Why do financial advisors push cash value life insurance?
A financial advisor who makes a living through commissions has a strong financial incentive to include life insurance, as some insurance companies pay rather well for selling their products.
The real reason life insurance agents and financial advisors push these plans is because they get huge commissions.
How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000. However, this is only an average.
A life insurance policy with cash value could be worthwhile if you want to tap into money while you're still alive. If you're looking primarily for a death benefit for your beneficiaries, term life insurance or certain forms of universal life insurance are likely good bets.
You can choose not to repay, but the outstanding loan balance will typically be deducted from your death benefit. A policy loan can be a helpful option if you momentarily need cash but want to keep the full death benefit in force by repaying the loan amount.
Most people only need life insurance for a limited time
The biggest reason Orman recommends term life coverage for most people is because this type of policy provides all the protection they need. Life insurance is intended to replace income or services the policyholder provides.
If you feel your Financial Advisor evades or ignores questions, changes topics frequently, or avoids details about commissions, then it could be worth considering if they are a good fit for your needs. Every advisor should make a good faith effort to help you understand all aspects of your plan.
You can cash out a life insurance policy. How much money you get for it will depend on the amount of cash value held in it. If you have, say $10,000 of accumulated cash value, you would be entitled to withdraw up to all of that amount (less any surrender fees).
What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.
The cash value will increase throughout the life of the policy and will eventually equal the face amount of the policy, but usually not until the insured reaches the age at the end of the mortality table used to calculate premiums for the policy, usually age 100.
What does Dave Ramsey say about life insurance?
Wondering what Ramsey teaches about life insurance? This article covers all the types, but let's cut to the chase: we always recommend buying term life. In particular, you want a policy that lasts 15 or 20 years with coverage that's 10-12 times your annual income.
During the early years of a cash value policy, the premium will usually be significantly higher than for term insurance. If you need coverage only for a short period of time, your net costs will be significantly higher than if you purchase term insurance.
Why? First up, you're going into debt, which is never a good idea. Second, you'll have to pay interest on the loan, and if you don't pay all of it back, your death benefit will decrease. Think about how crazy this is—you're paying interest on a loan made up of your own money.
How can you use life insurance to build wealth? Term life insurance can be used to build wealth across generations by providing a payout to your surviving loved ones. The death benefit can be used to pay estate tax, as well as preserve remaining assets.
However, a 401(k) typically makes more sense as your primary retirement income because it's more affordable and offers better returns than a LIRP or other types of life insurance.
Cash value accumulates tax-deferred, and it can serve as a readily available source of funds for any number of life's significant events. You can borrow from your policy's accumulated cash value by taking a loan at a competitive interest rate.
Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses.
If your family can afford daily expenses, pay their bills, and retire in comfort without the use of life insurance funds, you may want to consider canceling your policy.
As a financial planner, I've seen many people who have too much life insurance coverage for their needs or a policy that doesn't make sense for their situation. I typically recommend life insurance if someone depends on you financially, your heirs will have to pay estate tax, or you own a business.
On the other hand, fee-based or commission-based compensation structures can both be financial advisor red flags. These advisors may earn part or all of their compensation in sales commissions. In other words, they may be more incentivized to sell products than give advice.
When should I fire my financial advisor?
“If your adviser doesn't take your calls, responds slowly or doesn't address your questions, that should not be tolerated. A great relationship should involve the client feeling heard. The adviser should have a great understanding of the client's goals and develop strategies aligned with those goals.
Limited availability: Financial advisors may not be available at all times, which can be a problem if you need urgent advice or assistance. Risk of scams: unfortunately, there is a risk of financial scams in the industry, and it's important to be aware of this risk when working with a financial advisor.
Surrendering a whole life insurance policy will end your coverage. If your policy has a cash value, you'll be able to receive that amount after you pay any surrender fees. It's best to check your insurer's surrender fee schedule before canceling your policy.
But it's important to be aware that there are a few instances where life insurance won't pay out. Top reasons life insurance won't pay out may be because the policyholder lied on their application, their death was the result of suicide, or they passed away during the waiting period.
- MassMutual: Best overall.
- Guardian: Best for applicants with a history of HIV.
- Northwestern Mutual: Best for consumer experience.
- New York Life: Best for high coverage amounts.
- Pacific Life: Best range of permanent life insurance.
- State Farm: Best for customer satisfaction.
