In the following article we hope to dispel some of the common myths surrounding cash value life insurance. Although the majority of the clients we serve come here to compare term life insurance quotes, there are times when it makes sense to opt for a policy that builds cash value and lasts your entire life.
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 Ramsey’s and Orman’s advice is spot on, especially in regards to getting free from bad 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 (CVLI). 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 life insurance policies, and within those policy types are nuanced products that can be tailored to fit each person’s unique health, lifestyle and needs.
We do our best to stay on top of the latest trends in the marketplace. That is why we can offer no exam term life insurance, as well as talk to the major benefits of other types of life insurance policies, including whole life and universal life.
Because at the end of the day, the most important thing is helping our clients find the best life insurance, based specifically on meeting your needs and goals.
Top 10 Best Cash Value Life Insurance Companies and Policies
The following are our current picks for the best cash value life insurance companies and policies. Please click on the company name for more information.
|Company||Policy Type||Cash Value||Additional Benefits|
|Mass Mutual||Whole Life Insurance||Guaranteed cash value growth||Guaranteed death benefit, guaranteed fixed premium|
|Penn Mutual||Indexed Universal Life Insurance||High cash value accumulation||Guaranteed floor; Participation in indexed accounts|
|Penn Mutual||Whole Life Insurance||Guaranteed cash value growth||Guaranteed death benefit, guaranteed fixed premium|
|North American Company||Indexed Universal Life Insurance||High cash value accumulation||Guaranteed floor; Participation in indexed accounts|
|American National||Indexed Universal Life Insurance||High cash value accumulation||Guaranteed floor; Participation in indexed accounts|
|New York Life||Whole Life Insurance||Guaranteed cash value growth||Guaranteed death benefit, guaranteed fixed premium|
|Voya Life||Indexed Universal Life Insurance||High cash value accumulation||Guaranteed floor; Participation in indexed accounts|
|Foresters||Whole Life Insurance||Guaranteed cash value accumulation||Guaranteed death benefit, guaranteed fixed premium|
|Minnesota Life||Whole Life Insurance||Guaranteed cash value accumulation||Guaranteed death benefit, guaranteed fixed premium|
|Minnesota Life||Indexed Universal Life Insurance||High cash value accumulation||Guaranteed floor; Participation in indexed accounts|
|AXA Equitable||Indexed Universal Life Insurance||High cash value growth||Guaranteed floor; Participation in indexed accounts|
|Pacific Life||Indexed Universal Life Insurance||High cash value growth||Guaranteed floor; Participation in indexed accounts|
So now you may be asking, “what is so great about cash value life insurance?”
Top 13 Best High Cash Value Life Insurance Benefits
The following benefits deal with permanent life insurance cash accumulation and how you too can benefit from this investment vehicle. And just like any vehicle, you have to fuel it with the right type of fuel to get the best performance.
1. Supercharged High Cash Value Life Insurance.
Benefit #1 of cash value life insurance is, well, the cash value.Particularly for a policy that builds early high cash value.
Consider the long term benefits of receiving dividends and GUARANTEED rates combined equaling around 5-7% currently on your cash value whole life insurance. You could even see a higher return with a properly designed indexed universal life policy.
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 utilize the concept of infinite banking and 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 take out a life insurance loan which allows you to borrow money from your insurance company using your cash value as collateral and invest it in various income producing assets, such as depressed real estate or dividend stocks.
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, currently around 5-7% for whole life and potentially higher for an IUL policy.
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 “is cash value life insurance is an investment.” Our answer would be yes, life insurance is an investment. It really depends on how you utilize the policy. And it depends on what product we are talking about, whole life, indexed universal life, variable life, etc…
However, one thing of importance to note is that CVLI can be used to purchase investment assets. That is why it is important to not look at what a particular rate of return of an asset class in comparison to a CVLI policy.
Instead, consider what would be the preferred method for you: to use your cash to purchase assets, such as real property, stocks, bonds and mutual funds, or to borrow from your policy’s cash value to purchase the same assets, while getting a return on your policy’s cash value simultaneously?
Obviously, to obtain these great benefits your policy needs to be structured properly. But don’t worry about that. We are here to help you design the best cash value policy for your situation.
And for the parents out there, consider life insurance for kids as a great way to save for their future and educate them about money.
So with that long introduction into the #1 benefit, let’s launch into the other 12 benefits of CVLI.
2. Death benefit paid whenever you die.
Unlike term life, which has an end date, cash value policies are permanent life insurance, i.e. they last your entire life.
You may have heard term life vs. whole life insurance compared to renting vs 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 term life insurance is a good investment—for the insurance companies!)
Now, for those 2% that payout, 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.
So in summary, benefit #2 of CVLI is that your beneficiary receives a death benefit no matter when you die since the policy lasts your entire life.
3. Cash Value Available When You Need It
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!
You see, Walt 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.
Having your own wealth storehouse in the form of cash value life insurance can be invaluable down the road. You don’t need to qualify for a withdrawal or loan from your policy. You simply request your money and the insurance company writes you a check.
Further, the financing is private. It does not hurt your credit. No one even knows you have the loan or if you have cash value available in your policy.
Which brings us to our next benefit…
4. Financial Flexibility.
As the cash accumulates in your cash value life insurance 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 premium payments, 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 money making ways if your life hits a rough financial patch.
Further, if your policy includes dividends, you can use the dividends to pay your premium payments or you can cash out your dividend for a quick surge of money to help you through a rough patch.
5. Access to Cash Value at any time.
The life insurance policy’s cash value can be withdrawn tax free, borrowed against or surrendered.
