Working as a financial advisor in the Columbia Basin I regularly run into people who have an old insurance policy that they’ve had for years.  Most people don’t understand what they have and commonly haven’t given much thought to where it fits in their financial life. 

What is Cash Value Life Insurance?

Cash value life insurance is a form of permanent life insurance that features a cash value savings component. The policyholder can use the cash value for many purposes, such as a source of loans, as a source of cash, or to pay policy premiums.

Whole life, variable life, and universal life insurance are examples of cash value life insurance.

There certainly are benefits to owning cash-value life insurance the main one in my opinion is the death benefit should you pass away.  The most common reason people tell me they own the policy is that they believe it is a significant component to their overall retirement plans. 

Cash value life insurance policies are frequently sold as future retirement assets.  This in my experience is rarely the case. 

If you’ve ever purchased a cash-value life insurance policy you’ve likely been shown an illustration that has several columns.  There is always a “guaranteed” column (a worst-case scenario) illustrates how long the policy would stay in force if the insurer charged the maximum fees and paid the minimum interest or dividend crediting rate.

The insurance salesmen usually focus on the “nonguaranteed column” which assumes current policy fees and interest or dividend crediting rates.  This is likely where people get the idea that the policy will turn into a lucrative retirement asset.

In my experience the actual outcome of the policy is closer to the guaranteed column than the nonguaranteed column. 

My suggestion to people who currently own a cash value life insurance policy is to call the company and request an in-force policy illustration.  An in-force illustration provides a picture of your insurance policy as it currently stands. It shows the exact results of what has happened from the policy’s inception to today, including premiums paid and growth of cash value. Most importantly, an in-force illustration also gives you future projections based on current assumptions.

What you’re looking for with the in-force illustration is what we call the “crossover point.” That’s the point at which the policy is no longer growing cash value, but rather, consuming it. There is no real rule of thumb of when that might happen, it all depends on the company, the level of premiums paid, the mortality costs inside of the policy, etc. I often see that point reached when the insured is in their late 70s or 80s. The crossover point is critical, because once the policy costs start to outpace the growth of the policy, you are at risk of either having your policy implode or facing higher premiums to keep it in force

If you’re not sure how to order an in-force illustration, or you want help understanding what you have, give my office a call, I’m happy to assist.

I am taking new clients.  Please contact us to schedule a free initial consultation.