Cash value, or “cash accumulation,” is one of the most misunderstood concepts in life insurance. Many agents immortalize cash value, encouraging consumers to buy whatever the latest hot product on the market might be. They’ll say that you can borrow against your cash value, use it to send your kids to college, or even retire on it. Indexed universal life insurance (IUL) currently holds the “hot” spot—if you have come across IUL, do not buy it before reading this article.
More often than not, we find that cash value causes undue stress. In extreme cases, it can cause pure misery.
Read on to get a better understanding of cash value in life insurance so that you can avoid common misconceptions and mistakes.
Quick Article Guide
1. What is Cash Accumulation in Life Insurance?
2. You’re Paying More for Cash Value
3. Non-Guaranteed Life Insurance Has Passed Its Prime
4. There’s a Market Risk Involved in Cash Accumulation
5. You Can Use the Money, But It’s Not Free
6. If You Don’t Pay It Back, Your Family Will Get Less When You Die
7. If You Save It, Your Family Won’t See It
8. It Can Dry Up Without You Realizing
9. Better Options: Guaranteed Universal Life and Term Life
10. For Further Guidance
Cash accumulation is the investment component attached to many whole life and universal life policies. Your “cash value” is held in a savings account that earns interest, separate from your face amount or death benefit, which is paid to your heirs upon your death. You can borrow against your cash value, and contribute to it each month to grow your funds.
Sounds great, right? Not so fast…
No investment is free. A permanent life insurance policy with cash accumulation will typically cost 3 to 4 times more than comparable guaranteed universal life or term life policy. For what you would pay for a whole life policy with a $100k face amount, you can likely get a term life policy with a $500k face amount (meaning your family gets $500k rather than $100k when you die).
As an example, we recently had a client who was about to purchase a whole life policy with cash accumulation and an $80k face amount for $147 per month. We were able to instead get him term life insurance, with no cash accumulation, but a $250k face amount, for $87 per month. Declining a cash value investment for a “cheaper” policy might sound counterintuitive on the surface, but policy cost is only the beginning of why cash accumulation isn’t all that it’s cracked up to be.
Non-guaranteed universal life insurance with cash accumulation became extremely popular during the 1980s, when interest rates were at an all-time high of 15% or more. With current interest rates hovering around 3%, the vast majority of these policies are now underfunded. When a policy is underfunded, it means that the insured must pay additional money in order to keep the coverage.
Having a non-guaranteed policy from back in the heyday of universal life insurance, much less buying one today, is asking for trouble. Forbes describes the current situation as a looming retirement disaster for universal life policyholders.
Just like no investment is free, no investment comes without a risk. Unfortunately, many big-box agents selling cash accumulation policies tend to downplay the real-life market risk involved in using life insurance as an investment. After all, they are trying to hit their sales quota, keep their job, make a living, and earn a commission.
Your cash accumulation is used to pay your cost of insurance and mortality risk charges, which increase each year as you age.
These charges are different from your premium, and often go unnoticed by those who don’t take the time to understand their policy. The risk is that your cash accumulation account might not perform well, in which case the cost of insurance and mortality risk charges will deplete your cash value down to zero. More on this shortly.
At this point, you’re probably thinking, “Answer the question: Can I use the cash value in life insurance or not?”
The answer is yes, but we can’t caution you enough about doing so. Remember when your parents told you that money doesn’t grow on trees? Apply that reality here and understand that if you do withdraw the cash value in your policy, the life insurance company considers it a loan. You will be charged a “cash surrender” fee of up to $750 dollars, and will have to pay interest on the money you have withdrawn until the loan is paid back.
If an insurance agent tells you that you can use cash accumulation for your retirement, children’s college education, or family vacation, remember that doing so is essentially the same as getting a loan from the bank or using a credit card. You have to pay the money back, with interest.
So, what happens if you don’t pay back your life insurance-funded loan? If you still have an outstanding balance when die, the amount of the loan is subtracted from the payout that your loved ones will receive. If your family is expecting a $100k death benefit but you borrowed $30k from your cash accumulation and died before you were able to repay that $30k, your family would receive $70k. Many families end up underinsured at their loved one’s time of death for this very reason.
Cash value in life insurance is not a death benefit. If you die before you withdraw the cash value in your policy, your insurance company keeps the money.
It is not paid to out to your beneficiary or beneficiaries, and is essentially lost. With that said, there doesn’t seem to be much purpose in pouring money into a cash accumulating life insurance policy.
Oftentimes, when the cost of insurance and mortality risk charges dwindle a policy’s cash value, clients have no idea until they are hit with exorbitant monthly costs for keeping their coverage.
One of the worst horror stories we’ve heard is that of an older man who had bought a policy through an agent many years back. His cash accumulation dried up completely before he became aware of what was unfolding. To retain his life insurance, he was required to pay the cost of his policy, plus the mortality risk charge, plus his base premium—all out of pocket and with no warning.
To make matters worse, he had a major health issue and simply could no longer qualify for new life insurance. At a time when life insurance was more important than ever, the man had no means of protecting his family from potential financial hardship after he dies outside of a “final expense” policy to cover burial costs.
Is cash value starting to give you headaches already? Don’t worry, you have better options that free you from having to worry about whether your cash accumulation is helping or hurting your cause.
Guaranteed universal life insurance (GUL) is designed to last your entire life, just like any whole life or universal life policy. However, GUL does not build cash value, allowing you to keep your monthly payments low, and your rates locked in. GUL policies are set to specific ages (90, 95, 100, 105, 110, and even 121), functioning similarly to term life insurance.
Term life insurance provides a death benefit at a fixed premium, for a set period of time (your term). While GUL goes to a specific age, term life goes for a specific number of years. Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.
Both of these options provide the protection you need, without the “bells and whistles”—namely cash accumulation—that often make other life insurance policies complex and costly.
We don’t want to overload you with information. Here on our blog, we provide a world of insider tips and insights, but if you’re in the process of buying life insurance, the best thing to do at this point is to contact JRC and speak with one of our independent agents.
We’re here to help you navigate your life insurance needs and find the policy that’s right for you—no sales quotes on our end, and no commission fees on yours. Call us at 855-247-9555, or click the button below to get a free life insurance quote online. You can also see what our many happy clients are saying about us here.
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