References
- https://www.ramseysolutions.com/insurance/cash-value-life-insurance
- https://finance.yahoo.com/news/where-millionaires-keep-money-070638027.html
- https://www.quora.com/If-banks-only-insure-up-to-250-000-where-do-rich-people-keep-their-money
- https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance/
- https://www.forbes.com/advisor/life-insurance/whole-life-insurance-cash-value-chart/
- https://www.marketwatch.com/guides/insurance-services/how-to-cancel-life-insurance/
- https://www.protective.com/learn/life-insurance/living-benefits---using-life-insurance-while-still-alive
- https://www.selectquote.com/life-insurance/articles/life-insurance-or-401k
- https://doi.sc.gov/FAQ.aspx?QID=350
- https://cfbinsurance.com/2023/08/22/build-wealth-life-insurance/
- https://www.nerdwallet.com/article/insurance/cash-value-life-insurance
- https://www.trustworthy.com/blog/receive-inheritance-money-without-any-issues
- https://www.marketwatch.com/guides/insurance-services/cash-value-life-insurance-taxable/
- https://www.usatoday.com/money/blueprint/life-insurance/what-is-cash-value-life-insurance/
- https://www.marketwatch.com/guides/insurance-services/how-to-borrow-against-life-insurance/
- https://www.investopedia.com/articles/personal-finance/082114/6-ways-capture-cash-value-life-insurance.asp
- https://www.lsa-llc.com/tax-on-surrender-value-of-life-insurance-policy/
- https://www.forbes.com/advisor/life-insurance/is-life-insurance-taxable/
- https://www.investopedia.com/articles/personal-finance/082114/how-cash-value-builds-life-insurance-policy.asp
- https://www.jpmorgan.com/insights/investing/investment-strategy/how-to-use-life-insurance-as-a-financial-asset
- https://www.guardianlife.com/life-insurance/withdraw
- https://www.linkedin.com/pulse/how-establish-generational-wealth-irrevocable-trusts-permanent-noel
- https://www.progressive.com/answers/replacement-cost-vs-actual-cash-value/
- https://www.newyorklife.com/articles/life-insurance-asset
- https://www.policygenius.com/life-insurance/5-million-dollar-life-insurance/
- https://www.quickquote.com/what-is-cash-value-life-insurance/
- https://www.guardianlife.com/life-insurance/surrender
- https://www.lhlic.com/consumer-resources/how-does-whole-life-insurance-work/
- https://ca.rbcwealthmanagement.com/documents/396233/2476858/Wealth+Transfer+-+Waterfall+Concept.pdf/1afa1e4b-1473-497e-8a97-36f16dcc4cf2
- https://www.investopedia.com/ask/answers/050615/what-difference-between-death-benefit-and-cash-value-insurance-policy.asp
- https://www.broadridgeadvisor.com/kt/trns.aspx?xd=PT-ET-TB010&xsl=tool&il=tm&firm=Dennis%20J%2E%20Liefer%2C%20CPA%2C%20PC%2E
- https://www.selectquote.com/life-insurance/articles/high-net-worth-life-insurance
- https://www.marketwatch.com/guides/insurance-services/when-to-surrender-a-life-insurance-policy/
- https://www.investopedia.com/terms/c/cashsurrendervalue.asp
- https://www.newyorklife.com/articles/cash-value-life-insurance
- https://smartasset.com/life-insurance/how-to-use-life-insurance-while-alive
- https://www.vox.com/money/2024/3/13/24086102/billionaires-wealthy-tax-avoidance-loopholes
- https://www.eqgroup.com/acv_explained/
- https://www.investopedia.com/terms/p/policyloan.asp
- https://www.marketwatch.com/picks/7-signs-its-time-to-fire-your-financial-adviser-cda6b981
- https://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp
- https://www.ncdoi.gov/consumers/homeowners-insurance/actual-cash-value-vs-replacement-cost-value
- https://www.investopedia.com/terms/w/waterfallconcept.asp
- https://www.progressive.com/answers/life-insurance-cash-value/
- https://www.onpointcu.com/blog/4-traits-of-a-great-financial-advisor-and-4-signs-you-may-need-a-new-one/
- https://www.linkedin.com/pulse/why-rich-use-life-insurance-create-preserve-wealth-noor-uddin
- https://www.dfs.ny.gov/faqs/consumer-life/what-are-some-pros-and-cons-whole-life-insurance
- https://www.cbsnews.com/news/how-much-cash-is-a-100000-life-insurance-policy-worth/
- https://www.investopedia.com/articles/personal-finance/010716/do-you-need-life-insurance-after-you-retire.asp
- https://finance.yahoo.com/news/4-most-popular-banks-millionaires-150054420.html
