Cash Accumulation life insurance

76 Replies

I have been working with a financial advisor for about a year now and he is strongly suggesting permanent life insurance. I am skeptical about it because I would rather save the money that I would put into the policy and instead put it towards a real estate investment. Also, I am only 21 so life insurance seems like a waste of money right now. He is pushing it because it is a guaranteed return of 5% and it is also tax free. Is permanent life insurance worth it?

That insurance is a great investment. With 4% inflation you will net 1%. Life insurance is the worse place to invest your money if you want it to grow. There are a few things to consider that have benefits. If you purchase property, or own a home and you have a family you want to purchase WHOLE LIFE INSURANCE at the youngest age possible. With Whole Life Insurance you will pay less at a younger age and you eventually pay the policy in full in about 20 years where the policy has enough money in to pay for itself for the rest of your life. If you but Term Insurance you pay a lot less money, but at the end of its term of about 20 years the policy stops and you get no more insurance. Most Whole Life policies have Cash Values where you can cash out and get thousands of dollars, or you can borrow against the Cash Value.

The main reason people (a man) gets life insurance is so when (not if) he dies the insurance money covers payment to pay off a property and to pay bills like inheritance tax, income taxes, etc..

If you have a family get some life insurance when you are young so you pay much less for the insurance, but forget about the 5% because that is not what it is about. I've been using New York Life for the past 40 years and I've been satisfied with the service. But, of course, I haven't died yet. So, I can't tell you how well it will work out.

@Jack Orthman thank you for the advice. I have no family of my own or serious significant other at this point in my life so I should wait until that happens in my life before purchasing it or do you think there is a benefit in starting it as early as possible?

Originally posted by @Peter York :

I have been working with a financial advisor for about a year now and he is strongly suggesting permanent life insurance. I am skeptical about it because I would rather save the money that I would put into the policy and instead put it towards a real estate investment. Also, I am only 21 so life insurance seems like a waste of money right now. He is pushing it because it is a guaranteed return of 5% and it is also tax free. Is permanent life insurance worth it?

When you say you’d rather “save the money and put it towards a real estate investment,” where will you save the money?

Many people get life insurance confused with investments. Whole Life insurance is an excellent place to store cash. It’s a guaranteed cash asset, not an investment. 

Through the policy loan provision, you can use the cash value of the policy to buy a real estate investment *and* continue to get guaranteed growth in the life insurance policy.

Putting your money in a savings account, stocks, or other investments, you must first liquidate these assets in order to buy the real estate.

With a properly structured cash value whole life insurance contract, you can use the same money for two or more things at the same time.

Any questions, just ask! 👍🏻

JP


Just a couples things to point out: if your whole life insurance policy is only earning 4%, you have the wrong policy. If you’re setting up a pool icy right now you should be hitting 5-6% without even trying. I’ve got a company right now with guaranteed interest of 4% and a dividend that has been running about 6% the past 10 years or so. Make sure your policy earns a dividend.

@Account Closed is kinda right. There are easy paid-up options, but find someone who will customize a plan for you and your needs to keep the cost of coverage as low as possible. You should be funding the policy in less than 10 years at your age. You do have to be careful. An agent shouldn’t try to sell you a policy that will pay up around age 100, but that doesn’t mean they won’t try. Get it paid up sooner. 

Like the others said, this is a hedge against investments. Are you building money for retirement? What if it doesn’t grow the way you expected? A steady guaranteed growth of 5% makes life insurance an incredible back up to retirement.

Every day I talk to 60 year olds that were convinced they would buy term and invest the difference and now they’re looking for more coverage because they either never tried or the investment didn’t work out. Your financial planner is making the right recommendation. 

@Peter York

You can do both. But you can't do it with your basic Whole Life policy... it will take many years to accumulate the cash value that you would want to leverage into real estate. Instead, you need a policy that is overfunded to the maximum. With these policies the focus is on the cash value, not the death benefit. Most of your premium goes straight to the cash value of the policy (~85% in a properly designed policy). You actually get very little death benefit for the money.