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 to create additional passive income might be an excellent decision.
Cash Surrender: You can also terminate your policy and receive the life insurance cash surrender value, which represents your total cash value accumulation, minus any surrender charges imposed by the insurer. For policies that contain surrender charges, most insurers have surrender charges in place for the initial 10-15 years of the policy.
The bottom line is that your cash value is yours. You have the first right to it over anyone, including the insurance company.
6. 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.
Why would you take out a loan and not repay it? One reason people do this is because they use the policy loan to supplement retirement income. Since a policy loan is not considered income, it is a great way to supplement your income in retirement and not interfere with other benefits, such as your social security check!
Now, although you do not have to pay the loan back, it makes a lot of sense to pay back the loan in the early years. 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.
As time goes by, your policy cash value may grow annually more than you are borrowing from the policy. Therefore, the money you are taking out of the policy is being replaced every year so you are supplementing your income and maintaining your death benefit — a win-win!
7. Cash Value grows income tax free.
Cash value life insurance accumulation grows tax-deferred and is one of the best ways to save money. Your CV 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. And if you choose the route of policy loans, your CV will remain tax deferred for life.
And get this, 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 cash value growth remains one of the only sources of income that does not increase the tax on your Social Security income. And you can take out money from your cash value life insurance and it won’t count against social security tax.
Certain cash value life insurance coverage, such as participating whole life insurance companies, 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 pay your whole life insurance premiums.
- Dividends may be paid out to you in cold hard cash.
- Dividends may purchase more paid-up insurance for additional coverage and cash value.
- Dividends may purchase term life insurance for additional coverage.
- Dividends may remain with the carrier and accumulate with interest.
- Dividends may be used for paying back a policy loan.
Cash value policy dividends are a great tool to grow your life insurance death benefit. If you utilize the power of paid up additions, you will grow your death benefit over your lifetime. That way, your death benefit is at its peak when your beneficiary needs it most—when you die!
9. Cash value life insurance Variety
Often when we talk about cash value, the main product we are focusing on is Whole Life Insurance. But there are other excellent policies available that build cash value, such as Indexed Universal Life Insurance.
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. A single premium policy is categorized as a Modified Endowment Contract (MEC) and loses some of the benefits mentioned in this article. However, if you are considering an annuity, a MEC might be a better route to take since you will have greater access to your money. Consult a professional who knows the difference between an annuity and a modified endowment contract for more.
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.
Consider a limited pay life insurance policy because you only have to pay premiums for a period of time but the benefits last your entire life.
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, cash out, leaving with the carrier to earn interest, or paying whole life insurance premiums.
Non-Participating: No dividend payments.
Alternatively, a universal life insurance policy can generate cash value. Three main types of universal life insurance are guaranteed universal life, indexed universal life and variable universal life.
Guaranteed universal life focuses more on the death benefit than cash value. The benefit is you get lifetime coverage but you will not see robust cash value growth as you do with the other types of universal life insurance.
Indexed universal life provides the potential for higher cash value returns due to the participation in indexed accounts that track the major stock market indices. You can receive interest crediting based on the indexed accounts performance, subject to the account’s participation rate and cap.
Variable universal life allows you to directly invest in the stock market through sub-accounts that are similar to mutual funds.
At TermLife2Go, we recommend participating whole life insurance or indexed universal life as the best investment vehicles for building cash value.
10. Cash Value Life Insurance Riders
There are some great life insurance riders available exclusively for permanent types of coverage, such as whole life and universal life. A few of the main riders include:
- Paid Up Additions
- Waiver of Premium
- Accelerated Benefits
- Guaranteed Insurability
- Renewable Term
- Accidental Death Benefit
- LTC Rider
Let’s talk about the guaranteed insurability rider for a second. The GI rider is an excellent rider on life insurance for children because it allows him or her to purchase additional life insurance throughout their life with NO proof of insurability, i.e. no medical exam or background check.
So what that means is your kids can get a policy that protects their future insurability. And if you get the right policy design, the cash value can build and create a wonderful savings vehicle for use with student debt, large purchases (such as a first car), investment opportunities and future retirement income.
Long term care life insurance is another important aspect of your coverage. You can choose a hybrid linked benefits policy or life insurance with long term care rider so that you have the added peace of mind knowing you have financial help if you ever need long term care.
Long term care insurance provides an income benefit if you are unable to perform 2 of 6 activities of daily living. You can choose a cash indemnity or reimbursement benefit to help you cover long term care costs, such as in home care, assisted living or in a nursing home.
11. State Law Protection for Cash Value Life Insurance.
Many states have laws protecting cash values and death benefits of life insurance policies from the claims of creditors.
Now, 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 or click here for a great chart.
12. Guarantees: Most cash value whole life insurance policies come with guarantees.
We want to focus our attention on four cash value whole life insurance policy guarantees, which include a:
- guaranteed interest rate,
- guaranteed death benefit,
- guaranteed cash value and
- guaranteed premium.
These whole life guarantees provide a solid financial foundation on which to build your financial house upon. Consider the long term affects of a guaranteed rate of return on your “safe bucket” of money. This is money that you can put aside for a rainy day, such as being laid off of work, or for investment opportunities, such as the real estate market back in 2010.
13.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.
Now what that means is, if you choose the viatical settlement 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.
Cash Value Life Insurance Benefits Conclusion
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 or visit our Life Insurance Quotes page and see what we can do for you!
Thank you for reading our article, Cash Value Life Insurance. Please leave any questions or comments below.
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