I read somewhere that for permanent policies like whole life and UL, both having "cash value" don't actually pay the cash value part to beneficiaries when you die?
For example, if I buy WL/UL policy for $100,000, and 25 years from now the cash value is a simple $20,000. Does this mean that my beneficiary will NOT receive $120,000 upon my death?
I understand that I can BORROW against the cash value and of course pay back into it. And if I die some of the $100,000 benefit will have to pay for the loan. Although it's a loan, isn't it all my money and should be paid out to my beneficiary? If this is the case then why i
If that's the case then why the heck would anyone want to buy permanent insurance or why do insurance agents sell it as an "tax-free investment" when you can't even take it at your death????
What's the point? I don't get it!!!
Can someone shed some light on whether or not the "cash value" is paid out with the death benefit.? Does VUL work the same way? Or does the policy owner need to specify a certain type of payout that's both death benefit and cash value? I'm sure the premium would be high on this..if available... Most people can cover their needs with a term policy, and usually should only consider a permanent life policy if they have a permanent need for insurance.
Having said that, WL policies will only let you borrow from the cash value, while UL policies will usually let you withdrawal your cost basis and then borrow the remaining surrender value. The difference is that if you borrow from your policy, you reduce the death benefit by an equal amount. Given the option, I would rather withdrawal money from a life policy over borrowing it. Please note if you do either of these, you might be swimming in treacherous waters and you should order an "inforce illustration" each year and carefully review it.
Technically, there is not a life policy that will pay both the death benefit and the cash value, but you can buy a policy whose death benefit increases along with the cash value. If you had a policy whose death benefit increased along with your cash value, there is a cost to the increasing death benefit. If you have an increasing insurance need, it usually doesn't increase at the same rate as your cash value. If you really need an increasing death benefit, you are usually better off buying a guaranteed UL whose death benefit goes up each time you make a premium payment. You are usually better off getting the amount you need or will need, and not worrying about the cash value.
If an agent is selling "tax-free investments" when they mean life insurace, get them to put this in writing and take it to your state's Department of Insurance. It's a scam. If they are selling life insurance because you have a need for the protection AND you would like to enjoy a "potentially income tax-free retirement benefit", that's different. It MAY be income tax-free, and if it is, that DOES NOT mean it avoids other taxes - like estate tax.
You should understand that you have to pay taxes on the premium you put in first and once your distributions (withdrawals or loans) from the policy exceed what you put in, you may have a tax liability. The only way to keep paying income taxes on that amount is to keep the policy in force, which is sometimes trickier than it sounds. To do this, you would have to own the policy and the death benefit would be included in your estate's evaluation for taxes at the time of your death.
Here are two relevant links: You should never think of a permanent life policy as an investment; the primary reason is life insurance. Even though it is considered as an investment it is one of the worst investment vehicles available and you can almost always do better.
You should think of a permanent policy as a guarantee that you'll always have life insurance as long as you pay the premium. It is good in some cases because the premium doesn't increase. With a term policy if you still need the insurance when the term runs out you may not be able to afford the premium. A permanent policy is sometimes good for younger people because of the lower premium, for certain Key Man situations, to leave an estate for the beneficiary, and for a few other reasons.
You are right about the WL/UL; the beneficiary doesn't get the face value and the cash value unless the cash value increases above the face value. The beneficiary gets the larger of the face or the cash value.
With a VUL the cash value is added to the face value minus the surrender charges.
When you figure how much insurance you need you can get a smaller portion in a permanent policy because you probably won't need as large of a cash value as you get older. The larger portion should be a term policy because when you have kids you need more insurance. I have both a VUL for the future needs and a term policy to make up the difference for present needs.
Work with an agent that will give you the pros and cons of both types of policies and can offer you both policies. There is a place for both permanent and term and anyone who tells you any particular policy is better is not concerned with you. VUL doe swork the same way- You pay each month into YOUR insurance. When you die, your family chooses between either the face value of the insurance OR the cash value. Makes sense to be the Insurance company at this point, doesn't it? Why do I say that? Well, you have paid the premium each and every month, they make money of the investments and give you a little bit by way of saying thank you, and then they get to KEEP all the money in the cash account.
You could pay more each month to allow your family to receive the cash value AND the face value, but you will pay more for it. It is very important to understand that the insurance industry has been around a long time and has more money than all other companies. Just like a casino, they have made policies in their favor not ours. That's why they have the money and we don't.
As of this time, NO insurance policy should ever have more in the cash account than the face value, EVER. The only time that happens is when we turn 95-100, depending on the policy.
The reason it is tax-free is because you take a loan out on the cash. Like you say, if it isn't paid back interest and principal of the loan come out of the face amount. Taxes WILL be paid if what is in cash account exceeds what was paid in premiums up to that point. This is something they don't tell you. And who ever heard of an investment being "good" when the first couple years, little to no money is going into the cash account. That IS what happens to these policies. You can do far better on your own, than putting your hard earned money into one of these policies.
VUL and Universal policies came about in the late 80's to early 90's in answer to the "Buy term and invest the difference" policy of A.L. Williams, now Primerica. Their philosophy is that when you are older you do not need the insurance, or much less typically for funeral expenses. Why? Because there has been a financial plan that was put in place and followed from 15-20 years plus ago that has earned a very handsome interest. From this, you can now live comfortably for a long time. Because most or all of everything has been paid off, there is no longer any need for insurance, now you need the money.
What is worse is the large commissions that the agents earn when they sell these policies. Typically, they'll get a commission check for almost five years. Think about this- the insurance that part of the premiums pay for is Annually Renewable TERM!! WOW!! Term!!
WHY is this? MORE insurance for LESS money!
Any insurance agent has learned in their class that they CANNOT in any way, both spoken and unspoken, that Universal and VUL is an Investment. The SEC has told the industry that this claim cannot be made. An agent can lose his/her license if they claim this and a person reports them to the state insurance commissioner. |
