Cash Value Life Insurance Pros and Cons- Should You Purchase?
Understanding cash value life insurance pros and cons can be confusing and a little intimidating.
We get it and want to take the time to explain. In a world riddled with options for obtaining life insurance, it almost seems overwhelming to even take the time to learn the differences or the terminology used by us nerds in the life insurance industry.
Secret- Yes, we like this stuff, and yes, we know that makes us crazy.
What’s the good news for you?
Well, we deliver the goodies and package them up for you to read all the information needed to make an informed decision right here on this page. All you must do is stick with us for a few minutes, and we feel confident we can get the point across and demonstrate the pros and cons of cash value life insurance (AKA- Whole life insurance)
In the life insurance world, you have a few variations of coverage types. The main suspects include the following.
- Term Life Insurance
- Cash Value Life Insurance or Whole Life Insurance
- Universal Life Insurance
- Final Expense/ Guaranteed Issue Life Insurance (AKA- Burial Coverage)
All are unique in their own way and have various pros and cons. One question remains, however. Should you ever purchase cash value life insurance, or should you run from it? What should you do instead?
Let’s Dive into It.
Cash Value Life Insurance Pros and Cons- What are they and What do I need to Know?
First, we are going to cover a bulleted list of the pros and cons of cash value life insurance. Following the list, we are going to break down common questions, and concerns clients typically have with cash value life insurance to try and clear the air and your mind as much as humanly possible.
Cash Value Life Insurance Pros- Why it Can Be Beneficial
Many people stir over cash value life insurance and think it’s superior to all other life insurance. We disagree with this notion, but we do feel there is a strong purpose and the correct time to purchase cash value life insurance does exist.
If you don’t fall into one of the reasons on why it makes sense, then you should stop looking at it and take other recommendations from professionals for coverage.
Here are the Pros of Cash Value Life Insurance
Guaranteed Death Benefit
When you purchase whole life insurance or cash value life insurance, you select your death benefit from the get-go. Once you choose the death benefit, you’re done. It will be there if your parachute doesn’t open tomorrow on your skydiving adventure or if you are 102 years old fishing for bluegill in your neighborhood pond when death finally comes knocking on your door.
The kicker is, if you stop paying the premiums, it disappears. Well, most of the time but we will touch on that later. Long story short, the death benefit is guaranteed forever, not just for 10 or 15 years like term life insurance.
Avoiding Uncle Sam (AKA- Tax Benefits)
Cash value life insurance does not get taxed in nearly all circumstances. Regardless of if the death benefit is going to your wife or newest grandchild, the death benefit is passed down and received free of tax.
You are also capable of taking withdrawals against the cash value of the life insurance tax-free. This also serves as a con later in the post so make sure to stick around.
Therefore, you will usually see wealthy individuals stacked with permanent life insurance. It’s a tax-free investment vehicle (although a poor performing one) that allows them to diversify a bit and avoid paying those extra pennies to the Trump Administration.
Flexibility and Multiple Pay Options
Cash value life insurance depending on the insurance company you are working with will allow for many payment options and plans.
For example, Mass Mutual offers a…
- One Time Lump Sum Payment
- 5 Pay Cash Value Life Insurance Plan
- 10 Pay
- 20 Pay
What this means is that you can condense your premiums down into a shorter payment plan. Picture it like a home mortgage. Some people elect for 15-year mortgages so they can pay it off faster. Some people elect for 30-year mortgages.
You can do the same with these cash value plans. You’re purchasing the entire death benefit quickly and then owning it for the rest of your life and letting it sit and build off the interest earned.
That’s not all, however. Cash Value Life Insurance Offers Even More Flexibility than that.
Throughout the policies of life, you can elect to increase or decrease death benefits usually on an annual basis. As your circumstances and financial needs change, this can prove valuable and allow you to adjust if need be.
The Lovely Riders That You Can Select
Cash value life insurance also allows for some unique riders that term insurance doesn’t have in the package. We won’t cover them all in this article, but a good example would be the…
Long-Term Care Rider
The long-term care rider will provide cash payments in the event of needing to be placed in designated long-term care facilities or even in-home long-term care setups. Long Term Care is a leading pocketbook killer and quickly destroys a family’s wealth in a hurry, so this can be a massive benefit if executed properly.
Leverage with your Local Banks
Cash value life insurance is a top pick for collateral with any institution that you may seek lending from in the future. It makes beautiful collateral for the bank. I mean let’s imagine you are seeking a 350,000.00 SBA or business loan. If you pass away, the bank has no protection or guarantees and trust me they want both.
Having a piece of cash value life insurance can make it easy in the future to leverage opportunities for lending when needed.
Okay enough with the reasons why cash value life insurance can be useful, let’s look at why it can be harmful.
The Cons of Cash Value Life Insurance
Cash value life insurance is typically priced in a range that’s not doable or doesn’t make sense to do so. It has high built-in fees, high commissions to the agents and if you’re looking for protection, it’s just not the most suitable situation for you and your family.
However, depending on your age and health, it can make sense. If more 25-year old individuals considered a small cash value life insurance plan, the cost could be justified but, in most situations, it’s just not worth the price.
Buy term and invest the rest.
Lapsing a policy means that the policyholder just stopped paying the premiums. Cash value life insurance would be the record holder for this category, and the life insurance companies are aware of that. It makes them a ton of cash to pad that yearly surplus.
