Financial Freedom: 5 Dangerous Rules In A Cash Value Life Insurance Policy

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Illustration: Truth and LieRecently I met with a client who wanted me to help with her life insurance and investment plan.  She wasn’t quite sure what type of life insurance she had when I asked (while scheduling the appointment) but she was pretty sure it wasn’t what she wanted.  When I arrived at her home to assess her needs, I discovered that she had a 5 year term policy for herself and a $25,000 Whole Life (cash value) policy for her daughter — two red flags.  While I was preparing a game plan for her, she called the other company to find out how much she had saved in her cash accumulation.  To her dismay, she had a whopping $942 after 7 years.  I then proceeded to educate her WHY she only had so little.

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Cash value policies (whole life, universal & variable) are sold to the consumer with the promise that if they (the consumer) pay the high cost of the insurance, they will have money saved in the policy that can later be used in the same manner as a college, emergency or even retirement fund. What the agents fail to tell the consumer is there are 5 rules that can impact your family negatively.

  • Rule #1 – The company keeps your money for the first 2-5 years.  So…if you saved $100 a month for two years with a bank,  you should have $2400 — at least.  Right?!  What if they showed you a “0″ balance.  That would be a problem wouldn’t it?  Same concept!
  • Rule #2 – You are only going to earn 1-4% return on your money.  Mutual funds have been averaging 12% in any 4-5 year period in history since 1924.  If they’re only giving you 1-4%, where’s the rest of the interest going?  To the company maybe?!
  • Rule #3 – If you want the cash value you have saved, you have to borrow it at 6-8%.  Why do you have to BORROW your own money?  This is not a 401K.  This is a life insurance policy. Can you borrow from your car insurance?  Health?  Dental?
  • Rule #4 – The company has a right to wait 6 months to give your money to you.  Can an emergency wait 6 months?
  • Rule #5 – Your family will not get both the cash you have saved AND the death benefit.  You’ve been saving for years, never borrowing, only “stacking your cash” and when you die, the company keeps your savings.  Your family will only get one or the other.  But who saved the money?  You or the company??

Read: Life Insurance Isn’t For You, It’s For Your Family

Because my client knew the rules that I educated her on, she was ready for the conversation with the agent. She put him on speaker so I could hear the conversation.  He hemmed and hawed and stuttered when she asked what would happen if she borrowed the money.  “Will I be penalized,” she asked? ”Well…there is a small interest rate but you don’t have to worry about that,” he said.  “Are you saying I don’t have to pay the small interest”?  “Well…you do and you don’t…”  It infuriated her.  She hung up the phone and planned a trip to pick up her $942.  “And as soon as I get there, I’m closing my business with him.  I can’t believe this”.

This one client is among millions who are duped into believing that cash value policies are anything BUT life insurance.  Heck, I was one of them.  The reason they can never give you both the life insurance AND savings is because it is NOT an investment product.  Not for you anyway.  It is only a policy designed to protect your income…and even with that you must be careful (as it relates to cash value).

Read: Are You A Slave To Debt

If you’re going to play a game, isn’t it smart to know the rules?

See what Suze Orman, Dave Ramsey and other wealth experts say about cash value life insurance.

Until next time,

Ingrid

Regional Vice President

(Primerica)

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Originally seen on http://elev8.com/

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