Why do universal and whole life insurance have cash value but term life insurance does not?
Term life insurance isn't meant to have cash value. It's meant strictly to be a death benefit, and it provides a good amount of death benefit for low dollars. It guarantees a premium being level over many years at a very low rate. You're not paying any extra premium during all those years for the true mortality costs that are incurred by the insurance company. When you buy a whole life or a universal life, you're paying more than the pure mortality costs in the early years, and the insurance company takes this extra premium that you've paid. For example, let's say you have a whole life policy where it's a million dollar policy and you're paying fifteen thousand dollars a year for that policy. Maybe only two thousand dollars a year in the early years is a cost of mortality; the chances of you dying. The other thirteen thousand is put into the bank account of cash values of that policy. Now, the purpose of this cash value is many years down the road, when the likelihood of you dying is much greater, that cash value is there to continue the policy in later years. It's kind of like if you rent a house or buy a house. By paying a lot more money in the down payment of a house, in paying mortgage payments instead of rent payments, over time you'll have something that will still be there. However, in a term policy or renting an apartment, at the end of the lease, you're done. They both serve a good purpose. One is going to cost you more but it's going to probably be better for you over a lifetime. The other one is better in the short term.
