Cash value life insurance has come into ill repute primarily due to two well-known financial “gurus” Dave Ramsey and Suze Orman. In reality, Dave Ramsey and Suze Orman should be seen for what they really are, entertainers.
Now while much of their advice is spot on, especially in regards to getting free from debt, other aspects of their advice are too polarizing. One of the main areas they focus this polarizing advice on is cash value life insurance. But is CVLI really all that bad?
But is Cash Value Life Insurance really all that bad?
At TermLife2Go, we believe that everyone’s needs are unique and that there is no “one size fits all” insurance product to meet everyone’s need. There are many different life insurance types, and within those types are nuanced products that can be tailored to fit each person’s unique health, lifestyle and needs.
That is why, although our main focus is usually on no exam term life insurance, we also want to inform our clients on the benefits of other types of life insurance policies. Because at the end of the day, the most important thing is helping our clients achieve the best life insurance policy-for you! Based specifically on meeting your needs.
Now with that introduction in mind, please review our article covering:
Top 13 Benefits of Cash Value Life Insurance
The amazing benefits of cash value life insurance (CVLI) listed below can be applied to many different scenarios. For example, you may want to purchase a policy for you and your kids. Further, key man insurance can also benefit from having the ability to gain cash value. Finally, funding a buy sell agreement with cash value life insurance also has many advantages for business owners.
Supercharged Cash Value Life Insurance.
Consider the long term benefits of receiving dividends and GUARANTEED rates of around 7% currently on your cash value whole life insurance. You can add certain life insurance riders to your policy, such a Paid Up Additions rider, to greatly increase your cash value. As the cash grows in your policy you can become your own banker.
Need money quick for an excellent investment opportunity? What if your credit is bad? What if a loan is difficult to come by?
You simply borrow money from yourself (i.e. your cash value) and invest it in various income producing assets, such as depressed real estate.
Don’t see an opportunity worth utilizing your cash value?
No problem, let it sit in your cash account as it earns interest and dividends.
Also, there are many companies that use non direct recognition vs. direct recognition to allow the policy holder to take out a loan on the money and still receive interest and dividends on the policy’s cash value. That way your money is still being put to work!
Many people ask if cash value life insurance is an investment. The answer is no, it is not an investment. However, CVLI can be used to purchase investment assets. That is why it is important to not look at what an asset class’s rate of return is compared to a CVLI policy. Instead, consider what would be the preferred method for you: to use cash to purchase assets, such as stocks, bonds and mutual funds, or to borrow from your policy’s cash value to purchase the same assets.
Death benefit paid whenever you die.
Unlike term life, which has an end date, cash value policies last your entire life. I have heard term life vs. whole life compared to renting or owning your home. Term life is similar to renting a home. You put money into it but you will never get a return from it. However, whole life is similar to home ownership since you are building equity into your policy via the cash value.
Consider what percentage term life insurance policies pay out. Although we cannot find an actual source, a google search on percent of term life insurance death benefit pay out comes up with a unanimous two percent!
That means ONLY 2% of term life insurance policies pay out!
(Sounds like a pretty good investment for the insurance companies)
Now, for those 2%, term life was great. But we should consider the odds of our policy actually paying out when making our decision on what policy to choose.
Cash Value Life Insurance Benefits
We wrote an entire article covering the instances when whole life is superior to term life insurance. Without recapping that entire article, some of the major reasons why someone would want to have permanent cash value life insurance in place would be for:
- income replacement,
- mortgage protection,
- funding college education,
- estate planning,
- business succession planning,
- key man insurance,
- protecting a child with special needs.
An additional benefit is that the cash value life insurance can be used as collateral for a small business loan.
Walt Disney used his cash value life insurance to help fund Disneyland!
He could not find a bank willing to help him out in his venture so he took matters into his own hands and borrowed money from his policy. And the rest is history.
As the cash accumulates in your whole life policy it can be used for a myriad of purposes. Two excellent benefits to building cash value in your policy is the premium may:
- create the opportunity to reduce premiums
- or even stop paying premiums for a period of time.
This is a great feature if you hit an unexpected financial road block and find yourself short on money. Your cash value can help sustain you in a myriad of ways if your life hits a rough financial patch.
Access to Cash Value at any time.
The life insurance policy’s cash value can be withdrawn tax free or borrowed against.
Policy Withdrawals: Cash value policies allow you to withdraw your money that you contributed tax free. The key here is that you can withdraw up to your basis in the policy, i.e. the money you contributed. If you withdraw money above your basis it will generally trigger a taxable event.
