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I've been following, and sometimes participating in, the cash value vs term debate over the 
past few months.  From a quick survey of the archives, it appears that this debate has been 
raging since the dawn of this board.  My purpose here is not to extend the debate, 
but, hopefully, provide a means to end it.

I've seen this board's Don Quixote, Mike M, stand heroically against the hordes of 
"buy term and invest the difference" iconoclasts.  I've seen the debate get personal,
and, yes, sometimes ugly.  What I have never seen, however, is some structure for
the debate.

So a while back, I took my own research notes and started adding to them, based on
what I've learned following the debate.  Offered humbly below is the edited version.
I'm no expert and I claim no guarantee of accuracy in the content.  Also, I've tried
to be objective, but I'm sure some will read bias into my summary where it is 
incomplete or innaccurate.  Please don't attack me.  Add or clarify instead.

I think the framework can provide a means to structure the debate and, hopefully, end 
the endless statements of the same position by both sides in subtly different forms.  

I invite all to edit the bejeezusbells out of this until it is factually accurate
and then the debate will be done.  We can create a FAQ-like reference and let newbies
read the facts and decide for themselves.

In the sprit of community learning,



Product Offered			Benefit

Pure Insurance			Income for dependents to insure 
				comfortable standard of living in 
				the event of insured's early death

Guarantee of Insurability	Guarantee of future insurability at 
				reasonable rates (based on age only, 
				not uncertain future health status)

Death Benefit Flexibility	Pure insurance amount can be adjusted
				over time to reflect dynamic offset
				between insured's assets and dependent's
				future needs

Savings Discipline		Savings plan enforced via required 
				premium payments		

Estate Planning Tool		Limit estate tax impact on heirs via
				tax-free death benefit payout
Investment Vehicle		Tax-free investment returns with little
				investment expertise required


Pure Insurance

	Let's use annual renewable term cost as the basic building block.  This
	is the simplest to understand and most flexible option.  

	A multi-year level term policy gives you a long-term cost break (over ART) if you 
	hold the policy full-term but penalizes you if you terminate the policy early.  
	Basically, the 	insuror takes the projected total premium cost over the full term, 
	discounts this cost and then divides the discounted cost evenly by the total number 
	of premiums paid.  For the insuror to make money, the discount rate must be less than 
	the rate of return the insuror thinks it can attain through investing your early 
	overpayments.  A skilled, disciplined investor may be able to pay ART and beat the 
	insuror at this game.  

	A cash value policy will charge the ART rate for each year's death benefit, so it's
	equivalent to the ART policy in this regard (I'm putting policy fees, etc under 
	"Investment Vehicle").  Given that there will be some cash-value payment tacked on to
	the pure insurance premium and that everyone's insurance budget has some limit, 
	however, it is important to be sure that an insured isn't steered into a policy 
	that provides less than the desired level of pure insurance. 

Guarantee of Insurability

	An ART policy can be renewed annually with no need for health status update (no change 
	in class of insured).  Rates go up with age, but the age vs rate schedule is "locked in"
	to what the company offers others in the insurability class you buy into.

	A level term policy guarantees a certain rate for the life of the policy.  This provides
	an advantage over ART if premiums for a given age and insurability tend to rise over the
	life of the policy (as with inflation).  It also locks in an insurability class for the
	term of the policy.  Most level term policies also provide an option to renew with at 
	least one of the companies products (ART, level, cash value) at the end of the term, with 
	no danger of a change in insurability class.  Insureds of advanced age may not be able
	to choose another multi-year level term policy, but can usually get ART or cash-value.

	A cash value policy is, again, equivalent to ART in this regard.  The schedule of premiums
	is "locked in" as long as one keeps the policy in force.

Death Benefit Flexibility

	ART and cash-value policies typically allow the death benefit to be reduced without
	impacting the insurability class (no health check), but there may be limitations.

	Level term policies are typically less flexible and have to be scrapped and re-written
	to change death benefit, exposing one to the risk of a health check-up and increased
	rates.  For those who can anticipate their declining need for insurance, multi-year
	term policies are available which build in this feature.

	In order to increase the death benefit, all policies will requrie a health 
	screening and the risk of increased premiums.  
Savings Discipline

	An ART or level-term policy provides no savings discipline.  A cash-value policy does.
	Savings discipline can be achieved outside of insurance products through direct deposit,
	etc.  Forced savings outside of insurance products may not carry the penalty for failure 
	to save (incentive) that a cash value policy would.

Estate Planning Tool

	An ART or level-term policy is typically designed to cover dependents' future needs 
	beyond insured's current assets.  Once insured's assets cover dependents future needs, 
	the policy is typically dropped.  So these policies are not really estate planning tools, 
	since, when they pay out, the insured's estate will typically be below taxable levels.

	A cash-value insurance policy can be used to minimize the tax burden to heirs in the
	case of estates valued above the taxable level.  Other estate tax planning tools 
	(outside of insurance) are also available.

Investment Vehicle

	ART and level-term provide no "cash value".  To compare these with a cash-value fund,
	a "side" investment fund is typically hypothesized, with contributions equal to the
	difference between the total premium paid for the cash-value policy minus the cost of the
	"pure insurance" premium, assumed here to be the ART rate.  

	The game here comes down to this: will the tax-free return offered by your insurance 
	policy savings eventually overcome the fees and costs paid to the insuror for investing 
	your money.  The longer you hold the policy, the more likely you are to win this game.  
	This is because 1) fees and costs are typically heaviest in the first years of the policy 
	and 2) tax-free earnings gain their power through compounding.

	Some other things to consider when evaluating this "game":

	- The insurance product fees and costs should be compared to the fees and costs that
	  will result from your side fund investing.  These will of course depend on how you
	  invest the side fund.

	- If your side fund investing plan targets stock and bond mutual funds, then there is likely 
	  an insurance product that can provide similar options.  If you are willing to accept a lower 
          lower rate of returns in exchange for a guaranteed rate of return, an insurance product 
          may be one of your better options.  If you want the ability to buy and sell individual stocks 
          or complete flexibility in choice of mutual fund, I don't believe such an insurance product is 
          currently available.

	- If you plan to spend some of your savings (as opposed to passing it all to your heirs)
	  comparing the "cash value" amount to your side fund balance is a much more complicated 
	  game than it may appear on the surface.  Invested amounts (principal) can typically be 
	  withdrawn from any investment without tax penalty, insurance or side fund.  But if you 
	  want to withdraw earnings, the tax advantage of the insurance policy will only hold in 
	  one of two scenarios: 1) a policy loan, and 2) use of the cash value to pay future 
	  policy premiums.  The policy loan option essentially forces you to hold the policy till 
	  death.  If you terminate sooner, the loan amount from earnings will be taxed.  If you 
	  have no dependents or need for estate-tax relief in your retirement years, paying ART 
	  pure insurance premiums for your age group, until death, is likely to be a large waste 
	  of money.  

	- The amount of your cash value will be limited to some function of the policies death
	  benefit.  In other words, the feds only allow you to stash so much cash in an insurance
	  policy for tax-free earnings.  If the cash value exceeds this limit, your options will 
	  be 1) increase the death benefit or 2) withdraw some principal from the cash value.  Be
	  sure that the policy plan won't force you into buying more insurance than you need
	  in order to reach the desired cash value amount.
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