- https://www.fool.com/the-ascent/buying-stocks/articles/why-suze-orman-says-you-shouldnt-use-whole-life-insurance-as-an-investment-vehicle/
- https://idoi.illinois.gov/consumers/consumerinsurance/lifeannuities/faq-individual-life-insurance.html
- https://www.valuepenguin.com/life-insurance/cash-value-life-insurance
- https://www.aflac.com/resources/life-insurance/reasons-life-insurance-wont-pay-out.aspx
- https://www.ramseysolutions.com/insurance/actual-cash-value-vs-replacement-cost
- https://fiona.com/learn/articles/death-benefit-vs-cash-value-whats-more-important
- https://www.bankrate.com/insurance/car/how-is-car-value-determined/
- https://www.nerdwallet.com/article/insurance/best-life-insurance-companies
- https://corporatefinanceinstitute.com/resources/valuation/replacement-cost-vs-actual-cash-value/
- https://equitablegrowth.org/closing-the-billionaire-borrowing-loophole-would-strengthen-the-progressivity-of-the-u-s-tax-code/
- https://www.fidelitylife.com/life-insurance-basics/permanent-life-insurance-101/cash-value-life-insurance/
- https://www.policygenius.com/life-insurance/how-to-cancel-your-life-insurance-policy/
- https://www.investopedia.com/articles/pf/08/life-insurance-cash-in.asp
- https://www.cbsnews.com/news/how-to-use-life-insurance-while-alive/
- https://www.bankrate.com/insurance/life-insurance/cancel-life-insurance/
- https://www.fool.com/the-ascent/insurance/life/articles/why-suze-orman-recommends-term-life-insurance-over-whole-life/
- https://www.linkedin.com/pulse/pros-cons-hiring-financial-advisor-worth-ryan-peca
- https://www.marketwatch.com/guides/insurance-services/can-i-sell-my-life-insurance-policy/
- https://www.libertymutual.com/insurance-resources/auto/what-is-the-80-percent-rule-for-home-insurance
- https://www.globelifeofnewyork.com/content/articles/2019_07-glny-can-you-completely-pay-off-a-whole-life-insurance-policy.html
- https://nfg.com/policyholder-tax-info.html
- https://www.cnbc.com/select/what-is-cash-value-life-insurance/
- https://www.valuepenguin.com/how-tell-when-you-should-cancel-your-life-insurance
- https://www.marketwatch.com/guides/insurance-services/getting-cash-from-life-insurance/
- https://www.rbcinsurance.com/files/00117/file-117272.pdf
- https://www.allstate.com/resources/life-insurance/what-is-permanent-life-insurance
- https://www.policygenius.com/life-insurance/can-you-sell-your-life-insurance-policy/
- https://www.allstate.com/resources/life-insurance/cash-value
- https://www.thehartford.com/small-business-insurance/actual-cash-value
- https://www.investopedia.com/articles/fa-profession/092316/why-financial-advisors-sell-life-insurance.asp
- https://www.investopedia.com/terms/a/actual-cash-value.asp
- https://www.aflac.com/resources/life-insurance/can-you-cash-out-a-term-life-insurance-policy.aspx
- https://www.forbes.com/advisor/life-insurance/cash-out-life-insurance/
- https://www.businessinsider.com/personal-finance/situations-recommend-life-insurance-financial-planner-2020-7
- https://www.forbes.com/advisor/life-insurance/cash-value-life-insurance/
- https://www.cnn.com/cnn-underscored/money/cash-value-life-insurance
- https://www.policygenius.com/life-insurance/high-net-worth/
- https://www.investopedia.com/terms/c/cash-value-life-insurance.asp
- https://www.ramseysolutions.com/insurance/types-of-life-insurance
- https://www.sarsillc.com/financial-advisor-red-flags/
- https://www.aflac.com/resources/life-insurance/tax-consequences-of-surrendering-your-life-insurance-policy.aspx
- https://www.cnbc.com/select/acv-vs-rcv/
- https://www.financestrategists.com/insurance-broker/life-insurance/can-the-irs-take-life-insurance-proceeds-from-a-beneficiary/
- https://www.usnews.com/insurance/life-insurance/when-to-draw-cash-from-life-insurance-policies
- https://www.insurance.wa.gov/types-cash-value-life-insurance
- https://www.kbb.com/car-advice/insurance/actual-cash-value/
- https://www.forbes.com/advisor/homeowners-insurance/replacement-cost-vs-actual-cash-value/
- https://www.progressive.com/answers/life-insurance-loans/
- https://www.linkedin.com/pulse/rockefeller-life-insurance-strategy-building-wealth-lasting-mohanty