J is 35-years old and looking to purchase a whole life insurance policy. Which of the following types of policies will provide the most rapid growth of cash value?
The Correct Answer Is:
b. 20-pay Life
Correct Answer Explanation: b. 20-pay Life
The correct answer is b. 20-pay Life. This type of policy requires the policyholder to make premium payments for a period of 20 years. After these 20 years, the policy is considered fully paid up, meaning that no further premium payments are required, but the policy remains in force for the insured’s entire life.
Now, let’s delve into why 20-pay Life provides the most rapid growth of cash value for J, who is 35 years old:
i. Limited Premium Payment Period:
One of the key advantages of a 20-pay Life policy is that it has a fixed premium payment period of 20 years. This means that J will pay premiums for a relatively shorter period compared to other options, which can lead to faster accumulation of cash value.
With other policies like Life Paid-up at Age 70 or Increasing Term to age 65, the premium payments may continue for a longer period, which can slow down the cash value growth.
ii. Early Cash Value Growth:
Since the premiums are paid over a shorter period, a larger portion of the premium goes towards building cash value in the earlier years of the policy. This front-loading of cash value can result in more rapid growth compared to policies with longer premium payment periods.
iii. Longer Time for Investments to Grow:
With a 20-pay Life policy, the investments made by the insurance company on J’s behalf have a longer time to grow and accumulate returns, which can further enhance the cash value.
This is especially important for policies that have investment components, as the longer the investments have to grow, the more potential they have for higher returns.
Now, let’s discuss why the other options are not the most suitable for J:
a. Life Paid-up at Age 70:
This type of policy requires premium payments to continue until the insured reaches the age of 70. While it does provide coverage for the entire lifetime of the insured, the premium payments are spread out over a longer period compared to a 20-pay Life policy.
This means that the cash value accumulation may be slower in the earlier years of the policy. J, being 35 years old, might find this option less appealing due to the extended premium payment period. Additionally, the potential for rapid cash value growth, which is a priority for J, is limited by the extended payment schedule.
c. Increasing Term to age 65:
This type of policy provides increasing death benefit coverage up to a specified age, which is 65 in this case. However, it’s important to note that this type of policy primarily focuses on providing a death benefit to the beneficiaries and does not build cash value like a whole life policy.
Therefore, it does not offer rapid cash value growth, as the premiums paid are primarily allocated towards the death benefit coverage. Given J’s interest in accumulating cash value, this option would not align with his financial goals.
d. Straight Life:
Straight Life insurance, also known as ordinary life or whole life, is a type of policy that requires premium payments for the entire lifetime of the insured. While it does provide coverage for life and builds cash value, the premium payments are spread out over a much longer period compared to a 20-pay Life policy.
This extended premium payment period can result in slower initial cash value growth, which may not align with J’s preference for a more rapid accumulation of cash value in the earlier years of the policy.
In summary, while each of the mentioned options provides its own set of benefits and features, none of them offer the combination of a limited premium payment period and rapid cash value growth that a 20-pay Life policy provides. Given J’s age and desire for accelerated cash value accumulation, a 20-pay Life policy stands out as the most suitable option for his financial objectives.