Cash-Value Insurance

üWhat is cash-value or permanent insurance?

•It is an insurance contract that is purchased for your entire life with premiums divided between death protection and savings. 

üWhat are its advantages?

•Provides insurance that cannot be cancelled

•Can be used for estate, retirement, and “forced” savings

•What are its disadvantages?

•It is very complex and expensive

•Unless premiums are paid, it can expire worthless

•Certain cash-value products can lose money

Understanding Cash Value Insurance:
The Process

üDifferent types of cash-value insurance?

•Whole life.  For those who want term protection with a savings element

•Universal life insurance. For those who want a flexible policy that combines term protection and tax-deferred savings

•Variable life. For those who want term protection and to manage their own investments with an opportunity for tax-deferred savings.

•Variable Universal Life.  For those who want term protection, full policy flexibility, and to manage their own investments

üThe differences in cash-value products relate to the goals, types of investments, and flexibility

•Goals:  The type of return and risk the insured are willing to take with their investments. 

•Types of investments:  The types of investment vehicles the non-mortality portion of the premiums are invested in, i.e., long-term bonds, short-term cash, stocks, etc.

•Investment, premium and face amount flexibility:  The ability to change the type of investments, monthly premium amounts, or the face value amount during the life of the contract.

üThe key is to understand why you want cash-value life insurance

•Understand your needs

•Understand the individual polices of competing life insurance companies, i.e., the charges and deductions of the insurance company, and fees and expenses of the mutual funds/assets invested in

•Select the policy that gives you maximum benefit at the lowest possible cost to you.

üWhy are cash value premiums higher than term?

•It is priced for your entire life

•Earlier premiums must be priced higher to take into account that mortality costs increase as you age

•It includes a savings component

•These savings must be funded

•It cannot be terminated by the insurance company

•95% of all cash-value policies are paid

•It is more costly and time consuming to administer

•There are more and higher up-front and operating fees, and sales and other charges are higher

üIt is not uncommon for the deductions and fees to range between 5% and 15% of every dollar you put into some types of cash-value insurance. 

•As such, the cash-value portion of this life insurance grows slower than a term policy with the remainder invested

üCash-value insurance is not for everyone, but it may be for some

•Key is to understand your needs and the needs cash-value insurance can fill

•Estate planning, Retirement planning, after all other tax-deferred vehicles have been filled, and Forced savings (but it is not as good as other savings vehicles)

Cash-value Insurance

Important questions to ask about cash-value insurance:

•Are the premiums within my budget?  Are costs reasonable?

•Can I commit to these premiums over the long-term?

•On a variable life policy, what is the assumed interest rate in the illustration?

•Is the classification shown in the illustration appropriate for me (i.e. smoker/non smoker, male/female)

•Which figures are guaranteed and which are not?

•Will I be notified if the non-guaranteed amounts change?

•Is the death benefit guaranteed?

•Will the premiums always be the same, even if interest rates are lower that the illustration?

•Is the illustrated premium sufficient to guarantee protection for my entire life?

•Is the “current rate” illustrated actually the rate paid recently?  What was the current rate in each of the last five years?

•What assumptions have been used regarding company expenses, dividends, and policy lapse rates?

•Does all my cash value earn the current rate?

•Is the illustration based on the “cash surrender value” or “cash value?”  The cash surrender value is usually lower and reflects what will be paid if the policy is cancelled.

Cash-value Insurance for Students

üKey Questions:

•Can you commit to the premiums over the long-term?

•How can you, when you may not have a job?

•Do you need the tax benefits now?

•A 401k or IRA may be better?  Fill those first

•Are the rates of return guaranteed?

•No.  Be careful of people selling these products who do not know what they are selling?

•Do you have a history of medical problems that would preclude your ability to get term insurance?

•In this case, you “might” look into cash-value or convertible term insurance)