If you are a Northwestern Mutual agent you are bred to believe that life insurance without cash value is, by it’s very nature, evil. Northwestern Mutual has term life insurance products, but they are priced so outrageously high as to lead the casual observer to the conclusion that they would be foolish to buy term when they can get whole life and it’s cash value at only slightly higher rates.
Whole life is all about the cash value. Variable universal life is all about the cash value. Some agents sell straight universal life based on it’s ability to build cash value. Why does your life insurance policy need cash value? Bottom line, it doesn’t.
Cash value accumulation in a whole life policy is sold on the premise that you can borrow against it down the road. Cash value in a variable universal life policy is sold on the premise that you can retire on it down the road. The problem with down the road is that in most cases it is not guaranteed. You may or may not build the cash value to meet your goals. What is guaranteed is that you will pay a lot more for your life insurance than you need to.
Can these policies really build significant cash value? It’s possible. It is generally accomplished by a method called over funding. In layman’s terms that means that you are going to pay additional money above and beyond your normal premium. It still doesn’t guarantee that you will end up with some cash cow, but if you do, remember that you paid for the cow. Cash value comes from you, not the insurance company.
Back when whole life was about the only product around, cash value was the only option. Whole life policies by definition were policies that had a level premium and level death benefit to age 100, and at age 100, the cash value equaled the face amount (death benefit) of the policy. More recent “whole life” policies, in an attempt to be competitive, have structured the policies so that the cash value equals the face amount at age 120. That helps lower the cost since the company has 20 more years to use your money. The problem I have with this idea is that they also want you to pay premiums to age 120. I get this picture floating around in my head of me writing checks to the life insurance company at age 115. My hand writing and ability to balance a checkbook is already bad at half that age.
So, in the opinion of this agent, in most cases whole life is a bad investment and an entirely too expensive way to buy life insurance. What’s the alternative?
Anyone who has been around for a while has probably heard the phrase, “buy term and invest the difference”. Simply, if a term policy will cost $500 a year and a whole life policy will cost $2000 a year, buy the term policy for the life insurance protection and invest the other $1500 in something that produces real return on investment. I would add a newer version of that, for those in need of permanent insurance (see my post yesterday, “Why buy universal life….”), and say buy universal life insurance with a no lapse guarantee and invest the difference. Universal life with a no lapse guarantee is a permanent policy that is guaranteed by a rider and not by cash value.
A wise guy once said, “Don’t use your life insurance as an investment, and don’t use your investments as life insurance.” Before committing to a cash value building policy, discuss alternatives with an independent agent.
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