Life Insurance Myth #1: Cash Value

Speaking with as many people here in the Ocala area as I do about life insurance, there are several myths that come up very frequently. These myths are deceptive on a number of levels, and can actually end up hurting you, and/or your beneficiaries if care is not taken to ensure your actual position. In order to better understand these myths, let's start with the very basics of how life insurance works.

While there are several types of life insurance, not all of them accumulate cash value. If you are not sure what type of policy you have, it is time we sit down together and evaluate your situation.

The Myth

Cash value is great, you can borrow from it or cancel the policy and get that cash, but there are a few myths associated with it. A great many people think that the cash value aspect of a whole life policy is actually increasing the value (or death benefit) of the policy. That is not true in most cases.

In some ways, the cash value aspect can be viewed as detracting from the value of the policy. Since most of the time the insurance company keeps whatever is left, it is money invested without return.

Borrowing from cash value is not something I recommend, since it decreases the death benefit and increases the amount you have to pay until the loan is paid back (with interest). Just cashing out a policy can have negative tax consequences, aside from no longer having the policy.

An Example

Jim is a client (not his real name) who has $350,000 in whole life insurance. He pays about $250 per month for it, which is a great price for his age. But he also has had the policy for about 20 years, in which it has accrued almost $125,000 in cash value. The problem with this is that in most cases, the cash value stays with the insurance company. Essentially, he only had $250,000 in life insurance because the cash value was so high.

But what can be done to fix that? My recommendation to Jim was that he purchase a single-premium life insurance. Considering his age and current health, he could leverage the $125,000 in cash value to buy almost $500,000 worth of death benefit.

What is even better: No more premium payments. Ever.

At a savings of $250 per month, that leaves $3000 per year in freed up money—and he gets a bigger death benefit. Most anyone would be happy to hear that. There are a number of different ways to make this happen, but some of them can have negative consequences. Consult a reputable insurance professional, and get a second opinion if needed before making big moves.

No matter what your situation it is a good idea to review your policy with a qualified person every year or two. Make sure you speak with a reputable insurance professional who acts with integrity. Even if it isn't me.

While I can't make the promise that your situation will work out the same, it does not hurt to take a look. Life insurance contracts are dependent on the insured's current health, health history (another post is coming on that subject), there are also other factors the companies consider.