The debate about the superiority of term insurance over cash-value insurance is an apparently never-ending one. So-called experts assert that term insurance is categorically better than cash-value insurance. The reasoning is that life insurance should not be used for either savings or investment. They believe that the opportunity cost of cash-value insurance is being able to invest in capital-appreciation funds. When I first encountered sociology, I realised that no one theory or assertion could be considered a Universal law. In the complex realm of life insurance, any opinion-based statement purporting to be a law is likely to be highly misleading. The fact is that in several contexts, cash-value life insurance is vital.
The “forced savings” factor is a key benefit of permanent life insurance. A lot of experts ignore this. It is unlikely that everyone who gets the advice that you should spend less on insurance and invest the difference would follow it. They may like the idea of spending less once that’s what the expert recommended. However, they may spend the difference instead of investing it. After all, the retirement crisis a lot of individuals face is due to poor planning and inadequate financial discipline. Some people are investment savvy and that advice may benefit them, depending on their available options. Forced savings helps a lot of people accumulate wealth that they would have otherwise spent.
Some insurers actually have quite attractive interest rates and rates of return associated with their cash-value plans. In Trinidad, the performance of a fixed-rate investment with one insurer has been better than the local stock market for three years and counting. That insurer’s savings portfolio offers a 10% interest rate, which is similar to the accumulation rate on its fixed annuity. If someone invested the entire premium associated with this plan in a money-market fund at 6%, the return would be similar as well. I was amazed to discover that. This would not apply to all plan types and insurers. The advantage depends on the strength of the company and where the bulk of its investments are.
Low-risk savings is a feature of Universal Life plans. Universal Life plans include a minimum guaranteed interest rate. This minimum guarantee is often superior to the interest some commercial backs give on fixed deposits. Dividend-paying whole life insurance may also be independent of stock market performance due to their plan structure. Recipients of dividends could expect a significant return as the returns are based primarily on the sum assured and premium contributions.
There is a particular type of dividend paying whole-life insurance that provides superb rates of returns. These particular plans have a paid-up additional insurance option attached to them. Having this option means that the dividend is used to purchase even more permanent insurance. The increase in permanent insurance would increase the cash-value component, as is typical of a whole life plan. This would increase the value of the next dividend as well. This plan would work well for those who have access to it and understand the underlying principles behind dividend-paying whole life insurance.
Life insurance cannot be considered an investment even though some plans may utilise capital appreciation vehicles. It is an investment in protection, in family and in your future. Cash-value plans must be judged according to the insurer and the plan structure. Many people are not risk-tolerant or knowledgeable enough to make investments on their own. Cash-value plans that do not involve much risk provide a substantial alternative to many people. It would be presumptuous to assume that all plans are similar and make a generalisation. Some life insurance plans are very questionable, but each must be assessed according to its own merits.