The money you save will be accomplishing 3 things simultaneously:

1. Death benefit protection for you and your future family.

2. Principal-protected steady growth for life. When your family is grown and your house paid off, the cash value can be used to generate tax-free retirement income. And cash value generates 2-3X the income of the same amount of money in a typical brokerage account.

3. Source of funds for real estate investments. Loans against the policies cash value will allow this cash to work in two places at once. Cash Value plus side investment net return.

@Peter York and the other agents commenting here...

A 5% guarantee doesn't mean that the cash value will actually earn 5%. The cash value should never earn that return.

The guarantee is not a real number. It is simply the insurance company's worst-case scenario. The cash value of a policy is quite literally the client saving up their own death benefit over their lifetime. Since the insurance company wants to keep the premiums the lowest possible, they need to budget for the worst-case interest rate and the lowest amount of premium that will allow the cash value will grow reach the death benefit by the time the client reaches their natural life expectancy. This is a little over-simplified, but it is the essence of what is going on under the hood.

The insurance company has an incentive for the cash value to earn as high of a return as possible. Since the client is saving up their own death benefit, the faster the cash value grows, the quicker their risk is eliminated... since they are responsible for the difference.

Life Insurance 101: https://www.biggerpockets.com/...

Now, you are confusing me. I purchased more that 20 different whole life policies and one term policy. I will admit that I was very disappointed with the term policy since when it ended and I was 20 years older their was no cash value and the cost to insure myself for the same amount was double. I would never buy another term policy. I can't afford one since I am 70-years old.

My whole life policies have always been a nightmare to understand. I have one policy with a death benefit of $850k and the cash value is about $400k (I think). I was paying $11,300 for the policy every 6 months for I can't remember how many years until I did not have to pay any more. You said the insurance companies calculate for worse case scenarios, but I was told that my policy was paid in full and then I had to pay the $11,300 payments for a few additional years past the date that was written on my payment schedule. I understood the reason why, but I was getting frustrated because I thought the payments were never going to stop. Eventually they did stop. I was told that if the economy changed it is possible that I might have to make additional payments if the interest or dividend does not cover the cost to keep the policy alive?

I just looked at my statement and my annual payment is $20,449, but I don't have to pay anything because there must me enough interest, or whatever to cover the cost. That is pretty cool, but it was painful making those payments. Now, when I croak my beneficiary will be covered to pay any bills I leave.


Originally posted by @Thomas Rutkowski :

@Peter York and the other agents commenting here...

A 5% guarantee doesn't mean that the cash value will actually earn 5%. The cash value should never earn that return.

The guarantee is not a real number. It is simply the insurance company's worst-case scenario. The cash value of a policy is quite literally the client saving up their own death benefit over their lifetime. Since the insurance company wants to keep the premiums the lowest possible, they need to budget for the worst-case interest rate and the lowest amount of premium that will allow the cash value will grow reach the death benefit by the time the client reaches their natural life expectancy. This is a little over-simplified, but it is the essence of what is going on under the hood.

The insurance company has an incentive for the cash value to earn as high of a return as possible. Since the client is saving up their own death benefit, the faster the cash value grows, the quicker their risk is eliminated... since they are responsible for the difference.

Life Insurance 101: https://www.biggerpockets.com/...

If there is no dividend, then yes, A guaranteed 5% return is what you will see. Not every advisor is as smart as you @Thomas Rutkowski. Some of them are out there slinging terrible policies. There are certain agents with a nameless company that still try to sell people using 8 year old Blease Research data.

 

Originally posted by @Jack Orthman:

Now, you are confusing me. I purchased more that 20 different whole life policies and one term policy. I will admit that I was very disappointed with the term policy since when it ended and I was 20 years older their was no cash value and the cost to insure myself for the same amount was double. I would never buy another term policy. I can't afford one since I am 70-years old.

