Buying term life instead of cash value insurance may be appropriate if you need short term coverage, as you may not start receiving large investment returns with cash value insurance until several years have passed.
Term Life Insurance Policies
Insurance providers offer term policies that last for a set number of years, such as 10 or 15, or until you reach a certain age. Term policies don't have cash value accounts, so you won't get the associated tax and other benefits. Premiums on term life insurance plans usually start low, then rise. When your plan expires, you may be able to renew it, at greater cost each time. Over a shorter period, a term life policy will generally cost less than cash value. You may be able to convert a term policy into a cash value policy later. You could profit from a term policy by investing what you save on premiums in other funds, such as certificates of deposits (CDs).
Saving on Premiums With Term Life Insurance
You could purchase a term life insurance policy with adjustable premiums, which change to reflect circumstances, but won't exceed a preset maximum. These policies usually start with low premiums. You may be able to get a return of premium (ROP) term life policy. At the end of the specified term, this policy will fully or partially refund your premiums, depending on how long you held it. Your premiums may be higher with an ROP policy. You can take these savings to build up your investments.
Investing Your Savings
Cash value insurance, also known as permanent insurance, includes a cash value account and possibly dividends, which have a tax-deferred status. You could purchase single premium whole life insurance, a type of cash value policy, which is structured to function as an investment account and requires one large premium payment up front. If you cancel this policy within the first few years, you may face high taxes and realize very little gain. If you choose term life, you could invest savings in a mutual fund or similar enterprise that may yield greater returns, with fewer penalties for taking cash out in the short term. Before deciding, consider your own investment abilities, your potential cash value and the percentage an investment of your savings with a term life policy must grow in order to outperform a cash value account. You can use a computer projection to compare the performance of a cash value account with a term life insurance policy. Because of the policy's structure, you may be able to reduce your premium costs during retirement with cash value insurance.