Life Insurance With Cash Value Exposed!

So you buy life insurance and save money at the same time, sounds great doesn't it? But what if I tell you that the money you are saving is for someone else not for yourself? Outrageous, but true in any case with someone who bought a "cash value life insurance", or policies with names that are synonymous with that. (If you have universal life insurance or universal variable life insurance, you have a bigger problem. I will cover that in my next article)

The cash value doesn't belong to you, but to the insurance company. Anytime you need it, the company "lends" it to you and charge you with 2-3% interest cost. They make it sounds like such a good deal too. After all, where else could you find a loan with such a low rate?

Except that the cash value is your money to begin with, so they lend you your own money and charge you for it.

Life insurance with cash value is expensive compared with the cheap term life insurance. With the same premium cost, you can easily buy term life insurance that gives you 5-9 times the coverage you would get from cash value life insurance.

First off, no one wants to keep paying for an expense every month for life, right? You don't want to make payments for your car for your whole life. You don't want to pay mortgage payments for your whole life. You don't want to support your children for life. So why would you want to pay your insurance premium every month or year for your whole life? And they aptly named it "whole life insurance"!

For term insurance, you can cover your insurance needs for cheaper in the time span you most need it (Young families need money most if anything happens to the bread winners), and save the difference you would otherwise have spent on cash value insurance each month. You may invest the difference in index funds that make you at least 6-8% per year on average. If you reinvest your earnings in a tax-deferred saving plan, with the power of compound interest, you will be able to insure yourself by the end of your term insurance coverage. (20 years)

For a practical example with forecasting and numbers, see my post Buy Term And Invest The Difference

Many credible money saving experts, financial journalists, and independent financial advisers have long ago pointed out the pit fall of cash value life insurance, and also other varieties of products such as Universal Life Insurance, Variable Life Insurance, and many other types of permanent life insurance with a fancy name. Here I want to recommend some books if you are considering a major insurance decision and want further information than I already provided here.

One is for US and the other is for Canadians. Guess which is which.

Even Suze Orman is on my side, but I choose not to endorse her books because she permits young adults to live on credit card loans!! Also because I don't like some of the spiritual values and beliefs that she puts into her books.

If you want to, you can Google "Suze Orman Term Insurance" and you will get her take on this topic.

Next

What if tragedy happens and you die? They will pay you the death benefit that was written on your policy contract, nothing more and nothing less (Most insurance companies never pay the amount in the projected or illustrated chart. At least I have never heard.) Mind you, 90% of the people who have bought cash value life insurance are under insured, because they can't afford to buy the proper protection, because cash value life insurance is just too expensive.

Let's say the death benefit you purchased was $100,000, and in 30 years you have accumulated $50,000 in cash value, which is a very real number for real people. If you die, what will you get? $150,000? Nope. Again, the $50,000 cash value is never yours. It belongs to the insurer. They will only pay you $100,000.

What happens to my cash value?

The cash value is their cheese. You will never get to have it.

Wait, what about the dividend the agent told me about?

They Have This Dividend Thing, Sounds Good Right?

Insurance dividends are very different from dividends in stocks or other investments. It is not really dividends by any mean. It is a refund for overcharges.

They simply overcharge you in the beginning to make sure they have enough money in reserve just in case the actuaries underestimated the number of people dying or overestimated their profit within a certain time — in other words, they overcharge you to provide a buffer for themselves.

Most people are happy to get a refund. But if you think about it, they keep your money for years and never had to pay you any interest, and they are not obligated to give you any dividend at all, even if they have been making good money. Your money sit in the dark, far from your hands, and you don't have any say in it.

What If I Took Out My Cash Value And I Die?

They will deduct the cash value from the death benefit, and the interest on the cash value you 'owe' them, and pay you the left-overs.

Using the previous example, if you took out your cash value, $50,000, and incurred $1,500 interest costs, and you die, the insurance company will only pay you $100,000 - $50,000 - $1,500, which is $48,500.

So are the death benefits from term insurance! But there is more to this "tax advantage" argument that insurance agents always use when they try to sell you insurance policies.

Did you pay your life insurance costs with pre-tax money? Or after-tax money?

Personal life insurance is paid by your after-tax money, so the government has already charged you, so they won't charge you again, and that's why your death benefit is tax free, whether it's term insurance or cash value life insurance.

If the insurance agent tries to persuade you to buy cash value life insurance because it's tax-free, it's like a super market that only sells oranges but not apples because they have vitamin C. (But you know apples have more right?)

But My Cash Value Is Tax-Free!

Your cash value is not yours, remember? Of course you don't need to pay tax for something you never own.

In a hypothesized setting, the insurance company made big money with the excess money you gave them and they decided to be a good guy and shared with you a tiny portion of their profit, if that amount exceed the cash value they guaranteed, the government may see that as an income and will tax you the day you withdraw it. (They have a formula that calculate when they will start taxing you, and the tax-free allowance isn't very high I guarantee you)

To make it simple, the government will never let any of your income goes untaxed. If it's untaxed, it's because it was already taxed sometime ago. There is only tax-deferred income, no tax free income.