My whole life policies have always been a nightmare to understand. I have one policy with a death benefit of $850k and the cash value is about $400k (I think). I was paying $11,300 for the policy every 6 months for I can't remember how many years until I did not have to pay any more. You said the insurance companies calculate for worse case scenarios, but I was told that my policy was paid in full and then I had to pay the $11,300 payments for a few additional years past the date that was written on my payment schedule. I understood the reason why, but I was getting frustrated because I thought the payments were never going to stop. Eventually they did stop. I was told that if the economy changed it is possible that I might have to make additional payments if the interest or dividend does not cover the cost to keep the policy alive?

I just looked at my statement and my annual payment is $20,449, but I don't have to pay anything because there must me enough interest, or whatever to cover the cost. That is pretty cool, but it was painful making those payments. Now, when I croak my beneficiary will be covered to pay any bills I leave.

I'm sorry you went through that. What you're describing does not sound like whole life (having to catch up payments). It sounds like Indexed Universal Life or Variable Universal Life. These policies allow you to mitigate most of your risk, but can often depend on market growth to stay in force. You need someone like @Thomas Rutkowski who really knows what they're doing with IULs to structure them properly. This happened to a lot of policies from around the 1990's. They anticipated market growth that they never saw.

I'm more of a whole life guy myself. It's personal preference. Each policy type is good for different goals. IULs are great for income. Just not the kind of business I get into.

 

@Account Closed

It sounds like you have a Universal Life policy. They earned a bad rap for just this situation. The problem is that when they were first rolling out, interest rates were much higher than today. The insurance companies showed illustrations that were projecting the cash value growing at then current rates. 

Remember what I stated earlier, the cash value is quite literally you saving up your own death benefit over your lifetime. So they were projecting the cash value growth at outrageously high interest rates. The cash value in your policy simply didn't grow to be enough to cover the rising cost of insurance. That is the problem with minimally-funded policies. The insurance company is competing with other companies for the lowest price. They simply did not collect enough premium for the cash value to get to that sweet spot where the policy can run off of its own interest.

Worse, since the policy did not accumulate the projected cash value, the amount at risk to the insurance company is higher. They are responsible for the gap between the cash value and the death benefit. Since that gap is wider, the insurance company has more risk and the cost of insurance is higher.

By age 70 your cash value and your death benefit should be converging. You you should have saved up much of your death benefit already. What you can do is submit a policy change request to lower the death benefit. That will reduce the internal cost of the policy and will preserve the cash value that you have accumulated. Your policy can run off of its own interest, but you need to reduce the amount at risk to the insurance company to reduce the internal cost of the policy.

Thank you very muchmy policy has not required payment for several years. I was saying I get statements showing an annual bill for $20k, but the interest, or whatever has been covering it.

@John Perrings

Be careful about any loans against policies like this. If the policy is a Modified Endowment Contract (or if it becomes a MEC, even without your knowing it) any loans against the policy will be taxed exactly the same as if it were a cash-out distribution (plus a 10% penalty if you are under 60), AND you will still owe the full loan + interest back to the insurance company.

Loans on these types of policies are a terrible financial move.

So what if you cannot pay your annual premium one year, or more?

What if you just put that 20k annual premium in an index fund? I'm sure you would have millions by now, right?

How many years did you have to pay out that much cash?

What if the insurance company invested with Bernie Madoff or made some other bad investments and gets wiped out?

What's the financial advisors commissions on a 20k per year premium?

@Peter York your financial adviser is actually an insurance salesman. The 5% return is nonsense. Ask him this question. If I pay $10,000 each year for the next 5 years, how much money can I withdraw at the end of year 5? Spoiler alert, it is not $50K pus 5% per year. 

Why is he pushing this insurance? Because 30-70% of your first year premium goes to pay his commission. Top performers may even get as much as 100% of the first years premium. In other words, these policies are extremely lucrative to sell. You pay in for years and have nothing (besides life insurance). 

