Cash-value life insurance: The myth of buying young

- by Glenn Wessel, CFA, CPA, CFP®
A number of dubious marketing efforts swirl around cash value life insurance (CVLI) which includes most any type of life insurance that doubles as an investment. I previously addressed the fact that CVLI is often marketed as being permanent in nature despite the fact that the insurance component associated with most CVLI policies tends to decline or even vanish over time and that many people have no need for permanent insurance in the first place.
This week, I’ll address the ill-conceived notion that one should purchase life insurance early in life so as to lock-in the more favorable insurance rates available to the young. First, you’re not likely to see this claim in print because insurance companies know better. However, in an effort to induce people to purchase high-premium CVLI policies, insurance salespeople sometimes make oral claims similar to the following: “You’ll never be this young again. Buy the policy now and lock-in your cost.” Did you catch the fib? While it is true that you’re not getting any younger, you most certainly will not be locking in the cost of your life insurance – even if the premiums associated with the policy do remain level.
The truth is that a level premium is in no way comparable to a level cost. The cost of all life insurance tends to rise over time whether the premiums are level or not. Since the insurance component of a CVLI policy usually declines over time, the level premium simply purchases less insurance each year. So, the cost does increase – just as it does for a 50¢ chocolate bar that gets smaller each year.
If you’re ever induced to “buy young to lock-in your cost,” simply ask to see the policy’s surrender cost index at different points in time. You’ll see the truth…

Glenn Wessel has an investment counsel and financial planning practice in downtown Asheville. He has been admitted to the Paladin Registry as an elite financial advisor.