Saturday, May 20, 2017

More Proof that Cash Value Life Insurance Never Makes Any Sense

The word is out that it is much better to buy the lower cost Term life insurance and invest the difference. However, even among Term-believers, there are still many who believe that in certain situations, Cash Value might actually make sense.

A common misconception is that Cash Value life insurance makes great sense at least for estate planning for higher net worth individuals. Well, when people talk about estate planning, they are really just talking about tax planning or sheltering their money from taxes. For example, if you have a net worth of $10 million, when you and your spouse dies, and you have children and heirs who you are leaving the money to, you may have to pay around 50% in estate taxes to the government – or $5 million. So, for estate taxes, you would have to buy a $5 million life insurance policy that would pay the taxes and leave your family with the full $10 million. That is the reason for buying insurance for estate taxes.

Let’s say, just like in the example above, that you are worth $10 million and you are expecting to have to pay $5 million in estate taxes. What you could do instead of getting a Cash Value life insurance policy is get a $2.5 million Term life insurance policy on the husband and one on the wife. Then you could set up a variable annuity. If the husband were to die first, his $2.5 million would go into the variable annuity. They don’t have to pay the $5 million estate tax until they both die. So, now you have the $2.5 million in the variable annuity, and let’s say it’s growing at around 8%. Around 10 years later, the wife dies. By using the Rule of 72, the variable annuity has doubled in 9 years working at 8%. So, you already have over $5 million in the variable annuity. Then when the wife dies, her $2.5 million goes into the variable annuity also. Now they have over $7.5 million in the variable annuity that can be used to pay the taxes and now the family can get the full $10 million. And the variable annuity is tax deferred or sheltered from taxes, just like a variable life insurance policy, so why would you get a variable life insurance policy?

The reason cash value agents don’t even suggest the Term solution is because they won’t make as much money. If you sell $2.5 million worth of life insurance, it is 4-5 times more expensive to buy Cash Value for the same amount. Let’s say it is $10,000/yr. for the Term, it may be $100,000/yr. for the Cash Value and the agent gets paid on the first year of premium. If he has a 100% contract, he either makes $10,000 or he makes $100,000 – Which one do you think he is going to sell?

So, even for high net worth people, Cash Value life insurance still doesn’t make any sense!

Cash Value never ever, ever, ever makes sense under any circumstances!

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any comments, please post them below, otherwise, feel free to contact me.
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