Ask yourself how does the insurance company make their annual return? The answer is they invest your money in bonds, mortgages and the stock market. Nothing special and there is no magical way for them to get a better return. If you peel away the expenses, you are better investing all the money directly in those things yourself. Or better yet real estate!

You don't need life insurance if you are 21 with no family. Once you have a family, get a term policy that ends once the kids are out of college. Invest your other money in real estate. 

If you are considering life insurance, ask your planner these questions:

  1. How are you compensated?
  2. Do you accept referral fees?
  3. Will you itemize the commissions you will get from the products you offer me?

Fair questions to ask, but good luck getting a straight answer. 

There is nothing wrong with paying sales people to push a product. If you pay $50,000 for 5 years you are not going to get back $50,000 because you have to pay for the insurance. You are right about the salesman making 35%+, but so does a car salesman get a commission and try getting all your money back after driving the car off the lot.

21-years old is the best time to buy life insurance because at your young age you will pay a very small amount compared to when you get older. Your policy will be paid off at a very young age and may even build cash value after you stop paying. If you live to your 70's or 80's' you will bet 50 to 60 years of free insurance, so-to-speak, and maybe even keep building cash value. That is truly amazing when you stop paying for your insurance and the insurance company can invest the cash you have in your policy and continue to insure you for life and even build up more cash value.

As far as where the insurance companies invest their money and your trying to equal what the insurance companies can do, you will never come close to being as successful. Your trying to beat the insurance company's investing is the same as putting your money on a crap table. Eventually, you will lose and you don't have enough money to continually recover to beat the odds. Very few people become wealthy when investing in the stock market and the purpose for a life insurance policy in not for investing to create wealth. 

I seriously commend insurance companies for what they do with both investing and the way they manage to both insure people and even get you cash value. It is truly amazing.

As for dealing with life insurance agents, I was always skeptical because I am ignorant about insurance when they are talking fast and I can't comprehend everything in depth, but I purchased about $4 million worth of life insurance and paid what I think is a tiny amount compared to what my beneficiaries will get. My reason for buying so much life insurance is because I created a good lifestyle for a lot of people and when I leave this earth I want to make sure these people are not burdened with any debt and can continue to live the same lifestyle.

Things change and hopefully you find the woman of your dreams and when you already have life insurance in place you will be one small step ahead in securing your financial future. "A dollar saved is a dollar earned".  I would never go with less than a $250k policy and a million dollar policy should not be to hard to deal with at your young age. 

I had a term policy for 750k for 20 years and I was paying only $250 per month. When my policy expired a few years ago I did not want to pay $1800 per month for a new $750k policy. So, I purchased two $250k policies for something like $700 each. That is a huge difference going from $750k for $250 per month to $500k for $1400 per month. This shows how important it is to start with a whole life policy at your young age, or later. 


I divorced my 2nd wife in about 1998 and I re-married about 5 years later. I still love my 2nd wife as much as the first day I met her. So, I still take care of her and I spend more money supporting her than when we were married. Since she has a decent lifestyle and never re-married, she is constantly asking me what will happen when I die. My current wife asks the same question, frequently, but I don't know why because she is set for life with out real estate. Even so, it is a great feeling to tell my ex-wife and wife they don't ever have to worry because each of them will get about $1 million when I croak and its a great feeling to know that I ease their worries about how they will survive, financially. The feeling of being secure is worth the little money a whole life policy costs.

Even when a person is not married, life insurance can be critical if that person is going to will their properties to their parents because you (probably) would not want your parents to be burdened with the costs to inherit the properties, or any other outstanding bills or costs.

Originally posted by @Jack Orthman:

I divorced my 2nd wife in about 1998 and I re-married about 5 years later. I still love my 2nd wife as much as the first day I met her. So, I still take care of her and I spend more money supporting her than when we were married. Since she has a decent lifestyle and never re-married, she is constantly asking me what will happen when I die. My current wife asks the same question, frequently, but I don't know why because she is set for life with out real estate. Even so, it is a great feeling to tell my ex-wife and wife they don't ever have to worry because each of them will get about $1 million when I croak and its a great feeling to know that I ease their worries about how they will survive, financially. The feeling of being secure is worth the little money a whole life policy costs.

