I am savings.

Yes, this post is going to talk about cash value (permanent) life insurance. And no, I am not going to focus on the debate that rages between the "Buy Term and Invest the Difference (BTID)" crowd and the "Cash Value Insurance is the Swiss Army Knife of Financial Products" folks. (It's a ridiculous comparison anyway.) What I am going to focus on is the power that the right life insurance policy can have as a savings vehicle.

So before we start, let's get this out of the way. Some life insurance policies accumulate cash values and some don't.*  Those that do accumulate cash values for the benefit of the policy holder can be split roughly into two types: whole life and universal life. There are several variations of each, but I will limit the discussion her to the generic forms of both. With whole life, you have an insurance policy with level premiums and level death benefits. As time passes, cash accumulates within the policy and the insurance company's net risk is reduced. You are in effect "self-insuring" (although I hate that term because you can't really "self-insure"--the definition of insure infers the transfer of risk away from oneself!). A universal life policy has an adjustable premium and an adjustable death benefit. This mean that you can, if you so choose, opt to raise or lower either the premium or the death benefit, or both, within the parameters of the policy.

Many people make the mistake of equating whole life and universal life. In fact, these are very different animals living in the same zoo. (Did I push that analogy too far?) Whole life offers guarantees on everything--the premium, the accumulation of cash surrender value, the death benefit, etc.  Universal life does not; universal life's flexibility requires that certain parts of the policy be adjustable, including the factors that contribute to premium, cash surrender values and death benefit.  The best way I can explain it is like this:

With whole life, I will pay you $100 per day for your labor, and I will charge you $80 per day for your food. I guarantee this. So each and every day you will know, and can predict into the future, what you will have. With universal life, Here is what I will guarantee: I will pay you between $75 and $125 per day and I will charge you between $60 and $90 per day for food. We can take a guess at where you'll be in the future but we can only know for a certainty within a range of figures where you will likely be at in the future.

All right, I thought that it was important to highlight the difference between the two major types of cash value policies. That's done, so now let's address the point of the post: I am savings.  Yes, yes, yes! Permanent life insurance can function as a savings vehicle--a savings vehicle that compares favorably with other savings vehicles like bank accounts and CDs. In some ways it is better, in other ways it is not. Better because your savings accumulates without taxation, better because your money often earns a greater rate of return. It's also better because your money is doing "double duty", securing your life insurance while at the same time growing. If there is a slight against having your savings in a permanent insurance policy, it has to be liquidity. In the first 10 to 20 years, your funds are not as liquid as they might be in a bank account or CD.

A life insurance policy can be a powerful savings vehicle. There are any number of stories on the internet about how money from a life insurance policy was used to start a great business (Papmered Chef, Disney) or amass a great fortune. Perhaps it is something you one should consider when deciding on a policy.

Next: I am property that increases in value from year to year.

*Actually, this isn't entirely correct; all life insurance policies accumulate cash values. Huh? What is this you say? I've heard that term insurance is "pure insurance" without any "savings account" or "side fund".  Mostly, that's nonsense. What term insurance lacks that most permanent policies offer are cash surrender values. That's right, if you buy a 10,20 or 30 year level term policy, you will be overpaying for your insurance in the early years. This overpayment is essentially a "cash value"--it just isn't a cash value that is available to you, the policyholder. With a whole life policy, for example, you are also overpaying for the insurance in the early years. The difference is that with the whole life policy, the insurance company makes some of this excess cash available to you (in a variety of forms). Also, I know that I am simplifying; I do this fully aware that I am inviting a semantic debate, but what I post is conceptually right.