Permanent life Insurance: Pros and cons
Life insurance is the most dynamic asset on the planet with versatility that is matched by no other asset class. Consider what life insurance can do when designed properly: access to cash value can be sheltered from income taxes, death benefits can avoid estate taxes, and policies are protected from most creditors in Alabama as well as most other states. We also know that nearly 70 percent of Americans will face long-term care needs at some point, and life insurance can pay large, lifetime benefits that cover these expensive costs. What other asset class can do all these things and build generational wealth for your family? The answer is none.
Unfortunately, I have seen many companies and insurance agents repeatedly botch opportunities to help their high-net-worth clients by providing bad advice, bad products, or both. This creates reasonable hesitations that I encounter from time to time when having discussions about sheltering large sums of money in life insurance or just buying life insurance in general. I understand where all of these hesitations originate from. Any money-wise person wants to do their due diligence before making a financial decision. This is why I always prefer to take things slow and explain everything as clearly as possible. When I go to buy something, I refuse to go for the high-pressure act now before it goes away sales tactics. I can’t stand that approach and typically leave when faced with it, so I don’t use that approach with my clients.
The reality is that for the average American with a household income near or below six figures, life insurance is NOT the right fit for stuffing your money into for the primary purpose of accumulating wealth during your lifetime. Wait, what? Did you expect some long, drawn-out sales pitch? Not from me. Yet, I have seen countless instances where insurance agents try to coax their middle-class clients into dumping hundreds and even thousands of dollars each month into a product they don’t fully understand that is NOT appropriate for them. I have seen many agents steer their clients away from tax-advantaged IRA and 401(k) accounts in favor of life insurance that is filled with annual charges that are not clearly explained to the client. Over the long run, most of these products are marketed as having a 5-6% rate of return (they’ll say: it’s a dividend!), while the true rate of return is much closer to 1-2% over 10+ years when you look at the IRR. I have a library full of real policies to prove it.
Here’s the truth that 95% of insurance agents won’t tell you: Most individuals are better off buying term insurance if they want something inexpensive or Guaranteed Universal Life insurance if they want something to last the rest of their life. Guaranteed Universal Life (GUL) insurance is a type of life insurance that guarantees a lifetime benefit so long as the illustrated premiums are paid timely according to the contract. There may be a minimum cash value growth component, but that is not the primary objective of GUL. With a GUL, think of it as I pay X in premiums and I get Y in death benefit so long as I don’t touch the cash value during my lifetime. GUL insurance premiums are a lot like paying off a house - you can pay the policy off with larger premiums over a shorter period of time or smaller premiums over a longer period of time. Both term and GUL life insurance are expenses - NOT assets. And, in case you wondered, Dave Ramsey is wrong about permanent life insurance. Whether you buy term insurance or GUL is a personal decision, and the decision to buy GUL is actually supported by better math. The difference, of course, is that if you buy GUL, you will not be ahead until the moment you die. That means your heirs win with GUL and you win with the term insurance - if you want to look at it that way. To me, that’s not a right or wrong type of debate. It’s a debate about what YOU want for your wealth.
Life insurance as an ASSET is appropriate for the top 1-2% of wealthy Americans. This is not me being elitist, this is me being honest. For the average person that comes to me about life insurance, I will discuss the difference between term and GUL insurance, but I will not try to upsell them on buying life insurance as an asset. What is the difference between GUL and life insurance as an asset? With GUL, we want the cost as low as possible with the largest death benefit. When using life insurance as an asset, the goal is the complete opposite. The reality is, I’d be willing to bet that most insurance agents cannot even explain what GUL insurance is. They simply whip out their Whole Life presentation and start spewing their canned nonsense about creating your own bank and having lifetime income while leaving behind an instant estate for their heirs. Did you know that to take money out of one of these policies you must take out a loan (presently at 8%)? Wait, a loan to access your own cash value? Yep, but it’s tax-free. Oh, boy!
If you happen to be in possession of a life insurance policy that you’re not sure of and would like a second opinion on, we’d love to talk and let you know more about what you have. The best-case scenario is that you made a good choice, and we might be able to explain more about something you weren’t aware of. Sadly, this doesn’t happen very often. In the event that you were sold a bill of goods, there is good news: the IRS allows you to fix these mistakes without tax consequences. In what is known as a section 1035 exchange, you may exchange your existing life insurance policy for a better policy that suits your financial situation and move all of the accumulated cash value without incurring a tax bill. At least the government concurs that a good agent should be able to fix the mistakes made by a bad agent. And, to be blunt, if you have a life insurance policy issued by Northwestern Mutual, Mass Mutual, Nationwide, Mutual of Omaha, or State Farm, we should talk. There are much better options out there. Still not sure? Email me a copy of your policy, and I’ll personally take a look at it for you: dustin@hychefinancial.com
