will get $100,000, not $125,000.

You can get a cash value policy that will pay your beneficiaries both of these amounts (i.e. in our example, the whole $125,000), only you'll have to pay higher premiums for it. The reason that we mention this point is that our experience has shown that many cash value policyholders do not understand that their beneficiaries only receive the face amount of the policy at death -- they blissfully think that they have provided more for their beneficiaries than they really have. If you have any doubt about how one of your cash value policies is set up, ask your agent.

Again, you may want to take a quick look at a comparison of the various types of term and cash value insurance policies.