Depending on what you want to utilize the policy for, life insurance could be an excellent way to accumulate cash. It could also be a very bad buy if you think it will perform in a fashion that probably won’t happen. In this article, I will touch on types of life policies that probably aren’t good investments and next time, I will review some policies that are attractive.
Death Protection Only plans generate little or no cash value, so they won’t be a part of this article. From a protection standpoint, however, it’s my plan of choice, so if you haven’t done so, consider having a minimum of 10 times your earnings in life insurance. If you have a family, many carriers will cover 15-20 times your earnings.
There are three types of life insurance policies that probably aren’t very good investments: Universal Life, Indexed Life and Variable Life.
Universal Life was first designed in the late 1970’s as a product to better utilize the very high interest rates of that era. The premiums were essentially divided with part allocated to the insurance and administrative charges with the balance going into the cash value account. The illustrations looked great at 12-15%, but not very good at 3-4%. With annually increasing insurance charges, low interest rates will make it very hard to accumulate a large amount of cash. As a long term protection vehicle, however, this product is excellent and will be reviewed in a future article.
A recent entry into the life insurance as an investment field is Indexed Life. This is not a security but credits interest based on the performance of market indicators, usually the S & P 500 or the Dow Jones Index. It is promoted as a great vehicle to build supplemental retirement via withdrawals and policy loans after retirement. Most of these policies do not have underlying guaranteed benefits which is very important in life insurance. Reasons are coming up.
Finally, there is Variable Life which is a security. The growth of your policy values is based on the performance of the investment accounts that are recommended and you select. This is not a policy that will perform well if the cash value is invested in bonds or money markets. Generally, you will need to be in growth oriented funds for this product to do well.
Again, most of these policies do not have underlying guaranteed death benefits.
I no longer offer Variable Life and have never recommended Index Life. The fees, asset charges and other annual costs simply subtract too much from the potential return.
There are other concerns here that go beyond the product. The government now imposes limits to premium deposits one can make to a life policy. If premium limits are exceeded, the policy becomes a Modified Endowment Contract (MEC) and any withdrawals will be taxed as ordinary income.
My greatest concern is the possible collapse of the policy due to policy loans after retirement. Should your contract lapse with large outstanding loans, you will receive a 1099 representing “Forgiveness of Debt”, which is a taxable event. If your contract doesn’t perform as projected and all of the values are withdrawn, this will happen and you don’t want to pay the tax on a five figure cancelled loan.
In summary, there is a possibility of a better return outside of life insurance. To me, life insurance first and foremost is to be used for protection. Products are now available that will provide guaranteed death protection all the way to age 120. I won’t make it to that age however, some of our grandchildren might.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.
