Why does life insurance build cash value?
How come my auto insurance doesn't build cash value?
Why does life insurance build cash value? Life insurance a scam?
Answers:
Its because the life insurance industry is trying to make cash value life insurance look good to the consumer when it's really isn't.
It benefits more to the life insurance company because they use the cash value and invest it for themselves. Just like you put money in the bank, the bank lends it out to people or they invest it. But the difference between a bank and a life insurance company is that if you want to take money out from your life insurance policy, you have to borrow it and interest will be charged on the loan. In most policies, if you die, you lose all the cash value.
No agent is going to tell you this because if you knew the truth, you wouldn't buy it. An agent will say lots of misleading information to convince the consumer to buy it. They will say that your "cash value grows tax-deferred." You know why it grows tax-deferred? Its because you are getting a loss in your investment. Do you know that in most policies, no cash value grows in the first two years?
They will say "its a great investment." Of all the life policies I seen, I have not seen a single life policy that has generate a rate of return greater than 6% and that was a variable universal life policy. But the investment in that variable universal life policy actually had an average rate of 10%. I compared it to when the policy was enforced to the last ending balance date. The reason why its that way because life insurance companies charge bunch of fees on their policies. If you kept the same investment outside of the life insurance policy, you would get 10%.
Anyway life insurance isn't a scam. They do pay out death claim as long as the policy is still enforced. Its the cash value life policies that are ripoffs. Why pay for two things and only get one back?
There are basically two types of life insurance, term and whole life. Term doesn't build cash value - you pay to be insured for a particular period of time, much like other types of insurance, and when that time is up, you either pay some more for another period of time, or it's done. Whole life is more expensive than term, and includes a component that essentially goes into a savings plan for you - that's where the cash value is.
First, it depends on the specific life insurance policy. i.e. my life insurance policy does NOT build cash value unless you consider the value when my spouse or children get to cash in...
Some life insurance policies are MARKETED as investments. (they earn cash value) From what I've learned, you are better off buying a more standard life insurance policy and using the extra money in more traditional investments. (IRA's, Roth IRA's money market etc...)
If you had an HSA health plan, you do have health insurance with cash value. If you don't use the money in your HSA, it rolls over to a qualified account at 59 1/2. Does that mean it's a scam?
It's a pretty bad assumption to say that because you have cash value, it's a ripoff. The cash value just reflects the liquidity of your policy at any point in time if you wanted to make a change. Most people consider liquidity a good thing over the alternative.
There is a problem with agents selling protection vehicles for the purposes of liquidity.
If you really have a need for permanent life insurance, but want absolutely hate any cash value in the policy, set up a non-qual side fund that you control and just pay the costs of the life insurance policy each year from that pool. This is what third-party investors do when they buy life insurance policies. If you live more than, say, 5 years, this will be cheaper than buying yearly renewable term. Plus it will allow you to continue coverage beyond age 85 (where most level term ends).
If you don't understand what I said, go talk to an agent who does or 2 or 3. It's your money.
When we talk about cash value we are talking about whole life, universal life, variable life and variable universal life insurance. There are two parts to the insurances that accrue cash value.
First, when you pay your premium part of your money goes towards the cost of the insurance. By this I mean if you buy 100k coverage of any the above insurances, the insurance costs a certain amount. Wholelife policies have level term insurance, meaning that the part of premium that goes to pay cost of insurance today, will be the same when you reach age 99. We will say $100/month is premium. You get 100k coverage. Cost of Insurance is $40, the rest will pay commission and fees and after that what is left over will go to savings acct. All the other insurances mentioned above, also split their money in two ways. All these others insurance is increasing term insurance. Each year you get older, you will pay more for the insurance until the cost of insurance exceeds the premium. At this point, the company takes money from your savings to pay the difference. Your cash value will self destruct and, at that point, you have NO insurance unless you pony up beaucoup money.
The other place your premium is split to is towards a savings acoount.
But to answer your question shortly, life insurance builds cash value to pad the pockets of the insurance company and to pay the commissions of the agent who sold you this "trash" value policy.
Mark S
What happens when I buy a VUL policy ($100,000 face amount) and after a couple years the cash value of my policy spikes up to $91,000? At that point, I become very conservative with the investment selections so as not to lose any cash value. What happens to the charges that the insurance company deducts from my Cash Value?
When you understand this, you will have a better understanding of the way cash value insurance works.
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The short answer to your question regarding why your life insurance policy can build cash value is becuase the IRS and Congress allow it as an asset class for your policy to have liquidity and they don't for the others (except for HSAs with regards to health insurance). DO NOT listen to the people who are telling you that it is a scam or that insurance companies are investing this money to make their money... this is not true.
