Whole life insurance and universal life insurance

It is very difficult to find out the rate of return on an insurance company’s investment portfolio, which is what determines your cash value.

Whole life insurance and universal life insurance are two types of cash value life insurance policies. They both offer a little more than term life insurance, but they are also much more expensive. How, then, should your basic New Jerseyite choose between them?

We asked around, and our sources differ, but many said that you should first check out your financial portfolio, aside from the life insurance. Do you have any kind of tax-deferred savings plan, like a 401(k)? If you do, you probably don’t need to use your life insurance policy as a saving vehicle, and should just go for term life insurance. A cash value policy is better if you still need tax-deferred investments.

Possible Pitfalls With Cash Value Life Insurance

But suppose you decide whole life insurance (or universal life insurance) is for you. Before you head down the New Jersey Turnpike to your life insurance dealer and sign the papers, be careful. The following warning comes from Newsday magazine.

{When buying a cash value life insurance policy}, it is very difficult to find out the rate of return on an insurance company’s investment portfolio, which is what determines your cash value. Insurance agents will usually provide you with a sales ‘illustration,’ but be forewarned: the sales illustration is nothing more than a projection. It is not a guarantee! Make sure you ask about surrender charges; that’s what you lose if you drop the life insurance policy early. Typically, these surrender charges are highest in the first few years and gradually decline over the life of the policy. People who drop their policies after a couple of years may be shocked to find that despite the high premiums they have been paying, they will receive little or nothing back from their cash-value life insurance account. As a result, you should consider a cash value policy only if you can be sure of keeping up the life insurance payments for about twenty years.