Global Asset Management
Cash value life insurance can help you save and accumulate money for long-term needs like extra retirement income or to fund the purchase of something big, like a property or college tuition.
These accounts typically grow tax-free or tax deferred, depending on whether gains are
distributed at death or during lifetime.
But with so many types of cash value life insurance plans available, how do you know which one is best for you.
First, look at the facts. The numbers show that millions of people own life insurance, making it a popular and affordable investment in their lives.
For instance, 5 million more U.S. families owned life insurance in the year 2016 compared with the year 2010. But there are still many people that don’t have life insurance or don’t have enough.
Why haven't you bought life insurance?
The primary reasons why some people don’t yet own life insurance, (according to research from LIMRA, Facts About Life 2016), are:
Affording life insurance. Eighty percent of people say that can’t afford life insurance. But research shows that most people overestimate the cost of life insurance. Most people think it cost three times more than it actually cost.
Confused about what to buy. Sixty percent of people don’t know which policy they should buy or how much they need. Lack of information is the biggest obstacle.
Lack of financial advisor help. Surprisingly, more families who believe they need more life insurance are not being approached by a financial professional.
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What's important?
Both types of cash value accounts have a guaranteed interest rate.
Both cannot lose value due to poor market performance.
Both lock in earnings. Once you earn interest on these accounts, the account compounds its earning, making the account bigger.
And because the earnings are lock-in, any negative performance in the market that may occur in the future do not affect what you have already earned. So, in this way, the accounts work like a savings account. The interest you earn is yours to keep. Negative market performance will not reduce account value.
What are the differences?
Guaranteed cash value accounts are also known as whole life insurance. Whole life insurance is a term used to describe a certain type of life insurance that is distinguished by having guaranteed features.
The guaranteed characteristics of whole life insurance are:
Fixed and level premium. The premium you pay stays the same. It does not change increase as you get older. It should be noted that premiums can decline over the years, even to zero for policies that pay dividends.
Ability to cash in on the policy’s coverage amount if you get sick or injured and meet the policy’s criteria for critical or chronic illness. This allows you to take the death benefit in the form of an advance payment, before you die.
The ability to cash in on the death benefit while you are alive, even if you are in great health.
Some policies will allow you to cash in on the death benefit with the only requirement being that the policy is paid-up by the time you reach a certain age. Notice here that the money is coming from the policy death benefit, not the cash value.
This kind of policy is so new it’s worth mentioning that again. Many people mistakenly believe the cash is coming from the policy’s cash value. Its not. It’s coming from the death benefit.
That’s right, you can actually cash in and receive the cash from your own death benefit, before you die, before you get sick, and put the money in your checking account and spend it on virtually anything you like.
Similar cash value policies, Different Features
Whole life and index universal life policies both:
The policies differ in that:
A closer look at cash value life insurance.
You own a particular type of cash value life insurance policy that allows you to cash in on the death benefit when you reach a certain age. The age at which you start cashing in on the death benefit can be 70 or 85 years old for example.
The longer you wait before electing to receive your policy benefit, the more of a full benefit you get. If you elect to receive the benefits early, then you get a reduced benefit.
In this way the policy works like social security. With social security, if you start taking your benefits at full retirement age, then you get the full retirement benefit. However, if you elect to receive your benefits early, then you get a drastically reduced benefit. The policy works under a similar concept.
Continuing with the policy, upon reaching a certain age, you notify that life insurance company that although you are in great shape and expect to live another 30 years, you want them to start sending you the death benefit of the policy. You have an opportunity or plans to use it and you can spend it on whatever you what.
The life insurance company then sends you a check that is deducted from the policy’s death benefit. Over the next ten years, you get a check from the life insurance company for a tenth of the policy’s death benefit.
Since your policy has a $1 million death benefit, you get a check for $100,000 every year for the next ten years.
You use this money to add extra money to your retirement spending or save it for an even greater return on your investment. You can use it for health care, travel or gift it to your favorite charity. The options on how you can spend your own death benefit on virtually endless.
For some people, getting sick or injured is an unfortunate reality. We all know someone that has been stricken with disease, sickness or injury or know someone that has been directly affected by it.
When life happens like this, it can derail the best laid plans. One solution for these things is how life insurance is leading the financial rescue for many of these circumstances. Life insurance products have improved considerably by providing better protection while you live.
Living Benefits of life insurance policies have built-in protection for incidence of critical illness and chronic illness.
Critical illness are things like cancer, stroke, problems with your heart and a host of other conditions. It’s best to check the particular policy disclosure for all the conditions it covers.
Chronic illness is when you are unable to do things that people do every day as part of normal living activities. Activities of daily living are things like bathing, dressing, eating, toileting, getting in and out of bed or chair.
Today, more people are being affected by chronic conditions which leads to higher incidence of chronic illness.
According to Centers for Medicare and Medicaid Services, Chronic conditions consist of Heart Disease, Hypertension (high blood pressure), Diabetes, Arthritis, Osteoporosis, broken hip, Pulmonary disease, Stroke, Parkinson’s disease, and urinary incontinence that occurs once a week or more often.
Life insurance policies that have critical and chronic illness coverage can provide money, which is taken from the policy's death benefit (and so it reduces the death benefit), to help carry you through a difficult time in your life.
Public Health Problem
Chronic diseases—such as heart disease, cancer, chronic lung diseases, stroke, and type 2 diabetes—account for most deaths in the United States and globally. They are the major causes of sickness, disability, and health care costs in the nation. Chronic diseases are responsible for 7 in 10 deaths among Americans each year, and the vast majority of health care costs.
https://www.cdc.gov/chronicdisease/resources/publications/aag/NCCDPHP.htm
What if you change your mind, can you get your money back?
