Cash Value Life Insurance: There is a Right Way and a Wrong Way to do it

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Cash value life insurance is not really like a shirt sitting on the rack at Macy’s, but instead a stock piece of clothing at your favorite clothier. Sounds a tad strange, but here’s my point. Life insurance is a very customizable product. I can tweak a lot of aspects to life insurance (any kind really) to make it do certain things better or worse. This is one of the many things that makes life insurance such an incredible financial tool.

But many people would rather pretend that life insurance is an “off the rack” product that can only be implemented in a very narrow band of options. Nothing, thankfully, could be further from the truth.

So What Do You Do?

I’ve never looked at what I do as a particularly complicated job. I’m an expert at designing life insurance policies. And more specifically, I’m an expert at designing cash value policies to optimize the cash value performance for accumulating wealth (spendable cash) or retirement income through a life insurance policy.

There are those who would suggest that life insurance is a bad product for this purpose. They’ve never had the opportunity to truly look at what I can accomplish with the product.

And my mastery of the product comes with years of picking through policy specifics and learning the intricate details of policy construction as well as regulatory guidelines that qualify life insurance as life insurance.

In my eyes, this sort of preparation comes with the territory. If you want to be a master of what you do, there is no substitute for mastery knowledge of the things that are chiefly involved in what you do everyday.

The Life Insurance Reserve

The reserve is a quintessential element to cash value life insurance. We covered this a while ago. And the really important thing to keep in mind about the reserving process is that it’s designed to accumulate a pretty impressive amount of money over time. Further, though, it can be tweaked, massaged, manipulated, etc. to further take advantage of what it’s supposed to accomplish.

Put very simply, when you give a life insurer money, they take the money and seek out a certain investment return goal with that money. They don’t have the ability to discriminate against the type of money that they receive, so if you give them more money than you otherwise have to, they’ll take all of that money and place it in the same “account” seeking the same return that you’d get on the money you have to give them. However, there’s a bonus. All of this extra money, is free of any excessive fees about which some people criticize life insurance. The goal then simply becomes how to minimize, as much as possible, the portion of your outlay that goes to expense riddled life insurance and maximize the amount going to extra cash that is 100% discretionary and unburdened by high fees. It’s as simple as that, totally doable, and entirely legal.

But Why Doesn’t Everyone Do This?

I used to think they did, or at least could. But it turns out you have to spend a little extra time developing your life insurance skills and knowledge to design life insurance this way. Further complicating the process is that fact that every life insurer does things a little differently. So it becomes tricky to know exactly how each insurer goes about allowing you to design life insurance in the way I’m suggesting. If they allow it at all…some don’t or at least they make it incredibly difficult.

There’s also the compensation aspect to this. Designing policies in a way that mitigates expenses has an obvious effect on commissions that are paid to the agent (they go down a lot). I grew up in the corporate owned life insurance world so products that were designed by default to deliver higher cash while sacrificing expenses and therefore commissions were sort of an always understood design for me. Simply put, you don’t place money into a life insurance contract with the intention of accumulating cash with it, if the policy isn’t designed to minimize expenses. If the life insurance purchase is primarily or only interested in death benefit, that’s a different story.

Ultimately Be Carefulcash value life insurance design

Cash value life insurance as an asset serves a lot of great purposes. Whether we’re looking at it for retirement income, a self-banking mechanism, or simply a place to store cash and receive a really nice return relative to risk and liquidity, it’s a powerful tool. But we must be very careful about how we approach this. A lot of agents want to sell the dream, only because they want to sell more insurance. Their functional understanding of what is going on, or what needs to be done to accomplish the end goal, is practically non-existent. And when policies are issued by individuals without proper knowledge, bad things generally take place.


2 Responses to “Cash Value Life Insurance: There is a Right Way and a Wrong Way to do it”

  1. Brian says:

    Great job! I wanted to ask you about the premium expense/load or whatever other name they give it. Early in your article, you wote: “All of this extra money, is free of any excessive fees “.

    Does this mean any excess payment does not get hit with the premium load? It is my understanding that ALL premiums received by the carrier are subject to this mandatory tax for doing business in the particular state. Any help breaking this down would be appreaciated and I love what you are doing…thanks again.

    • Brandon Roberts says:

      Hi Brian,

      The point was that paid-up additions have a much much lower expense component vs. base whole life insurance. No paid-up additions are not expense free in most cases.

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