How to get the most Cash Value of a Life Insurance Policy!

How to get the most Cash Value of a Life Insurance Policy!

Here are some good guidelines to make sure your insurance agent is doing his/her job well with the cash value growth in your life insurance policy. If you discover that he/she is not, by all means call me!

TIP #1 In order to over fund a life insurance policy properly you must first ensure without a doubt that the insured is healthy. The health class of the insured should be either “Standard Non-Tobacco” or “Preferred Non-Tobacco”. If not, than this is not an investment style that is in the best interests of the client. The less the insurance cost, the better the investment, so make sure you are either in a Preferred or Standard non tobacco class.

TIP #2 When over-funding a life insurance policy you should know that life insurance is governed by a 100 year old tax law. There is no grey area when it comes to legality here. But there can be a moral flexibility when in it comes to agents building your program, which is why I am writing this article. The more insurance you buy, the more the agent gets paid.

Your goal is to put as much money away as possible while purchasing as little insurance as possible.

The IRS has a limit as to how much money you can contribute to an insurance policy over the life of the policy. Always ask what the maximum amount is that you can fund the policy with. If you are not putting in close to the maximum amount that the policy allows, than you are not doing yourself any favors. The reason is this; You want the bulk of the funds you deposit to go towards the investment not the cost of the insurance.  This can mean the difference of thousands of dollars in your retirement years.

For example:

I am a 32 year old Preferred Plus Non Smoker (thank you Jesus!). If I were to purchase a $250K Equity Indexed Universal Life Insurance Policy today, here are some of the values: The minimum amount to keep the insurance in place until age 100 is $79.88 per month. The maximum the IRS will allow me to put in to keep this a non taxable event is $233.45 per month.

If I only put in the $79.88 per month, then by age 65 I would have deposited in $31,632.48, and at an 8.6% interest rate I’ll have a cash value of $62,232.00. That is a horrible return, because the cost of insurance is eating up all the cash value. I would have been better off buying a term plan and investing in an IRA (assuming I’ll die of old age).

Although, if I put in the maximum amount of $233.45 per month, then by age 65 I would have deposited $92,446.20 and I would have a Cash Value of $383,579.00. Now that looks much better. In addition the death benefit will have grown to over $470,000.

At this point I would elect to stop paying into the policy and I would annuitize it. Over the next 25 years of my retirement I would receive an annual income of $35,201.37. from this policy.

Let’s review, I put in a total of $92,446.20 over a period of 33 years and all the while I have at least $250K of life insurance. By age 65 I accumulated just less than $400K and decided to stop making payments. The policy then turned around and paid me a TAX FREE retirement income of over $880,000 over the next 25 years of my life. By age 91 the income stops and I have a life insurance benefit of $75,000 that I can access for Long Term Care if I need it. The Life Insurance will slowly decrease until age 100 where I will die as a happy handsome 100 year old man.

This brings me to my final tip

TIP #3 Make sure that you have at least a 15 year run to fund your policy. Do to the nature of the product,  life insurance policies do have a cost of insurance.  If you have not figured that out yet, please start back from the beginning of this article. We find that most cash value life insurance policies will not out-perform competing Roth IRA and Mutual Fund accounts until after 15-20 years of funding. These products are designed for funding long-term not short term.

Also - If you only have a short term run of 10 years or less, consider a Bonus Indexed Annuity as one of your options. These days you can still double your investment with a ten year run in an annuity.

Once again I hope this was helpful, please feel free to ask any questions via online or by phone.