There's so much bad advice that gets passed around the life insurance industry that sometimes it's hard to point out the real stinkers. But today, we're zeroing in on the misguided direction that some self-appointed life insurance gurus have been spewing into the world over the last few years.
What's the bad advice?
Well it actually stems from the intention of people really wanting to take advantage of using cash value life insurance to build wealth.
The problem sometimes arrises that those people who are looking to use life insurance as an asset class to provide a supplemental retirement income–are not insurable or not at rates that makes them happy.
They've some sort of snafu with their health along the way that's left them either completely uninsurable or insurable at less than desirable rates.
When you are looking to use cash value life insurance as asset, you're main priority is lower the cost of insurance so that more of the premium you pay is used to efficiently build cash value. However, if there's some sort of issue in the underwriting process that takes you, as an example, from a preferred rating to a sub-standard (think table 3 or 4) rating, the costs of insurance are significantly higher, thus dragging down the internal rate of return on cash.
A Great Idea
Yeah, so somebody came up a with a great idea to circumvent this problem. They had a lightbulb moment.
Why not just take that $20,000 per year you were going to put into a policy for yourself and instead buy a policy on little Suzy or Timmy. You'll accomplish your goal of building cash and this policy will work even better because the cost of insurance is way less.
In other words, you will create a much more efficient policy.
Except that lightbulb was pretty dim.
While this idea may sound great, it doesn't work. Why? Because insurance companies will want some reasonable financial justification for insuring Timmy or Suzy with a $5million death benefit.
Most life insurance companies get really weird about issuing policies at more than a $1million on children. There really has to be a set of unusual circumstances for them to get comfortable with that. In fact, we've had trouble with them being okay with levels half that amount.
The idea works in theory but no so much in practice.