Cash Value Life Insurance – is it a good deal?
Cash Value Life Insurance as an Investment
“Cash value life insurance is a good long term investment”
“Whole life insurance returns dividends in excess of seven percent”
“Indexed universal life lets you accumulate money tax deferred and withdrawal at retirement time tax free”
Truth or Hype
cash value life insurance promoted benefits
| hyped benefit | reality |
|---|---|
| competitive interest rates | It is competitive if you consider getting 4-5% rate of return after waiting 30 years competitive. Surrender prior to 30 years and the returns will be less. Surrender in the first 12 years and your returns will most likely be negative. (see #2 below) |
| downside protection | True, there is a floor. But the floor could be zero to one percent. |
| tax free withdrawals | True, until you lapse the policy: then you may have a big tax problem. (see #3 below) |
| guaranteed returns | Guaranteed returns on whole life could be 0.5%; on IULs it could be 0%. |
| self completing if you become disabled | It is self-completing is you add the Waiver-of-Premium rider, and if you are totally disabled. Read the fine print about what is considered 'totally disabled' and you'll be totally disappointed. |
| tax deferred earnings | True, if there are earning they wont be subject to income tax while in the policy. But there are many better places to get tax-deferred earnings: 401k, IRA |
The downside details that are downplayed, not mentioned, or buried in small print
- High lapse rate means many policyholders will experience a negative return because only 60% of policies will still be in force after 10 years. And it takes at least 10-12 years for most recurring premium plans (that are not over-funded) to reach the break-even point.
- Surrender charges will be incurred for up to 14 years, which means you could have negative returns if you surrender the policy in the first dozen years (see 1.)
- ‘Tax free’ withdrawals can trigger a taxable event if the withdrawals cause the policy to lapse
- Whole Life Insurance dividends are not guaranteed (see vanishing premium scandal below – agents presented illustrations that showed whole life plans being paid up in less than 15 years, even though premiums are due to age 100)
- The only thing the insurer is legally obligated to honor is that which is “Guaranteed”
- IULs have a lot of moving parts (caps, participation rates, indexes, etc.) and hence it is difficult for an insurance agent or financial planner to understand and almost impossible for a lay person to understand.
- The portion of premium that is ‘invested’ is reduced by loads, admin expenses, and COI**.
- IUL and UL fees and costs can and do change even though the illustration show them remaining level
- COI can and do increase
- As of 2.17.2020 we can Minnesota Life to the list of companies that have increased the COI. See also Axa, Voya, Transamerica
- Participation rates or caps can be changed
- Administration costs can increase
- History of bad behavior by life insurers
Exceptions
Guaranteed No Lapse Universal Life (GUL)
GULs are typically different from ULs and IULs in that the main goal is not to accumulate cash value, but rather it is to guarantee a death benefit for a long period of time. In this regard, it can behave more like term insurance and less like ‘cash value’ insurance. It can act as term insurance but for a longer period of time than is typically available with term life.
There is a catch of course. That is the premium payments have to be made on time. Late payments can lessen your guarantee period. Surprisingly, even early payments can sometimes have an adverse effect in the guarantee.
Special Needs Dependent Planning
If someone has a special needs dependent that will always be dependent then permanent life insurance may be the proper solution.
Estate Planning
A large estate that may have to pay estate taxes could consider a permanent plan especially if the estate is made up of non-liquid assets.
