Cash-Value Life Insurance explained

One of the most misunderstood financial products of our generation is cash value life insurance. There are those on TV and the radio who say to never buy a policy that has any kind of investment component to it. There are also articles written in many financial publications saying that everyone would be better off to buy term insurance and invest the difference somewhere else. I have found that if set up properly, that cash value life insurance can be one of the best investments that you ever make. 
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If you need death benefit forever, there is no other way to solve this issue than to buy a life insurance policy that has some sort of cash value component. The product that competes directly with any kind of investment is an Indexed Life Insurance policy better known as an IUL policy.  An IUL policy accepts premiums, which can vary from year to year, and places them into an account whereby they are then credited each policy anniversary with the gains in a commonly followed index such as the S&P 500, the DJIA, the Eurostoxx 50, the NASDAQ, or the Russell 2000 to name a few. If the index gains in value in a particular year then the policy is credited with the percentage gain that year. Since the money is never really invested in any fund the losses do not affect the IUL contract in the form of losing money. 

​"If the market performance is negative then the policy owner is credited between 0-2% in returns for that year depending on the carrier chosen to issue the policy. Therefore there are never negative return years in this product."

Because there are no negative returns, most companies have a cap on the index that the policy owner is following. These caps range generally from 12-19%. A well know player in the IUL industry has done many studies to show what type of returns and expenses can be expected over a 20 or 25 year period.  It is interesting to note that with this carrier, the rate of return in their S&P 500 product from 1995 to 2014 was 7.288%.  The expenses on average per year over this same period 1.204%.  This translates to over a 10% gross return in a 35% tax bracket and the expenses look quite a bit like what a very low cost mutual fund charges per year as an expense fee. Past history is no guarantee of future results but as an investor, returns of 10% gross with no chance of losing money in a down market are a tough act to beat. I think that based on this information--life insurance can be a very good investment, especially when you consider that the cash in the policy can be accessed tax free as well.