Policy Loans: You can borrow money from the life insurance company using your cash surrender value as collateral. Borrowing money from the insurance company in the form of a policy loan allows for the policy owner to take advantage of buying opportunities, such as declines in the stock market or real estate market. If you are sitting on a large cash reserve in your policy, then gobbling up some investment properties or dividend yielding stocks might be an excellent decision.
Loans do not need to be paid back unless you WANT to pay the loan back.
That is right! You do not have to pay the loan back.
Now, although you do not have to pay the loan back, it makes a lot of sense to pay back the loan. If not, the company will SUBTRACT the loan amount from the total death benefit payout. However, for some people this is no big deal because they were able to put the money from the loan to great use.
Cash Value grows income tax free.
Cash value earnings grow tax-deferred. The earnings remain tax-deferred until you begin to draw on the funds or surrender the policy. The cash value portion above your contribution (i.e. your basis) is the portion that is taxable.
Social Security beneficiaries with total income exceeding certain limits must claim part of their Social Security benefits as taxable income. Source. When determining how much of your Social Security you can lose to the IRS, the cash value growth in a life insurance policy does not need to be taken into account. That is because the growth of life insurance policy earnings remain one of the only sources of income that do not increase the tax on your Social Security income. And you can draw money from your cash value life insurance and it won’t count against social security tax.
Certain cash value life insurance policies offer dividends. Although dividends are not guaranteed, you will find that many companies have not missed paying a dividend for over a hundred years, that means dividends were paid even during the Great Depression!
Six key benefits of cash value life insurance dividends:
- Dividends may be used to lower your premium.
- Dividends may be paid to you in cold hard cash.
- Dividends may purchase more paid up life insurance for additional coverage.
- Dividends may purchase term life insurance for additional coverage.
- Dividends may be added to your cash value and accumulate with interest.
- Dividends may be used for paying back a policy loan.
Cash value life insurance Variety
When we talk about cash value, the main product we are focusing on is Whole Life Insurance. There are other policies available that build cash value, such as Indexed Universal Life Insurance. However, we covered that product already and wanted to focus specifically on whole life.
Please note: If you have read this far, you owe it to yourself to read our article on infinite banking to understand the full value of a properly funded whole life policy.
Whole Life is available in level premium, single premium, or as 10 payment or 20 payment.
Level premium whole life offers a fixed premium over the entire life of the policy. The policy premiums are structured so that the policy is paid up at different ages, with age 100 and age 121 being the most used, depending on the company, plan and your needs.
Single premium whole life requires one lump sum payment at the outset.
10 Pay or 20 Pay Whole Life insurance requires payments to the policy over a period of years, i.e. 10 or 20. It can also go to a specific age, such as paid up at age 65.
Whole Life also offers both participating and non-participating plans.
Participating: Pays dividends to shareholders on excess earnings from investments. Dividends can be used for various options, including purchasing more coverage or lowering premium payments.
Non-Participating: No dividend payments.
- Cash Value Life Insurance Riders
There are some great life insurance riders available exclusively for permanent types of coverage, such as whole life. A few of the main riders include:
- Paid Up Additions Rider
- Waiver of Premium Rider
- Accelerated Benefit Rider
- Guaranteed Insurability Rider
- Renewable Term Rider
- Accidental Death Benefit Rider
State Law Protection for Cash Value in Life Insurance.
Many states have laws protecting cash values and death benefits of life insurance policies from the claims of creditors. If your state provides such protection, this is a huge benefit for anyone who desires to insulate their retirement reserves from lawsuits which typically allow creditors to reach other assets such as bank accounts and mutual funds. Check with your local state regulations for more.
Guarantees: Most cash value life insurance policies come with guarantees.
Four cash value life insurance policy guarantees include a:
- guaranteed interest rate,
- guaranteed death benefit,
- guaranteed cash value and
- guaranteed premium.
You can always sell it.
If you come to a place where you no longer need the policy you can always sell it via a life settlement. Typically this means you would capture a settlement of more than your cash value and less than your death benefit. However, if you choose that route you should start with a company that can help set up the transaction for you. A simple Google search for selling your life insurance policy will provide some alternatives.
So…while it’s nice for simplicity purposes to come up with a catch phrase like:
“Buy Term and Invest the Rest”
Like most things in life, things aren’t always that easy, and true financial advice can rarely fit on a bumper sticker!
So if you would like to learn more about whether or not a Cash Value Life Insurance policy might be right for you feel free to give us a call today!
Thank you for reading our article, Cash Value Life Insurance. Please leave any questions or comments below.
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