The long answer to your question is this:
There are three types of Cash Value Insurance policies, whole life, universal life, and variable universal life. The IRS allow the policy holder to gain liquidity in these policies and the ability to take the cash value out of the policy in the form of tax free loans from the policy (much like a loan from your 401k) to do anything you want with the money, buy a house, a boat or use for retirement income. Here are the differences between the three types of Cash Value Insurance Contracts:
Whole Life: Whole Life is the most conservative type of Cash Value life insurance. You really only find this type of CV insurance with Mutual Companies (companies that are not owned by stock holders but rather the policy holders) becuase a large portion of the Cash Value is dependant on dividends which can only be paid to the policy holders by participating companies (read Mutual Companies). What makes up the cash value is guarantees, which is something similar to an interest rate that you would recieve at a bank. For example, the company I represent has a current guarantee of around 4.85. The rest of the Cash Value is detirmined by the dividens paid by the company, these are just like a dividen from a stock investment, they are not guaranteed. The plus side to a whole life contract is that you get the coverage you need plus you can build safe money equity in the policy to use later, most commonly the cash value is used to help supplement retirement or to help start a business. Again for example purposes, the company I represent had a policy holder by the name of Mr. Penny, that's right JC Penny got started in part due to a policy loan from Mr. Penny's whole life insurance contract.
Universal Life: This is a policy that is gives the policy holder more options than the whole life. They are generally given three premium options to pay on a monthly basis, a low, medium and target premium (higher). The cash value in this policy grows similarly to the whole life but with one major difference, you still have the gaurantees, but instead of the dividens, you have units. These units have values that can vary somewhat, and there are also maintence fees to these policies. So if you are paying the lowest monthly premium and you die, you run the risk of not having enough insurance to cover what you wanted to cover. These policies also gave the insurance industry a bad rap a few years back because some agents where going out and telling clients that they only had to pay a certain premium for so long like 10 years, and then the client wouldn't have to pay any more. Well once the agent was done delivering the policy, and took the check for the first months premium at the higher amount, the customer forgot about the downside of the policy implouding and started making the minimum premium payments for several years. Year eleven they didn't make any more premium payments and that was fine for about 5 or 6 years, then all of a sudden there came a premium request from the insurance company saying that if they didn't pay the premium the policy would lapse. So if you are going to buy one of these policies make sure you are going to be disiplined enough to pay the Target premium in the good months.
Variable Universal Life: This is the one where you here that there is an investment componate. Again like with the Universal Life policy disapline is very important, because a great deal of the cash value is in market related securities. There is also a fixed account portion and you can reballance the amount of cash value that is at risk. There are also administration fees, no these do not go to the agents pocket, but they can siphion off a large portion of your gains if the market is not doing so hot.
So again the reason that life insurance is able to build cash values and your other types are not, is because the IRS and Congress have allowed it to viewed as an asset class where your home, auto, disability, and most health insurance is not and asset class but more of a protection against the loss of the assets you own. Life insurance is not a scam, as a matter of fact it use to be to most widely used sorce of wealth for the affluent, because there where no limits on how much they could stuff into the policies, and then get the money out later on a tax free basis. Many of the investment vehicles that we advisors suggest to people today have their roots with life insurance policies, such as the Roth IRA, is nothing more than a whole life policy contract with restrictions on how much money you can put into it, when and for what reasons you can pull the money out. Also to give the true answer of what lines the insurance companies pockets... term insurance, when you consider that 75% term policies are never paid on by the insurance company due to the fact that people don't keep them, but the insurance company keeps all the years of premiums that these people paid. So if you look at a $1MM term policy and over the course of lets 10 years for Non-Smoker 45 year old. The company will collect rough 10K, now you multiply that by all the other 45 year olds who keep there policies for 10 years and then "dump" them that adds up to a lot of money that the insurance company was able to take in, with very little risk on their part because they have the law of large numbers in favor, that most 45 year old Non-smokers are not going to die of natural causes in a ten year time span... but they die 35, 40 or even 50 years down the line and they will do it with out life insurance because they didn't think ahead that they would need it for estate tax, or charitable giving purposes. Term insurance is a cash cow for insurance companies not the other way around, because with a cash value insurance policy, they are always on the hook for having something in place for you to access wether it is the cash value or the death benefit.
Lastly, always remember this, Life Insuarance always makes for a bad investment, but investments always make bad life insurance.
Not ALL life insurance builds cash value. There's pure insurance, like term, that does not. The ones that build cash value, well, you pay 10X as much for them!! and 10% of what you pay in, goes to cash value, AFTER you've held it a few years.
Cash building policies, or "investment" policies, are a gimicky way to sell life insurance, MOST of the time (but not all). They are NOT the cheapest way to invest, or to save. To put it mildly.
ps. Avald, if that's the SHORT answer, I don't think I'm up to the long one, LOL.
Avald is the only one that tell the true about cash value life insurance, hope people learn that, I personal believe, not all the insurance agent or financial adviser know very well on all insurance company product, if does, they will find out Massmutual 10 payments life insurance policy cash value power, and they will no longer saying buy term life and invest the different.
no cash value term life is just like rent the house, you don't own the house, and the rent will be a lot higher later years, ask you self, do you want to own or rent, of cause not all cash value policy are good to buy, the only cash value policy you can buy is whole life policy from mutual life insurance company.
You never buy VUL cash value policy, this type of policy just life term life, cost of insurance will a Lot higher when your in retire age, agent will told you, your cost of insurance pay only from face amount minus total cash value, that way your cost will a lot lower, the key is, when you need money and loan out from cash value money, then your insurance will become higher, mean you can not touch the cash value.
Oh ok I got this for you...
Better check on this... Im pretty sure you'll discover something...
http://www.myautoinsurancetips.com/...
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