Group Warns Consumers About Cash-Value Policies Term Life Insurance A Smarter Option For Most, Study Finds

The deal is enticing: Buy a cash-value life insurance policy and watch your money go to work in stocks and bonds - a double gain of insurance protection and financial profit.

But that only works when the policy is held for many years, warns the Consumer Federation of America.

According to a study released Wednesday by the consumer group, cash-value life insurance policies, which provide a return to the policyholder through investment in stocks or bonds, often are a bust because consumers tend to terminate them before they turn a profit.

“If you do buy a cash-value policy, and they can be good investments … you must hold the policy 20 years; that must be your commitment,” said James Hunt, an actuary with the consumer group who analyzed the rates of return of 4,000 such policies.

Consumers lose at least $6 billion a year by prematurely terminating cash-value policies. Because agents take their commissions at the policy’s start, the average estimated rate of return in the first several years winds up being negative, Hunt found.

But 25 percent of such buyers relinquish their policies in the first two to three years, losing most, if not all, of their investment, he said. Fifty percent terminate in the first 10 years.

“For consumers who don’t know what they’re doing when they buy life insurance … probably the best advice is to stick to term insurance,” said Hunt.

Term insurance is simple insurance against early death. It is in force only for a specified time, typically between five and 20 years, and only pays a benefit if the policyholder dies within that time.

But many agents try to persuade consumers to buy the more costly - yet more profitable for the agent - cash-value policies, even if term insurance is more suitable, Hunt said.