Permanent life insurance, or whole life, is a financial product that generates some controversy.
It used to be that it was promoted as a good investment – one that happened to generate large and ongoing commissions for the agents selling it.
The permanent reference indicates that these products are structures to remain in force throughout the life of the policy holder. But does that make sense? Life insurance is intended to replace the income stream of a person supporting a family. While the death of an aged person is just as sad, there’s no income to protect. They’re retired! While there may be shrieks about estate taxes and pensions, there are more cost-effective solutions to these kinds of problems.
The cash value component of the policy is the crux of the matter, as some purport that it is an excellent investment. But what most people, including insurance agents, don’t know is that the cash value is not intended to be an investment. It’s there to reduce the insurance company’s risk.
Cash value is, in technical terms, referred to as the “terminal reserve.” It is intended to reduce the net death benefit the insurance company has to pay. As policyholders age, the risk of death increases. The premium may not rise as the chance of death increases, but the net death benefit declines due to the impact of the reserve. While there may be riders and other cash value magic to make it appear that the death benefit goes up with the cash value, it doesn’t change the basic facts. The chance of death increases with age and the increased risk has to be paid for. It’s not the insurance company that is going to do the paying.
Cash value investments are generally less efficient than alternatives, mostly due to quietly lurking agent commissions and cunningly hidden but expense costs and fees. So when is life insurance profitable? When you die young, before paying a ton of premiums and building cash value. But you don’t need permanent life insurance for that unpalatable alternative.
For more information, please read:
Stock Market Investing With Variable Life Insurance: Safe Investing Panacea Or High Cost Horror? | Forbes