Guess what, when you lapse the policy, you don’t get your money back, and that makes sense. I mean, they did provide you with the death benefit while paying the premiums and the fact you’re still living doesn’t make them a money sucking company by any means.
This doesn’t, however, take away from the fact that lapsed policies is a con for cash value life insurance.
It becomes too expensive and 99% of America if they must choose between that New York Life Whole life policy they purchased at 29 years old or keeping NFL Sunday Ticket, which one do you think are going to choose?
So, after seeing the Pros and Cons of Cash Value Life Insurance, should you Buy it?
Our best answer we can give in for this exact question is most likely not. We are huge fans of the term life insurance options you have available. A term life insurance policy is cheap, provides the most crucial piece of life insurance to your family which is, of course, the protection if something was to happen to you.
You can also make more substantial returns investing in other financial vehicles. Sure, maybe a cash value life insurance outperforms a certificate of deposit but in most situations whatever financial vehicle you use, the cash value will not perform or deliver a high internal rate of return.
What does Suze Orman and Dave Ramsey think?
They agree with us. Buy term and invest the difference. It’s very rare that whole life insurance is going to be the best possible avenue you can take. Sure, they are paid influencers for insurance agencies but that doesn’t make what they are saying any less factual, and its time people started listening!
Whole life or cash value life insurance isn’t worth it at the end of the day.
What about Using Whole Life or Cash Value Insurance as a Retirement Plan?
This is just Ludacris and companies that advertise this, probably don’t believe it either. It doesn’t matter if you are 20 years old or 60 years old, we can personally list 50 other options that will net you a better retirement than cash value life insurance.
News flash. When a Mutual Company such as let’s say New York Life or Mass Mutual advertises it’s making 6.2 percent inside cash value life insurance….
That has zero impact on what rate you are getting inside the policy. There are additional fees, mortality cost and other deductions diminishing the returns quickly.
Again, we can’t say it enough times. Buy term and invest the rest. Sure, sometimes the whole life or cash value life can make sense which we listed in the cons, but we can count those on less than one hand. If you don’t fall into this bucket or scenario, you need to look at other options.
Permanent life insurance quotes, where do I find them?
If you do fall into one of the reasons why cash value life insurance makes sense, then you should continue pushing on and consider purchasing it. You can always use our free rate engine to the right to look at quotes for permanent life insurance. Just make sure to select “whole life” on the coverage option bar.
Also, yes, we do represent over 60 companies who offer top rated cash value life insurance. We will get you taken care of for you one way or another.
Best permanent life insurance? What is it and Where is it?
If you are looking for the best form of permanent life insurance, we recommend a few things.
First, consider a company that offers top rated Universal Life Policies such as Protective Life, American National or even Lincoln Financial Group. These can be cost savings technique that provides you with the same benefits.
Also, if you fit the mold for someone who needs permanent insurance, you should also consider the paid up or condensed pay options. When you choose a 20-year pay or 10-year pay, you do provide the policy some opportunity to grow and compound interest a little faster. Companies such as Mass Mutual or even Foresters offer great options for these policies.
Again, we are always here to help if you need us.
Overfunding cash value life insurance, should you do it?
Again, this is a theory and or question that we think is crazy that’s it being pushed so heavy by Captive Life Insurance Agents for the Big Mutual companies such as Northwestern, Penn Mutual and others. If you have additional cash to throw at something in hopes for a big return, we promise you cash value life insurance isn’t where it should go.
The only time this may even make a tiny bit of sense is if you are incredibly wealthy and need the life insurance for either…
- Estate Planning and Protection
- Business Planning
- Credit Leverage for your Next Business Move
- Alternatively, you need something with some additional tax benefits.
If it’s the tax benefits you’re looking for, you still must be very careful. Too much overfunding and those tax benefits go bye-bye, and the IRS will consider your cash value life insurance a modified endowment contract which is defeating the entire purpose.
What about whole life insurance for the kids?
Okay, we are 50/50 on this. This can be good, and this can be bad. It depends on your discipline and why you are purchasing it. A decent performing cash value life insurance for the kids can be good if,
A.) It’s Started, Young
B.) It’s with a company earning decent Dividends
C.) You have other outside Investments already in place for the kids earning high interest.
Many people think you need to have one of these cash value plans to help fund your kid’s college which absolutely isn’t true. You could be safe and do a 529 program and get the same results or even consider putting the money in Mutual funds for your child and earn the more significant rewards.
If these are already in place and you want something to diversify a little bit more, than yes these can have advantages.
So why is permanent life insurance so bad? Do we understand the Cash Value life insurance Pros/Cons?
Let’s start by saying that we are by no means cash value life insurance haters. We believe the average consumer is vastly misinformed, undereducated on life insurance and taken advantage of by agents who are taught that whole life is the next best thing since sliced bread and that couldn’t be further from the truth.
We pointed out the pros of cash value life insurance and what it can be used for, but we also hope we emphasized that term will most likely get the job done and protect your family for a fraction of the cost.
The choice is ultimately yours and we are here to help whichever path you choose.
Have any experience with whole life or cash value life insurance or any further questions about it? Make sure you leave a comment below or fill out the form on the right to get started finding the best life insurance policy for you. Thanks for Reading.