Even when a person is not married, life insurance can be critical if that person is going to will their properties to their parents because you (probably) would not want your parents to be burdened with the costs to inherit the properties, or any other outstanding bills or costs.

With proper estate planning, whoever inherits your properties will not be burdened much at all. 

Also, not sure I agree with your premise that we stand very little chance of outperforming the investments of an insurance company....especially when you consider the fact that it takes 7 or so years for your policy's cash value to match the cash that was put in. So you're saying that despite the 7 year head start, the insurance company will still blow us out of the water?  I certainly wouldn't want to have a policy with an insurance company that makes those types of aggressive investments.

I do agree that starting at an early age with a whole life policy isn't a bad idea. But I can almost guarantee you that 15-20 years later, you will realize that you will need additional insurance.

If I'm following you right, it takes about 7 years to show a cash value, but you are paying for the insurance at the same time.

I spent an entire year working with a stock and option trading company and I developed a software program for that company that teaches people how to invest in the stock market and how to invest in stocks along with 52 different option and stock trading strategies. I still have that software and may will give anyone a copy if they are seriously interested in trading.

@Peter York

He strongly suggest it because it’s the one that pay the most commission to him. Of course, the commission is indirectly coming from you.

 I thought some state like New York have inheritance taxes so high that the heirs get just about zero.

Also, even with the best tax planning in the world and what you think is the perfect Living Trust, your spouse can end up with zero becausethe Trustee can create a horrible mess and cause the spouse to have serious litigation problems, or the trust can be deemed invalid because the owner of the trust did not put all the properties in the trust, or any number of reasons. People who have a Living Trust have false beliefs if they think everything will be okay when they pass away. There are many more reasons a Living Trust will fail and the spouse will be put in the poor house. This is one reason for purchasing insurance. Believe me! I had three Living Trusts with three different attorneys and I've heard many horror stories. And, those stories are the reasons I did my Living Trust three times.

I deal with a supply house. The owner passed away and left his daughter about $50 million worth of property. The IRS went back 50 years to find out how her dad paid for their warehouse and imposed a $3 million tax that had to be paid within something like 90 days. Who has $3 million in their savings account. Luckily, the dad had a $2 million life policy and the daughter scraped up the other million by not paying their supply house bills for a few months. Otherwise, she would have had to sell some properties at flea market prices and take a big loss. This is what life insurance is for. If you own real estate then owning life insurance should be a priority. It is insurance that covers the bad things that you do not expect to happen.

And...I am not an insurance salesman.


Originally posted by @Ryan D. :

@John Perrings

Be careful about any loans against policies like this. If the policy is a Modified Endowment Contract (or if it becomes a MEC, even without your knowing it) any loans against the policy will be taxed exactly the same as if it were a cash-out distribution (plus a 10% penalty if you are under 60), AND you will still owe the full loan + interest back to the insurance company.

Loans on these types of policies are a terrible financial move.

 You’re right a policy that becomes a Modified Endowment Contract can become taxable if you access the money. People putting these policies together do need to know what they’re doing.  The rules around MECs are pretty simple. Illustrations will tell you if the anticipated policy will MEC. Insurance company (maybe not in the past, but as of now) will reach out if a payment will cause a MEC to make sure you still wish to deposit it. There are many safety measures in place. Today no one accidentally creates a MEC. 

Loans do not cause a policy to MEC, payments cause a MEC. Life insurance loans are the easiest and lowest fee money you can access. Many policies will let you net a profit while the money is being borrowed. 

Also don't forget the tax-free nature of insurance payouts. Once you completed your contributions for your permanent insurance policy any draws against the cash balance including the appreciation is tax free. I wouldn't say just go dump all your cash on a policy but use that as a diversification vehicle.