In the best scenario where your cash value does make any money, it will work like a Tax-Deferred Saving Plan that you register with your government (such as IRAs, 401(k)s and RRSPs), except that your TDSP often do much better than the cash value because people usually register their investments in the market and the market return rate often beats the insurance companies' return rate.

I have seen too many cases when insurance companies tell their customers that they have overestimated their earnings and the cash value is just the value guaranteed in the contract. And if it does make any profit, it is even less than what you would get from a simple Certificate of Deposit from any bank out there for the same dollar invested in the same period of time.

But why worry about money that isn't yours? Cash value is just for show, if you give the insurance companies pressure.

If you surrender your policy and take out the cash value (i.e. cash surrender value), it's the leftover money that's left (Refund for overcharges) after they get their fat portion.

There are two kinds of earnings that the insurance company shows you in your contract. Open your contract if you have one, and you will see guaranteed earnings and projected earnings (aka illustrated earnings).

The guaranteed earnings are the only number they are required by law to pay you. Projected earnings, however, are subject to their free will. It doesn't hurt if they don't pay you more than what was guaranteed, for whatever reason.

I have never seen an insurance company that pays more than what is guaranteed by any significant amount. Usually they pay only what is guaranteed, and they also make you pay an expensive surrender charge if you want to take out the cash value and end the policy.

Where Is My Cash Value For The First Few Years?

Gone With The Wind!

If you check your guaranteed chart, the first few years you had zero cash value, while you still had to pay for your monthly or yearly premiums, so where did your money go?

Your cheese had been moved right from the beginning!

And it went to the insurance agent's pocket!

Your money was spent on the agent's commission.

How many years your cash value remains zero depends on the agent's whim. If you are easy to please, then he would just go ahead and make it 7 years since you won't say a thing about it anyways, but if he thinks he needs to try harder to win your business, then he may make it 2 years.

Although I was an actuarial student, my parents bought a cash value life insurance for me and I didn't know better. My cash value had remained zero for 7 years

But The Agent Said Everything Will Be Gone If I Cancel The Policy Now

If you get stuck in a pit, should you keep digging?

Just shop for new term insurance policies and see if you can get a good deal, take out whatever cash value is there, and buy term insurance for 20 years. If you are under 55, you will probably still be able get reasonable coverage for a reasonable price if you buy term.

But don't jump the gun. Go through the underwriting process and see if you can get the new term policy issued first before you cancel the old policy. You don't know if there are any hidden diseases that you may have developed in the last few years.

Don't Believe The Projected Figure! It's An Illusion To Keep You In!

Instead, ask them to show you the money now. What they can give you right now is the actual amount. Don't listen to them if they say, "Oh if you cancel now, all your projected earnings will be gone!" If they can't give you that projected earning to you this year, they will never be able to do it in the future.

People who cannot fulfill their promises now will always try to direct your attention to the future. Politicians do that all the time. So do insurance agents and companies.

It's amazing how much humans can endure if they are given hope, but if it's false hope...

Don't Let Them Get Your Children Too!

Insurance agents will try to lock your children in at a young age. However, children simply don't need insurance coverage because they don't have any income to protect for.

They will say that if your children get insurance now they will lock in at a cheap rate. I also sell oxygen for cheap, would you buy it?

They will say it's for saving money for your children just in case they need that money in the future. But it's such a lame excuse.

If you have money to buy insurance for your children, then by all means you should start an education savings plan for your child instead. (RESP in Canada, UGMA, UTMA, or Educational Savings Account in the US)

Sadly, I have seen many families in which each of the family members has been issued one or more insurance policies. Most of the time, what they need are term insurance for the income earners, and to invest the insurance cost difference toward tax-deferred retirement saving plans, or an education savings plans for the children. These plans are very powerful tools for you to enjoy the market return of 8-12% and grow your nest egg without having to worry about tax until your basket becomes huge.

Shop online for the best term insurance quote, and try not to get an agent in the way because they would be tempted to sell you products that give them the highest commission possible, which would be cash value life insurance. Instead, buy from the provider directly.

I have seen term insurance with 30 year terms. Such products do exist. If you are in your 20s and you expect your family to rely on you for more than 20 years, then you can consider buying the 30 year one.

After that, call your agent and make a scene. Ignore all his threats that I mentioned in my article, and demand he to cancel your old policies and be done with him.

Last warning: Don't cancel the old one just yet before your new one is securely in place. Unless the old policy is such a big rip off (In case you don't know, I think all cash value life insurance is a rip-off) and you can insure yourself anyway.

Sai Kit is a Christian blogger. I usually write about Christian stuff but this time I want to reveal some of the deceptions in the world and serve some unbelievers too.

I have an honor bachelor degree of Actuarial Science from the University of Waterloo, so I could be an actuary that designs life insurance policies. But after learning about the industry, my conscience got in the way and I could barely finish my degree and lost my way in my career.

I became an insurance agent and insisted on selling term insurance only. This path was very difficult and I didn't make any money at all, but actually lost money in business expenses.

To this day, I still suffered the consequences of the decision to not go after the career in actuary. Things are going well though, and I will see if I can get into the health insurance, auto insurance, or travel insurance fields.

If not, I will still continue to pursue my path as an infoprenuer who will always write for God on the Internet and expand His kingdom on earth through words and multi-media.

See my story here: