Question

In the past, Insurance industry focused mainly on marketing of Cash Value life insurance policies. Whole Life insurance with a saving component was being promoted as effective “forced saving” tools. Nowadays, Term life insurance is being promoted as a more “effective” insurance product. More and more insurance companies encourage consumer to “buy term and invest the difference”.
In no more than 3 pages, identify all critical factors in determining whether Term life or Cash value life insurance would better suits the financial planning needs of a consumer

Answer 1

Term insurance plans provide risk coverage against a precided premium

Cash value plans have a risk cover component as well as savings components.

These factors are of different priority for customer to customer and after considering these factors and personal financial needs the consumer can decide which product is better.

Pricing:Term policies are easier to compare and this leads to a very competitive market.Pricing here is more aggressive than for cash value policies

Flexibilty : Term policies are much more flexible than cash value policies as far as entry and exit are concerned. Life policies are also renewable and convertible.

This is because in term policy the policy ends and accrued benefit is due, however in cash policy if premium Is not paid then whole policy lapses.

Tax benefit : often there is tax benefit on premiums paid in term policy , in contrast to cash value policy.

Premium : Premiums are lower for term policy than for cash value policy.

Simplicity : Term policy are simpler to understand than cash policy

Age : The premium for term policy increases with age and hence maybe costlier than cash policy.

Specific Purpose : For specific purposes , like education marriage etc. cash policy is better. Also for wealth creation term cash policy is better.

Inflation : Cash policy provides a hedge against inflation.

Surrender Values : No surrender values are available under cash policy.