Years ago I was brought into a case for some Second Opinion work by an advisor for his client. The client had a proposal on the table for a cash value policy and the accumulating cash value was a major point of the presentation. The advisor wanted to know that the client was getting the full story and asked me to put together some considerations. Once I did, I found that it was handy to have it at arms reach as I have been asked the same question in some way many times since. I thought I would share it in this blog posting.
I have nothing against whole life, universal life or variable life insurance in and of itself. I am a big advocate of permanent insurance when explained properly and positioned well in an estate and financial plan. However, I do have something against sales strategies all too often employed to sell these policies. When you review this list you will undoubtedly come away with the sense I am very negative about it based on the questions I am asking. I ask these questions purposefully. The reason is, the client has already been shown all of the upside aspects of the transaction, and there are indeed potential upsides, depending on your needs, goals and expectations. But, all too often the potential downsides are glossed over or not brought up at all. In other words, I am often brought to the table to be, in effect, the “Paul Harvey of the insurance world”, meaning, here’s The Rest of the Story.
Hardly a day goes by when I don’t spend time educating policy owners on what is going on in their policy(s) and why. I am not saying that they weren’t told at one time, but if they were, they certainly don’t recall it. In too many of the accumulation based insurance plans which make it to my desk, the policy owner’s understanding of how the cash value is credited, what it is growing to and how much they can ever reasonably expect to get from it as spendable cash in their retirement years, is dramatically different that reality. In part this is because of the decade’s long decline in crediting rates for most policies but even after putting that aside, expectation and reality seldom coincide.
For example, most people have no idea the internal rate of return on their premium to cash value will be negative until they are quite a few years into the transaction. Most people I speak with actually believe that their premiums are being credited at the dividend or stated interest rates of the policy. Most people have little understanding of how much cash value has to remain in the policy to support the death benefit indefinitely so they don’t have access to all of it. Most people do not understand that if the policy is not meticulously maintained until the day they die, the adverse income tax consequences could be more devastating than they could possibly imagine. Most people have never had a true internal rate of return calculated on the premiums into the policy relative to net income available from the policy. And so on.
If one understands and agrees to all of the points on the list, then this opportunity was made for them and they can jump in with both feet confident in their understanding and expectations. Sometimes, however, we have this conversation and the transaction does not move forward because, given the potential downsides, it simply isn’t what they thought and does not fit their situation.
Better to understand this now than in a decade or two. Do me a favor and let me know if there are points you feel should be on here that I have missed or, conversely, if you take issue with any of the points and you feel they are unfair. I look forward to it.