Image Courtesy: Discovery Channel
Cash Value Life Insurance, China and El Dorado
For a capitalist state like ours (thank God even China is a socialist capitalist state today!) the first two words of ‘cash value life insurance’ is a Right Bros invention by the insurance companies. To me, it sounds more powerful than Jesus himself (No blasphemy meant!). Just think how the name of the Prophet of Nazareth got corrupted and turned into interjections: jeez, jeeze or geez. But, we, the sons and daughters of the land of El Dorado, have not corrupted the phrase ‘cash value’. Truly speaking, the phrase ‘cash value life insurance’ has a pull of its own.
A great pull.
The Gold Rush Series and the Aggreived Lady from Ohio:
While thinking of and studying for writing something on cash value insurance, I chanced upon a review of one of the most popular mutual insurance companies that sells cash value insurance. The aggrieved reviewer from Lucas county, Ohio, in a famous consumer review site–
I bought whole life policy when I was about 18 years old. I paid $42.00 per month for nearly 30 years and was told every year after the original ‘maturity’ date that the promised cash value had not ‘popped’ and would not. The value was supposed to be about $80k to my recollection. I was told it was only about $4k and chose to cash it out as after dozens of phone calls, I was just given the runaround. The reason I am doing this review is a young person approached me selling one of these policies from another company. He said it would be a great investment. That I would put money in and if I didn’t use the life portion, I would virtually receive my initial investment back (no interest of course). I lost tens of thousands of dollars from ABC and would never recommend a whole life policy. Put you(r) money in other investments and buy a term life policy. ABC stole my money.
I have used ABC for the company name. Though I know referencing the aggrieved person, citing the source and naming the company would add authenticity to my writing, I refrained from doing so with a view not to inconveniencing any parties.
Let’s Give Her a Name
The aggrieved person’s, let’s give her a name Ms. Aggrieved, complaints remind me of Christo Doyle’s (Executive Producer of) reality TV series Gold Rush aired on Discovery Channel. While watching the series, I sometimes felt like crying seeing the primitive efforts that brought up nothing to the miners. I think you also felt the same way seeing the miserable conditions of the fortune seekers in the forlorn and dangerous lands.
they had hopes.
they had despair.
It was like a rainbow of hope and despair.
When luck favored, they again had hopes, to be quick-rich, millionaire, billionaire, trillionaire, zillionaire.
Cash value life insurance, if you have perused the review above, you might have noticed, creates the Gold Rush hope in some, if not many, of us.
It is to bring despair.
And, unless you know what cash value insurance is and how it works, you may also feel it, the despair of God Rush. This is the reason the discussion got birth.
What Is Cash Value Life Insurance?
There is no such thing as cash value life insurance. It is a strategic catchphrase related to whole life insurance. The central characteristic of whole life insurance is the length of insurance protection that it provides to the policy beneficiary. When you are on its opponent form of insurance, the term policy, your protection is valid as long as the contract is signed up for. Once the contract years is gone, you are signed off and fall out the protection. The end is tragic— with all your money gone. But the length of protection with whole life insurance extends so long as you live. A sweet end awaits you– the benefit coming to you.
Your premium payments fall in three bowls in the whole insurance. One part goes to the management cost that the insurer chops off prior to everything. Another amount goes to build the death benefit so that the company may pay the face value should you pass away before the maturity date. And, they send the rest of the money to the money market to fetch profit to supplement the money that your beneficiaries will claim finally. So, you see, not a big seed of your payment is actually sown for the money plant to grow. But, for not a few buyers of cash value insurance this small figure sows the seed of the Gold Rush dream plant.
To needlessly decipher it still again, cash value insurance is only a supplemental approach by the insurer to arrange the money your insurer will owe to the beneficiaries finally. The cash that they generate belongs to the insurance and adds value to it.
What Happened to Ms. Aggrieved
Calculation shows that Ms. Aggrieved’s payment over nearly 30 years was plus-minus $15k. She hoped she would get $80k but received $4k only. I don’t know what exactly happened to her but whatever happened was a shameful instance of sheer injustice done to her. I personally have no words to console her.
But I guess…
Perhaps, there was a misunderstanding on her side of the cash value insurance. At least, her calculation of $80k says so. If you invest $42 each month over nearly 30 years, no magic can make it $80k. It looks like she had a Gold Rush dream.
Five Truths About Cash Value Life Insurance
Before you want to cash in on your cash value life insurance, know the following 4 truths that you will save you from disappointment.
Only a slice of your money goes to the money market for the generation of the so-called cash value. So, what it brings in should not be much.
Cash value or whole life insurance works in a way that a visible amount of money comes up only when the policy matures.
Although cash value life insurance policy is tax-advantaged, when you surrender you have to pay income tax on it.
The insurer cuts off a size-able amount of surrender value that undermines your calculations. So, surrendering the policy will prove to be a ‘cash out’ instead of ‘cash in on’ strategy.
Although the profit share or equity that you receive from the insurer does not impose income tax on you, it is the insurer that pays it to the government. While you do not pay tax yourself on your income, the insurer does.
Perhaps, I guess, all these things happened to her.
Maybe, all these things will happen to you if you want to cash in on cash value insurance.
Pros of Cash Value Life Insurance
If you do not take cash value life insurance to be a Gold Rush tool, there are pros you may like it for:
You can borrow against your cash value accumulation for personal use.
Also, you can channelize your cash value to pay the premiums.
Cons of Cash Value Life Insurance
The borrowing of the so-called cash value levies interests on it.
If you keep your loan upaid, your final payment or death benefit goes down by the amount due or even more.
If you purchase a cash value insurance policy or whole life insurance, I suggest you take it for a savings account. The money will not be as much as Mz. Aggrieved calculated. Keep paying your premiums till the maturity date arrives (if possible, refrain from making adjustments from the cash component). The beneficiaries will be better rewarded than they would be from savings account.
Life insurance is meant to protect you in the time of need, not make you rich.