If you purchased a permanent life insurance policy over five years ago, your agent probably explained the benefits of cash value. You may have also been told that you could access it during life. But, if you bought the policy based on paying in the lowest premium for the highest death benefit, you may not have been told the full story.
When you bought your policy, the premium was calculated based on several factors. One way to keep it low was to design the policy to build up the lowest amount of cash value possible. If the cash value drops to zero, the policy will terminate. Yes, it’s surprising, but true. Much like an automobile requiring gasoline to run, many policies will terminate if they run out of cash value. If you want to keep the policy inforce beyond life expectancy, make sure there is always sufficient cash value. Therefore, if the cash value was at such minimal levels, how could a policyholder be told they could spend the cash value? Unless the policy experienced unexpected excess cash value, they cannot or the longevity of the policy could be adversely impacted.
Secondly, this cash value requirement adds to the premium. By comparison, some of today’s newer policies allow the cash value to be depleted to zero and the death benefits continues.
Third, many policyholders do not realize that most policies do not add the cash value to the insurance at death. Rather, the cash value is retained by the insurance company.
HERE IS SOME GREAT ADVICE: Ask your insurance advisor or carrier to provide you with an inforce illustration. That is a projection of how much longer your policy last. This low interest rate environment has left many policies at much lower levels of cash values than what was expected at implementation of the policy. Chances, are you are in for a surprise and a 1035 exchange life insurance could be in your future.
Please do not misunderstand my criticism of cash value to be implying that permanent life insurance is a bad deal. On the contrary, I believe it to be an excellent fit in most situations, but am merely criticizing two things. First the lack of product choice the industry provided years ago. Second, most carriers continue to only send out statements with only a snapshot of the cash value today and no explanation about the longevity of the cash value and the policy itself. I assume, the carrier’s rationale is to allow the agents to communicate this, but I just don’t see that being done.
Cash values are not always a bad thing. Many policyholders used their policies to build up large amounts of cash value, by over-funding the premiums. In most situations, this can be a great source of retirement income. Of course, each situation is different for each person and their financial goals.
If you are still healthy, but concerned your existing cash value policies are no longer competitive, you may want to consider a life insurance replacement utilizing a section 1035 exchange. 1035 exchange life insurance policies require that you find a capable insurance advisor to guide you through the process and the life insurance marketplace. Please visit our site for more information and advice at 1035exchange.org.