October 16, 2009

Yet Another Example of Bad Cash Value Life Insurance Performance

I've talked before about some examples of cash value life insurance policies that proved to be poor investments: One example, another example, another and another.

On another episode of the Suze Orman show a caller had a cash value policy which (surprise) was not a good investment at all. The details of their policy are as follows: They had a 'Variable Appreciable' insurance policy. I'm not sure what a Variable Appreciable policy is exactly but from what I can gather its just another name for a variable life insurance policy.

Premiums of \$28/month for 20 years
Total paid = \$6,700
Cash value = \$4,870
Death benefit = \$50,000

The 'investment' lost 28% of the money put into it. That is not a very good investment at all.

A term policy would cost much less. A 30 year old man can buy a \$100,000 term policy for 30 year term for about \$132 a year and of course it would have been much cheaper 20 years ago. So their variable policy is costing them at least \$204 more than what a better term policy should have. If they had been investing that \$204 difference at just 4% returns for the past 20 years then they would have over \$6,000 today.

Option A: Buy term and Invest the rest:
\$100,000 death benefit for 20 years + \$6,000 in the bank

Option B: Buy variable appreciable insurance:
\$50,000 death benefit for 20 years + \$4,870 in the bank

Seems to me that option A is the clear winner. With the term policy you'd get 2x the insurance coverage for 20 years and then end up with more money in the bank. In fact the amount you save with the term policy should be MUCH more since the cost of the term policy 20 years ago would have been significantly less than the cost today simply due to inflation.

What about the permanent nature of the cash value policy? You should not need a life insurance policy in your old age. By the time you retire you should have fixed income from your retirement and should not need a life insurance policy to replace any earnings. I guess there are some exceptions to this so in those rare cases where it might make sense to have insurance for a long period then you could get a term policy with a rider called a 'conversion option' or a 'policy exchange option'. Those options would allow you to convert your term policy to a cash value permanent policy at the end of the term if you choose to. A key to doing that would be to get such a rider that does NOT require further evidence of insurability. Otherwise you might hit middle age and try to convert an expiring term policy and then just get denied due to a minor health issue.

Yet again we see an example of a cash value policy that turns out to be a poor investment over time. I have yet to see a cash value insurance policy that did any better than buying term and putting the difference into US Treasuries. Many of the cash policies do much worse than others and its common for them to lose money compared to the premiums paid.