I receive although I never subscribed to an industry magazine called National Underwriter. It occasionally has a relevant article on such things as estate taxes, marketing ethics and so on, but mostly the articles lean in directions that are against my professional grain.
An article this last week caught my attention because it pushed one of my buttons. The article, “For The Cash-Strapped Business, Cash Values Can Be A Life-Saver” by Warren S Hersch. The premise of the article is that whole life and universal life policies with cash value are good things because when things go bad you can borrow from that cash value. On the face a good thing. Or not!
While the virtue of whole life is being extolled by the author as something of a God send in times of tight credit markets, what this author fails to mention is that if the cash value in your whole life or universal life insurance policy is significant enough to save your business, you had to have paid way more than significant premiums for quite some time to accumulate that cash.
Now, I’m not saying that it isn’t an alternative at this time. If you already bought the farm, I mean the whole life policy, then that cash may in fact be a valuable tool for you to use*****. I believe that statement requires five asteriks because if you choose to tap that cash you run the risk of trashing the very thing you initially purchased, a life insurance policy. If you are not prepared to pay back that cash in a prudent, timely manner, your life insurance contract, especially in tough times like this, may gobble itself up and disappear.
The last paragraph of this article was provided by a charter financial consultant named Mark Weber. He states, “If a business doesn’t know what cash flow will be or what impact a downturn will have on their ability to meet business obligations, then I wold recommend purchasing convertible term insurance….you don’t want the premium to be one of the causes that drags the business down”. And everyone said Amen except for the whole life insurance sales people.
The whole idea of buying whole life, universal life or variable universal life policies because of their potential savings and loan value is just, well, stupid. The article makes it sound so easy. No loan application. No loan committee. Just call the company and ask for the money!! Well, if they had protected themselves with term insurance and socked the difference away, guess what? The money would have likely accrued more interest and therefore have been a larger sum. You could access it without an application or a committee and all you would have to do is call the institution where it was stashed in order to access it. And the frosting on the cake is that if you never pay it back you still have your life insurance.
Bottom line. The term versus whole life debate will rage on forever. For me it comes back to the old adage about “if it sounds too good to be true”. Run the numbers every which way before you ever commit to a cash value policy. Get a second opinion from someone who doesn’t seem to believe cash value it the best thing since sliced bread.