There is a topic that gets kicked around a lot by many people including some celebrity experts like Suze Orman and Dave Ramsey: should I buy cash value life insurance?
There is no easy answer to this question. The celebs frequently think that buying term is the best way to go. This may be true for some but definitely not all. They are in the entertainment-information
business, and aren’t aware of the day-to-day features and benefits offered today by cash value life insurance.
Why cash value insurance?
With the newer policies that offer significant cash value growth as well as living benefits, such as critical illness and chronic or long term care benefits, it makes the conversation much more interesting.
A properly designed index universal life policy gives you the potential to earn 12-15% returns on you cash value growth. When you add this to the tax free income benefit these policies can act like a Roth IRA, only with added benefits. Term insurance is death insurance, meaning it only pays when someone dies during the period covered. That is why the premiums are much lower than permanent life insurance.
Who needs cash value life insurance?
I usually recommend this to young families who have needs for large death benefits to help pay off the mortgage, provide cash for other debts such as student loans, car loans, credit card debt and college funding.
If you need coverage after the term expires, you have to requalify to obtain a new policy at a higher premium since you are older than when you took out the first policy. If you can’t qualify due to health reasons, you can continue your current policy, but the premiums will increase every year. This can become extremely expensive if you still need coverage in you golden years. With more and more seniors still having mortgages, this is something to think about. At a time when you are no longer working and able to earn they kind of money needed to keep the policy in force this can put you in an unfortunate predicament. Cash value life insurance can be structured so that premiums will only be required for a limited number of years. This allows you to be covered for the rest of your life without the need for premiums in you older years. With the added features such as tax free income, double digit return potential, living benefits that I have already mentioned and the ability to leverage you money in the event of death, you can see why it has many advantage over term insurance.
We have done may studies and properly structured index universal life that show them to be even more beneficial than a 401k plan. With tax rates at some of the lowest levels we may see in our lifetime we have to ask ourselves if deferring taxes today to pay them at potentially (and probably) higher rates in the future makes it more enticing to fund a life policy instead of a 401k.
Who would do that?! Well, the University of Michigan football coach Jim Harbaugh is one example. He even took a cash value life insurance policy as part of his compensation package.
Here’s a helpful read if you want to learn more.
It’s a complex topic. So, any questions you have are great ones, and I’m more than happy to help answer them for you.