Here we are, the conclusive post to the Emergency Fund trilogy (sounds special). Again, if you'd like a refresher on all 8 reasons from the original post they are:
- Increased rate of return
- Tax deferral
- Potentially tax free withdrawal
- Death benefit
- Private and non-probate asset
- Fewer fees (in most cases)
- Recaptured opportunity
- Systematic savings
Fees Fees Fees
According to Warren Buffet, one area where investors need to take particular note is in the fees they pay on the money they have saved. If there's one thing the most adamant permanent cash value life insurance naysayer must admit, it would be a completely lack of management fees (Please Note: Variable Universal Life insurance would have a management fee, you'll never see us recommend this product here, we believe life insurance a low risk asset, which this product simply isn't). Cash value life insurance does not have a management fee on the money that sits in the policy. On the topic of Whole Life insurance, there is no additional fee structure period (Universal Life insurance is a little different, however a point will usually be reached in the contract when these fees become very small or go away completely). This means, instead of paying some adviser 1% or so of your account balance annually, you can keep all of your money in your account.
Interest, those who Understand it Collect it, and those who don't Pay it.
We've talked about the recaptured opportunity concept that drives LEAP, Circles of Wealth, and Infinite Banking et. al. a few times around here. Here's something that's quite powerful about this idea. You get a rate of return that rivals the return you achieve in something like your 401k when it comes to a balanced portfolio, you can use the money when you need to, and you don't loose the interest you would have earned if you had left the money alone. Consider this scenario
- You run into an emergency or hardship
- You spend some of your Emergency Money
- You put the money back
- The whole time you continued to earn interest on the original amount and end up with more money once you've put all the money back because you were able to still take advantage of dividends and guaranteed cash growth despite having an outstanding policy loan
If you've yet to have the ah-ha moment I've been pushing, let me make it a little more obvious. You can share some of your emergency money with other financial goals you might have. Most people do this already. They have a savings account that is sort of the emergency fund, but it's also the vacation fund, the new car fund, the kids go to London fund, etc. While I'm not one for co-mingling too much (emergency money should really be mostly for emergencies) there's nothing wrong with combining efforts so long as the emergency balance doesn't get withdrawn for anything short of an emergency.
What if someone else has an emergency and needs some money. Sure we like to pretend that we wouldn't put our own financial well being at risk because someone else we know and care for has fallen on hard times or made a few mistakes, but where do you think that money comes from most of the time when someone finally works up the courage to put their tail between the legs and reach out to friends and family for a cash infusion? And when you go looking for the money, you look far less like an ass if your borrower knows that not paying it has a negative financial impact on you.
If you've ever felt the need to criticize the forced savings claimed feature of cash value life insurance, you'd better be sure that you are sitting in a top 4% financial attainment situation, otherwise you yourself could probably benefit from the plan. So, for the 96% of Americans who fail miserable to put their financial affairs in order…ever, heed this advice very well: this plan will be your accountability buddy, and unlike a real life human accountability buddy, it isn't influenced by human emotion to go easy on you when you're having a bad day.
Not only will this plan make you save regularly, it will also make you put back the money you took out. If you don't you'll inevitably come to game over time and you'll have no one to blame but yourself. If you're resisting all this with your over-idealized thoughts of how good you are at personal will power, I ask you one simple question: do you have 1 year worth of bills saved somewhere? I'll ask another: if you don't, how long will it take you based on what you've saved for the past year to get there? And one last one: did you just make some lame ass excuse about how you'll get there as soon as you get a raise, new job, or whatever conditional (if my aunt had balls she'd be my uncle) situation that probably isn't the real answer to your lack of real self discipline comes true?
The 4% that achieve financial greatness have a system, do you really believe your superior? Can you afford to argue with the results? Dave Ramsey gets a lot of things wrong, but the one thing he gets magnificently right is the implantation of systems to achieve a a better financial life (mostly a process for getting out of debt). It works everywhere else, why is saving money any different?
And Our Trilogy has Reached its End Point
And there you have it, the low down on why cash value life insurance can be a truly great place to stick your emergency fund money. Want more? Help is just a few steps away, but you must initiate the process.