Should You Buy High Early Cash Value Life Insurance?

You should buy high early cash value life insurance if you have a need or desire to quickly accumulate cash value in your life insurance policy. After reading that, you may be asking yourself, “why wouldn't everyone want to grow their cash value as quickly as possible?” That's a fair question and one with a pretty simple answer. There is a tradeoff that you are making between short-term cash surrender value and your policy's cash value accumulation over the long term.

Most products that carry the label of high early cash value in their title and have accelerated cash value growth have higher ongoing expenses. No doubt that it seems strange as you would think that a product like the whole life legacy high early cash value (Legacy HECV)offered by MassMutual (Massachusetts mutual life insurance company), provides greater value for policyholders. And it does provide cash that is very close to the cost basis of the policy in the short-term but because of the increased expenses, the value to the policyowner decreases over the lifetime of the policy. Which is exactly the opposite of most other permanent life insurance policies.

What Is High Early Cash Value Life Insurance?

Let us rewind for just a moment to explain exactly what a high early cash value policy is and then later we will explain more of the specific features. The origin of all high early cash value products (you can get a whole life policy or a universal life insurance policy with a waiver of surrender charges rider) is for businesses to use in connection with key employees and for executive benefit programs.

Many businesses would like to provide specific benefits to entice particular employees to stick around. In many cases, that involves some sort of golden handcuff benefit for retirement and those benefits have been funded by premium payments on a cash-value life insurance policy. Without going too far down the rabbit hole as to the how and why, just understand that through the policy's death benefit, policy loans, and withdrawals, life insurance coverage has been used in the corporate world quite extensively. The taxability of those transactions to the executive largely depends on the extent of gain in the policy.

In the business setting, the policy will payout to the named beneficiary at the death of the insured. Sometimes that may be the company that pays the premium and other times it could be the employee's family. And in some cases, a portion of the policy's death benefit is paid to both the business and probably the surviving spouse by the life insurance company. Either way, the policy fulfills a guarantee that is made to the employee of the business.

Features Of High Early Cash Value Life Insurance

The most valued feature of a HECV policy is that the higher cash values help to reduce the impact of the premium costs on corporate balance sheets. This is probably the benefit that any life insurance agent with experience will present first in a pitch meeting for this type of product. It is a major plus that very much excites corporate accounting and finance types.

Yes, the company may have a desire for additional life insurance on the key employee in question, however, additional insurance has real costs that the CFO and company board would like to minimize. Consequently, everyone involved in making the decision to pay the annual premium would like to see a policy building cash value as quickly as possible to offset the total cost of the purchase. Remember that in a whole life insurance policy specifically, the cash value is liquid from day one or at least in the first 30 days or so.

Just like any other participating whole life insurance policy, these high early cash value products offer standard fare: a waiver of premium rider, an accelerated death benefit rider, terminal illness rider, the ability to earn dividends, and a guaranteed death benefit.

But let's not be too fast to completely dismiss universal life policies as a viable option for the same application. While it is absolutely true that most universal life insurance comes with a hefty surrender charge, limiting the liquidity of the cash value early on the life of the policy, some offer a way around that limitation.

Enter the liquidity rider or early cash value surrender option or any number of other proprietary names that essentially offer the same feature. With one of these riders, you are able to have the surrender charges waived on a universal life policy (Indexed and Variable Universal Life in most cases). Of course, just like the whole life variations of high early cash value products, you will sacrifice long term cash value performance (lower internal rate of return) for short term cash liquidity.

Also, worth mentioning here, these specially designed high early cash value policies are manufactured to avoid modified endowment contract issues. That doesn't mean that they cannot become a MEC, just that they are engineered to provide greater cash accumulation early on without that worry.

Why Would Anybody Buy It?

The truth is that the preference to purchase a high early cash value policy rarely has much to do with the face amount of the policy or any real concern for the types of life insurance that can be used. No, the true motivation for it is to have more cash, faster.

As discussed in the section above, the original intention of HECV products was to entice business customers to purchase life insurance and to make them less inclined to just buy term life insurance. Think about it, if you can pay the premium each year and the policy's cash value is close to or exceeds the total cost basis, it is easier to justify it and to provide the benefits you want with less impact to the business. That is a win-win.

A less traditional use case for these products has presented itself in the last several years–real estate investors and small business owners. With the rise in popularity of Nelson Nash's, Infinite Banking Concept and Pamela Yellen's, Bank on Yourself, more people than ever are interested in all types of permanent life insurance.

The appeal of a high early cash value product to both of these groups is the ability to borrow against your cash value. You can take policy loans from the policy itself, or you can use the policy's cash value as collateral to open a line of credit with your banker (or find a banker that understands the idea). That means, in the case of a real estate investor, that you have cash on hand quickly to do all-cash deals. If you're buying foreclosed properties on the courthouse steps, for example, having a ready stash of cash available is very appealing. And of course, your cash value continues to earn dividends and interest while you have the loan outstanding. That's a truly unique feature of all these policies that you definitely won't find with a 20-year term policy or by investing in mutual funds.

What Are the Potential Disadvantages?

There certainly is a balance that you must strike between the desire to have early cash accumulation in your policy and long-term growth. As stated earlier, it can definitely offer you the ability to seize investment opportunities as they come your way. But remember the original intention was to minimize total net cost early in the lifetime of the policy.

What you will see if you compare illustrations with identical funding of annual premium payments is that the high early cash value products will have a much higher internal rate of return for the first 10 years or so. When you look out to 20 years and beyond, a product that was not created to have higher early cash accumulations will have significantly higher returns.

Final Thoughts

High early cash value life insurance is a great product for the proper application. In most cases, that will be for a business to use as a way to fund benefits to a key employee or executive. In fact, the focus on businesses has the product referred to as a “balance sheet product” in many cases because of its ability to show very little impact on the corporate balance sheet.

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