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Top Consumer Confusions about Cash Value Life Insurance

 Top Consumer Confusions about Cash Value Life Insurance

What is the average life insurance cost per month?

The process of purchasing and maintaining a life insurance policy can be overwhelming. Agents and advisors often sell life insurance based on policy features, such as cash value and possibly lower premium payments.

When you purchase a cash value life insurance policy, you will receive an offer of both secured and unsecured policy features. It is important to understand that these expectations are based on three components:

1. Profits, such as dividends or interest on the monetary value

2. Cost of insurance, also known as death cost, means the actual cost of insuring your life

3. Internal policy costs, also known as administrative expenses

These components may have different names, depending on the type of life insurance policy.

Cash-value life insurance can be extraordinarily complex, and the agent may ignore the complications in order to sell the policy to you.Some of the things that can easily be confusing we explain to you:

Confusion # 1: The premium is the cost of the policy

The total "cost" of your life insurance policy is not the premium you pay. The cost is the sum of premiums, mortality fees (cost of insurance), and interior fees. These components will vary in name depending on the type of policy and company.

why does it matter? 

Costs you don't pay attention to - such as costs of domestic policy - can reduce the potential monetary value. If more of your premium goes into internal fees, then there will be less money deducted. 

If you then take out a loan for your cash value, the higher internal fees will likely eat up the remaining cash value and your policy may lapse with an additional infusion of the premium. So the "low premium" policy that impeded it was suddenly not cheap.

Unfortunately, these costs are not always disclosed as separate items in policy illustrations.

Confusion # 2: It's easy to compare illustrations of a life insurance policy

Illustrations for life insurance policy sales are usually at least 10 pages long. These illustrations include projections of multiple scenarios.

These scenarios are based on projections of opaque policy components. 

It's hard to compare forecasts when you don't have all the information, such as internal cost disclosures and actual profit rates. Sales illustrations may not include historical information, which can provide context.

Confusion # 3: Life insurance is an investment

Life insurance is a form of insurance and not an investment contract.

Life insurance policies include a fee for the cost of insurance. This cost makes life insurance a much more expensive asset class. 

While life insurance policies accumulate monetary value, it is important to bear in mind that monetary value is a feature of the policy, not the endgame.

Confusion # 4: Annual statements provide all the information you need.

Annual Life Insurance Statements provide a summary of your document's current values, without context.

The annual data doesn't show expected values, so you can't measure whether your policy is working as expected. A small percentage of life insurers indicate the number of years a policy is expected to remain in effect, based on current assumptions.

But life insurance companies do not disclose the basis for how they determine dividends or interest credit rates. They generally do not disclose a change in mortality costs.

This may leave you in the dark about exactly what is going on in your life insurance policy. 

The solution is to ask for an explanation of a valid policy and find out what is happening and what might happen in different situations, such as a cash value loan that you plan to take out.

Confusion # 5: Life insurance policies don't require monitoring.

Actual cash value life insurance policy performance can easily differ from what is shown in the sales illustration.

You must request a valid clarification every two to three years. This is the only way to determine if your policy is not working as expected. 

In other words, it will show you whether there has been a change in one or more of the policy components, and how that change affects the performance of the policy. 

The bottom line is that changes in profits, cost of insurance, and internal policy costs will affect policy performance.

Confusion # 6: You can always borrow or withdraw money from your life insurance policy.

Cash-value life insurance policies allow you to borrow or withdraw money from your cash value. In fact, doing so may have a negative impact on your life security. 

It is smart to request valid clarification from your insurance company before withdrawing or borrowing funds from your policy to determine the impact.

Here are some of the pitfalls you might encounter in getting paid from a policy:

• When you withdraw cash or take out a loan against the policy and do not pay it back, it will reduce the death benefit on a dollar-to-dollar basis. 

This means less compensation is paid to your beneficiaries when you die.

• Since the monetary value is a reserve account in a life insurance policy, withdrawing a lot of money can create a problem in the future: 

There may not be enough cash value to offset future increases in the cost of insurance. If your monetary value is depleted but fees continue to appear, the policy lapses.

• When you borrow money from a life insurance policy, you are borrowing your own money. You are not obligated to pay off the policy loan. 

The insurance company will charge you interest on the amount you borrow, while at the same time adding a lower rate of profit to the amount borrowed. This makes a policy loan less like "borrowing on yourself" than you might think.


As you can see, purchasing and maintaining a cash value life insurance policy can get more complicated than you expected. Understand the moving parts of politics (insurance premium, change in mortality, and internal costs), and that a change in one part can affect the others.

The best life insurance companies offer low internal costs and policy illustrations consistent with actual performance, among other qualities.

Make sure you monitor your policy, as you would any other financial instrument.