As life insurance, the product sucks. You correctly point out that the cos of insurance increases by age. It isn't much of an increase per year, but over time the increase is huge. More and more of your payment each year goes towards the insurance component and less goes towards the investment. When you die, the beneficiaries receive the face value and the insurance company keeps the investment component, so each year the portion of the policy that truly represents the insurance goes down. Example on a $500,000 face-value policy:
- In 2019, after a few years in force the cash value has grown to $50,000 and the death benefit has grown to $510,000
- In 2029, the investments have done well and the cash value has grown to $150,000. The death benefit has grown to $580,000.
- It all looks good until you plot out the death benefit growth versus the cash value growth. If you die in 2019, the beneficiaries get $510,000 at a "cost" of $50,000, so you truly net $460,000. In 2029, you only truly net $430,000 ($580,000 - $150,000).
As a savings mechanism, the product is okay. In the example above, you were mathematically better off cancelling the policy and paying the deferred taxes on the growth. If you are already going to do that, why not invest in a tax-favored (or even taxable) account? the answer is fear--the floor is set to play on the customer's fear of the next crash.
But, keep in mind the company charges lots of fees and employs an army of actuaries to ensure it isn't going to lose money on the deal. Therefore, the ceiling is set to ensure company profit. Calculate your life expectancy and compare the ceiling to the average returns of the index (include dividends) over that time versus the ceiling. Then think about all the bad things that happened in the market during that time and wonder how the index still beats the ceiling.