Putting Life Insurance Cash Value to Work

I want to share some insights with you, from being in the financial services industry for over 10 years, concerning certain types of life insurance. Before I start, I want to assure you that I am not writing this to sell you a life insurance policy now, tomorrow, or at any time in the future. As a matter of fact, I will not sell you a policy if you beg me, although I will be happy to refer you to a licensed agent, but then only if you reside in Louisiana. I want you to know I am writing this strictly for the benefit of the reader and I hope that the information is useful to you.

There are 2 basic categories of life insurance: term and permanent. Permanent policies often build up a cash value, aka living benefit, in addition to the face value, aka death benefit. In a cash-value type policy, these 2 values are found in a single policy, but they are separate and distinct. The death benefit is paid to the beneficiary after the death of the insured, but the cash value can be utilized by the policy owner (while alive, of course).

Different policies accumulate their cash value using different methods. Some policies earn interest which compounds based on the performance of the insurer's own corporate investment portfolio, while others are tied to market interest rates or even options purchased on stock market indices. Still others allow the owner to invest money directly into funds which are very similar to mutual funds so the owner's cash value rises and falls based on the funds' gains and losses (called variable life insurance policies).

Although permanent life insurance often gets a bad rap, it can be a great place to accumulate savings and a portion of your net worth. Its value as a savings vehicle is often maligned because the internal rate of return is ususally only 3% - 6%. But I want to help put that in perspective for you right now. First, 3% - 6% may sound low and unexciting, but wouldn't you love to get 5% or 6% on your savings right now? (For that matter, how would you feel about getting a low 5% in the stock market right now? Pretty good, when your investments are down 40%, right?) The past-20-year average on CDs is about 6%, but that's much higher than the 2% - 3% on CDs available today. So, as a savings vehicle, earnings on money in cash value are essentially the same as bank CDs. Note: I am not referring here to any variable-type life insurance policy as a "savings" vehicle. Since variable life insurance investment funds involve market risk, I put them in the "investment" category rather than the "savings" category; and comparing savings vehicles to investment vehicles is really apples to oranges.

Why would you want to accumulate savings in a life policy instead of, or in addition to, a bank CD or money market? Here are several reasons for you to consider:

• Flexibility to vary your monthly premium payments (within a certain range).
• Tax-deferred accumulation.
• Tax-favorable distributions.
• Premium payments/deposits can be guaranteed in the event you become disabled so your savings will still accumulate even if you can't work.
• Privacy: No IRS reporting.
• Policy earns a contractual, guaranteed interest rate (usually 3% to 4%).
• Potential for higher-than-guaranteed interest earnings.
• Liquidity: Policy funds received within one week by check or two days to clear by EFT.
• No cost for direct withdrawals of funds.
• Low net cost for policy loans (usually only 1% to 2%).
• Pay back any withdrawals or policy loans on your terms.
• Cash value is protected from creditors in most states.
• And let's not forget, when you die, someone (your beneficiary) gets a bucket of cash.

So, for about the same rate of return you get on a CD or a money market, you also get many more benefits on your savings dollars stored in life insurance cash value. Because you get so much more bang for your buck in life insurance, it makes sense that you should consider putting some of your savings money there...whether or not you have a need for a life insurance death benefit.

Remember, the internal cash value of a life insurance policy is a real asset for the owner of the policy and can be used in several ways: to access cash, to pay on debt, to secure outside loans, and to secure policy loans.

I hope this information helps you and I welcome any questions or comments you have about this subject.