Cash Value Life Insurance – is it a good deal?

I have been involved with life insurance since 1981. When I started in the business I trusted my managers and believed all the good ‘stuff’ they told me about whole life insurance / cash value life insurance.

They told me what a good long term investment it is.  It builds cash value on a tax deferred basis. It returns profits in the form of dividends, etc. However, once I started asking questions and started doing my homework I came to a different conclusion.

The conclusion: most cash value life insurance plans are only a good deal for the person and company selling them.

If someone can provide me evidence to the contrary I would be most obliged.

I’m talking about Whole Life (WL), Universal Life (UL) , Index Universal Life (IUL)

Marketing Material vs. Reality 

The company promoted benefits:

Benefit Comment
competitive rates If 4-5% is okay after waiting 30 plus years. Surrender prior to that and returns will be less and could be negative if surrendered in the first 11-14 years (see #2 below)
downside protection True there is a floor, but it usually means your floor could be 0 to 1%.
tax free withdrawals True, until you lapse the policy then you have big tax problems (see#3 below)
guaranteed returns Guaranteed returns on a Whole Life could be 0.5%, On IUL it could be zero.
self completing if disabled It is self completing if you add the Waiver of Premium rider and if you are totally disabled (read fine print about what qualifies as disabled). Additionally the rider’s premium  with reduce overall returns even more.
tax deferred earnings True, but there are a lot better places to get tax deferred returns (read 401k, IRA, etc.)

 

The downside details that are downplayed, not mentioned, or buried in small print

  1. High lapse rate means many policyholders will experience a negative return because only 60% of policies will still be in force after 10 years. And it takes at least 10-12 years for most recurring premium plans (that are not over-funded) to reach the break-even point.
  2. Surrender charges will be incurred for up to 14 years, which means you could have negative returns if you surrender the policy in the first dozen years (see 1.)
  3. ‘Tax free’ withdrawals can trigger a taxable event if the withdrawals cause the policy to lapse
  4. Whole Life Insurance dividends are not guaranteed (see vanishing premium scandal below – agents presented illustrations that showed whole life plans being paid up in less than 15 years, even though premiums are due to age 100)
  5. The only thing the insurer is legally obligated to honor is that which is “Guaranteed”
  6. IULs have a lot of moving parts (caps, participation rates, indexes, etc.) and hence it is difficult for an insurance agent or financial planner to understand and almost impossible for a lay person to understand. 
  7. The portion of premium that is ‘invested’ is reduced by loads, admin expenses, and COI**.
  8. IUL and UL fees and costs can and do change even though the illustration show them remaining level
  9. History of bad behavior by life insurers

Exceptions

Guaranteed No Lapse Universal Life (GUL)

GULs are typically different from ULs and IULs in that the main goal is not to accumulate cash value, but rather it is to guarantee a death benefit for a long period of time. In this regard, it can behave more like term insurance and less like ‘cash value’ insurance. It can act as term insurance but for a longer period of time than is typically available with term life.

There is a catch of course. That is the premium payments have to be made on time. Late payments can lessen your guarantee period. Surprisingly, even early payments can sometimes have an adverse effect in the guarantee.

Special Needs Dependent Planning

If someone has a special needs dependent that will always be dependent then permanent life insurance may be the proper solution.

Estate Planning

A large estate that may have to pay estate taxes could consider a permanent plan especially if the estate is made up of  non-liquid assets.