Yes. All life insurance policies come with a time period, usually 20 to 30 days in which you can return the policy for a full refund for any reason or no reason at all.
Yes. Since cash value life insurance is life insurance (with the cash accumulation features), you can request a refund as in the example above.
Yes. Policies with the return of premium feature can return some or all of the premiums you have paid into the policy. For instance, one policy may return eighty percent of your premiums after 20 years and one-hundred percent of your premiums after 25 years.
Other policies may have a schedule for return of premiums whereas the company will return an increasing percentage of premiums paid starting after year five and increasing the amount every year until the full 100% of your premiums are returned. This can be part of a term policy such as a 20 or 30-year term policy or it can be a permanent type policy such as an index universal life policy.
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Lifetime Protection
Guaranteed Cash Value
Dividend Potential
Market Linked Interest Potential
Life insurance is the only certain way to create instant cash. That cash can then be used to resolve numerous problems for people and businesses alike. This is known as one dollar doing the work of many dollars.
There are many variations of policies within the meaning of whole life insurance, each having its own purpose or criteria.
For instance, a 10-pay whole life may be used to fund a deferred compensation plan of a key employee (a highly valuable employee or executive) and guarantee that key employee will receive a certain level of compensation after retirement or some future date.
Please notice that deferred compensation plans can take many forms. One form that is often used is to provide an executive or business owner a lump sum cash payment during working years. This can be used as motivational compensation in which the executive can use the payment in any way they choose, such as to pay down or pay off the mortgage on a home, buy a boat or otherwise pay for a large ticket item. The choice in how they spend the money is theirs to make.
At the other spectrum of whole life insurance types are policies used to pay final expenses or funeral cost. These are normally smaller whole life policies with coverages and benefits that make them more affordable than other types of whole life policies.
This type of life insurance is often offered on a guaranteed acceptance basis, meaning the applicant will not be turned down for coverage, provided they are within a certain age, normally between the ages of 50-85.
In between these two types of whole life insurance policies are a wide variety of policies with a host of features that can be used to customize a policy to fit your needs and circumstances.
A SUPERB INVESTMENT
According to well-known experts and authors of textbooks and software used by the financial planning profession, life insurance is a "superb investment". Tools & Techniques LIFE INSURANCE PLANNING 4th EDITION, CHAPTER 1 Life Insurance as an Investment, pg 5
Whole life insurance is characterized as having:
In addition to interest paid on whole life insurance, some policies pay dividends. Whole life insurance offers considerable flexibility in how dividends are paid.
One dividend option is called paid-up additions. Under this option, dividends are used to buy units of paid up whole life insurance. Each of these units contains it’s own cash value and since the unit is “paid up”, no further premiums are needed to continue the coverage provided.
Furthermore, these paid up units of whole, once added to the policy, can in turn pay their own dividends which further escalate overall dividend payments, increase the policy’s death benefit and rapidly increase cash values.
If the meaning of whole life insurance can be summed up with one word, guarantees, then index universal life has two, flexibility and guarantees.
While whole life insurance has been a safe place for people and their money for more than a hundred years, a new type of policy called indexed universal life promises to do far greater things than its predecessor.
Index universal life has many of the same guaranteed features of whole life, including the guaranteed interest rate, but offers more flexibility in terms premiums, death benefits and interest credits to name a few.
Interest is credit to indexed life insurance in a couple of ways. First, you can elect to receive interest based on the companies declared fix rate account. The fixed account interest rate is normally set in one-year intervals and declared at the beginning of the year. This interest rate is typically guaranteed to never be below a set amount for the life of the policy.
The second option to receive interest credits is to base the amount of interest credits or earnings on a stock market index. The interest credited to these policies are based on the performance of one or more stock market sectors. Although they are not directly invested in the stock market, the earnings to the policy are linked to the market which can outperform other types of safe money investments, including other types of cash value life insurance policies.
Since index universal policies do not actually participate in the market, negative market performance does not affect the cash values in the policy.
This means that if and when the stock market has a bad or negative performing year, the account is not credited with any negative growth, which can take away prior year’s earnings.
Index life insurance policies normally contain a minimum interest rate for the index account. This rate is normally zero, but not less than zero.
Another important feature of index life policy’s is the annual reset feature. Annual reset is important because it can enable the policy to experience greater gains especially after a poor year of stock market index performance.
In order to provide flexibility of index life policies with its guarantees, and no possibility of losses due to stock market performance, insurance companies place a limit on the amount of interest credits that can be earned from the marked linked accounts. These limits can be called caps or spreads.
Index life policy caps work like this. If the market index that’s linked to your life insurance policy earns 14% and your policy has a 12% cap, the amount of earnings credited to your account is the cap rate of 12%.
Another example is that if the cap rate is 12% and the market index earns 8%, then 8% is the interest that gets credited to your index life account.
In a negative year where the market index linked to your account loses 15%, then the minimum guaranteed interest rate of zero gets credited to your account. The account made no gains that year but did not lose any value due to the negative performing market index. In this regard zero percent is greater than negative 15%.
At this point annual rest kicks in giving the index life an advantage of not needing to wait until the market recovers before it starts to earn, because the new starting point for growth is the new market low point.
Now while other investments that are in the market need to wait for the market to recover just to get back to even, annual reset feature starts to record it’s market index gains from that previous market bottom.
This is one-way the annual reset used in index life policies can help you capture more growth, allowing more interest credits to accumulate inside your cash value index life insurance account.
