When my husband and I were newly weds, our insurance agent convinced us that a whole life policy that built cash value was a “good investment.” He was quite enthusiastic about it: “If you decide you don’t need the insurance in 40 years, you can turn it in and get cash!”
Hooray! We got a policy for each of us. They aren’t huge policies (thank heaven), but the more I’ve thought about it, the more I’ve decided that — at least for my husband and me — a cash value life insurance policy isn’t really that good of an investment.
Giving Up Better Returns
Whenever you give up safety in an investment, you give up the chance of better returns. Most cash building life insurance policies do that cash building at a snail’s pace. You are guaranteed an eventual return (provided the company doesn’t fold), but the returns are often quite low. Sometimes your returns won’t even keep pace with inflation!
The price difference between my 30-year term life policy (which has a much bigger benefit) and my whole life policy is about $15 a month. That’s $180 a year that I pay more for my cash building policy. If, instead of having a whole life policy, I invested that $180 in securities with better potential yields, I could make a great deal more. Over the past 8 years, the cash value of my policy has grown to about $72. Now, let’s say that over that last 8 years I had put the $15 difference in an index fund tracking the Dow. Using a dollar cost averaging calculator, I see that if I had put that $15 a month in ^DJA, the value of shares today would be $1,709.36. That’s a lot better than $72. Of course, the cash value will supposedly build faster over time, but it’s still discouraging.
What About Equity Indexed Policies?
In some cases, you might try equity indexed policies. These are whole life cash value policies tied to the performance of an index. You have a guaranteed minimum return, and the potential for more, based on how the index does. As the index rises, you benefit. This can be a good option for some.
However, it is important to note that there might be additional costs and fees associated with this type of life insurance policy, and those expenses can erode your returns. You should carefully consider your options before deciding that an equity indexed policy is a good way to balance safety with increased returns.
In the end, whether or not cash value life insurance represents a good investment for you largely depends on your financial goals, and the role that your insurance policies play in reaching them. Before you decide, carefully weigh your options.
Miranda Marquit is a personal finance blogger. She writes for a number of sites, including the AllBusiness Personal Finance Corner and InsuranceQuotes.org.