The reason is that at some point the cash value is pooled with other monies so that the risk is shared by the person purchasing the life insurance. So, the question becomes, if the cost of insurance is less, why would someone purchase term life insurance?
First off, we know that the cost of life insurance should be shown in the hypotheticals even though it never is. However, the answer to the previous question comes from looking at the cash value portion a little differently. In reality, you may be getting a built in rebate since you have accumulated cash value and are sharing in the risk.
What I mean is that people typcially see the premiums for their life insurance. If they dig a little deeper, they will see actual cost of their life insurance. If they dig a little deeper they will see normal cost of their life insurance along with the rebate amount based on the amount of cash value. We have:
cost of life insurance = normal cost of life insurance - rebate amount
Once viewed this way, the decision between cash value and term life insurance is easy. Would you get more money from investing the overpaid premiums into a separate account or from the rebate and interest of a cash value policy? Navigating through the smoke in mirrors is difficult but at the end of the day, you will find the cash value policy is not worth it.
Do you view cost of insurance as cheaper in a cash value policy or as more expensive? Find more great questions to ask here.
This post was reposted from http://finlit.biz/life-insurance/2-ways-to-view-the-cost-of-insurance-in-a-cash-value-policy/, originally written on March 1st, 2013.
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