Cash value life insurance can be a tempting proposition, offering both life insurance protection and the potential to build wealth. But before you jump at the first policy offered, it's crucial to understand the key factors behind those rosy illustrations. Here's why a cash value life insurance review, or at least considering multiple options, is essential for making an informed decision.
We need to throughly review and understand the Cash Value Life Insurance Illustration and have multiple options to compare.
The Illusion of Certainty: Guaranteed vs. Non-Guaranteed Assumptions
Life insurance agents often present illustrations that show a steadily growing cash value over time. These projections are based on a mix of guaranteed and non-guaranteed assumptions. The guaranteed elements, like the death benefit, are set in stone by the insurance company. However, the non-guaranteed assumptions, which significantly impact your cash value growth, can be a moving target and are often misunderstood by consumers.
A Breakdown of Non-Guaranteed Assumptions and Why They Matter
Here's a closer look at some key non-guaranteed assumptions and why they can be misleading:
Mortality expense: This covers the cost of paying out death benefits. Lower mortality rates could mean more money goes to your cash value, but this is just an estimate.
Expense charges: Some fees are fixed, but others may fluctuate, impacting your overall growth.
Interest rate: Insurance companies use conservative estimates, but actual returns on your cash value may be higher or lower.
Dividends: While some policies offer dividends, these are not guaranteed. The insurance company's performance dictates the amount paid, and dividends can fluctuate from year to year.
Index returns: Some policies are linked to market indexes, offering the potential for higher returns. However, index returns also fluctuate and can be even more volatile than dividends.
Rates, returns, caps, and floors: The illustrations may show specific rates of return, guaranteed minimums (floors), and maximum payouts (caps) for certain aspects of the policy. Be aware that these rates, returns, caps, and floors are not guaranteed to stay the same. The insurance company can adjust them over time, potentially affecting your cash value growth significantly.
The 7-Year Cash Value Benchmark: A Red Flag
Cash value life insurance isn't solely designed for wealth accumulation. It also provides a death benefit. Unless the policy prioritizes cash value growth with a minimal death benefit, your cash value accumulation will likely underperform.
Based on our extensive experience, a strong indicator of a policy's effectiveness is the 7-year cash value benchmark. Ideally, by year seven or eight, the cash value in your policy should be at least equal to the total premiums you've paid since its inception. Unfortunately, in over 90% of the policies we've reviewed, this benchmark is not met. This is a significant red flag, suggesting the policy might not be a good fit for your long-term wealth-building goals.
The Cascade Effect: How Lower Returns Lead to Policy Lapses
When the cash value grows slower than anticipated, the entire policy can be at risk. The illustrations factor in that growth to cover future premiums and policy expenses. If the growth stalls, the policy may not have enough cash value to sustain itself, leading to a lapse. This means the policy is cancelled, and you lose out on the death benefit and any accumulated cash value (minus surrender charges, which can be significant in the early years).
The Shocking Truth: Policyholders Left in the Dark
Many policyholders don't realize this harsh reality until years later, after the policy has been lagging behind for a long time. By then, cancelling the policy may not be an option due to surrender charges, leaving you with little to show for your investment.
Cash Value vs. Term: A Tale of Profitability
This lack of transparency highlights a key difference between cash value and term life insurance. Life insurance companies selling cash value policies benefit from showing non-guaranteed or inflated illustrations, potentially leading to more sales and premiums collected. Term life insurance, on the other hand, provides pure life insurance protection at a lower cost, with no promises of investment returns.
Empower Yourself: Don't Be Sold a Dream
Cash value life insurance can be a valuable tool, but don't be swayed by overly optimistic illustrations. By understanding both the guaranteed and non-guaranteed assumptions, getting a review of your existing policy, or comparing multiple options before you buy, you'll be in a far better position to make an informed decision. Remember, it's your financial future – take control and ensure the policy you choose reflects reality, not just a rosy picture.
Cash Value Life Insurance FAQs
1. Are cash value life insurance illustrations guaranteed?
No, the rosy projections of cash value growth you see in illustrations are based on a mix of guaranteed and non-guaranteed assumptions. The guaranteed elements, like the death benefit, are fixed. However, factors like interest rates, mortality rates, and fees can significantly impact your actual cash value growth and are not guaranteed.
2. Why are cash value life insurance reviews important?
A cash value life insurance review by an independent professional can help you understand if a specific policy aligns with your needs and risk tolerance. They can analyze the non-guaranteed assumptions used in the illustration and compare the policy to other options.
3. Is a high cash value accumulation guaranteed in the first 7 years?
Unfortunately, no. Our experience shows that over 90% of cash value life insurance policies fall short of the cash value accumulation projected in the first 7-8 years. This can be a red flag, especially if your goal is to build wealth through cash value growth.
4. What's the difference between cash value life insurance and term life insurance?
Cash value life insurance offers both a death benefit and the potential for cash value accumulation. Term life insurance, on the other hand, provides pure life insurance protection at a lower cost, with no promises of investment returns.
5. Can I lose money on cash value life insurance?
While unlikely, it is possible. If the cash value growth falls short of policy expenses and surrender charges (fees for canceling the policy early), you could lose money. This is especially risky if you withdraw cash from the policy frequently.
