Today, I’m going to talk about a financial product that, like annuities, is highly controversial: cash value life insurance. Some people are staunch advocates of CVL for its potential to build tax-free wealth and its flexibility in terms of how that wealth can be accessed and deployed. Others are dedicated to discrediting CVL, claiming it’s far better to buy term life insurance and build your wealth separately. But in the debate over its worthiness as a financial product, there’s an important aspect of CVL that has been overlooked, and that’s what I’m here to shed light today.
Let me ask you a question: How would it feel to know that, no matter when your time in this life is over, there will be a sum of money given to someone you care about that could potentially make a huge difference in their life? I’m not just talking about making provisions for your family in case you die while they still depend on you financially. Even if your children are fully grown and supporting themselves when you pass away, that money could still be a wonderful gift, helping them pay for your grandchildren’s education, allowing them to start a business that they’re passionate about, etc. If this appeals to you, then that right there is a good reason to get a cash value life insurance contract. Consider this: when people think of leaving an inheritance to loved ones, they tend to assume that means accumulating that wealth themselves over a lifetime of work and investing. But what if you don’t live that long? What if you don’t get that chance? That’s where a CVL contract comes in: as soon as you’re approved for the insurance coverage and have paid your first premium, you have your legacy. You’ll have it as long as you keep paying your premiums in a timely manner. And even if you end up living a long time, the cash value component can help you make sure that the amount your loved ones get when you die is greater than what you put in over the lifetime of the contract. This arrangement frees you up to allocate other money to building up assets for you to enjoy during your lifetime, without having to worry about how much of those assets will be left for your family when you die.
This exposes a flaw in the argument that all you need is term life insurance. Term life is good for a specific insurable need with an expiration date, such as a mortgage. This is because term life is the cheapest form of life insurance — until the term expires! You see, the reason term life is so cheap is that there’s a 98% chance that once the term is up, you’ll still be alive. Insurance companies know that the odds are overwhelming that the flow of money will be entirely from you to them, without a penny going from them to your family. But if you decide to renew your coverage once the initial term is up, then all bets are off. The low, flat price you were paying each month will now skyrocket, and keep going up year after year. You could go immediately from paying $100/month to paying $1000/month! And you’d be paying even more the next year, and the next, and so on. This is why a cash value contract always costs more up front than a term contract for the same coverage; the insurance company knows that, sooner or later, they will have to shell out a sizeable amount of money to give to your loved ones. They have no choice — as long as you keep your end of the deal. That means making sure the expenses of the contract are covered for the rest of your life. You can do this by setting up automatic payments from your bank account on a regular basis, or (if it’s a type of universal life insurance, such as an IUL or VUL) using shrewd investment management to grow the cash value to a size where it can cover the policy expenses for you. But either way, you’re making a lifelong commitment. It’s important to understand that. But if you know that going in, you can structure the contract accordingly to maximize the odds in your favor. You can start with a monthly budget you’re comfortable with and tailor the contract to give you the biggest bang for those bucks. If the resulting contract won’t provide your dependents enough to replace your income while they still depend on it, then many cash value products allow you to tack on additional coverage for not that much extra a month, and as soon as the need for that extra coverage goes away, you can “turn if off” and not pay for it any further. Alternatively, you could buy a separate term life contract.
Speaking of term life, if you’d like permanent life insurance coverage but are on a particularly tight budget, a lot of companies that offer CVL products will allow you to buy a term life product and then convert it to one of their CVL products down the road (assuming your budget is no longer so tight). The window for making this conversion is usually somewhere in the range of 5-10 years. But the beauty of this arrangement isn’t just the fact that you’re paying less up front — you can make the conversion without having the insurance company reassess your health, etc., at that point. To illustrate how powerful an advantage this can be, I have friends (a married couple) who wanted CVL contracts for each of them, but at the time, they were focused on paying down debt, so they opted for term contracts with a plan to convert to CVL when their debts were paid off in a few years. Well, shortly before the time came for them to make the conversion, the wife was diagnosed with leukemia. I’m happy to report that she seems to have beaten it, but if she hadn’t already been covered by life insurance at the time, a diagnosis of leukemia would’ve made it a lot harder to get coverage at that point. But even with that diagnosis, she was able to convert her term contract into a CVL contract — no questions asked about changes in her health or anything of that nature.