When we buy a whole life insurance for its cash value, we have generally seen a very long-term view of the strategy. Although someone may want access to the money in the life insurance policy within a few years, we still want to maximize the lifetime value of the dollars committed for the entire life insurance. To achieve this, we must build a policy that focuses on optimizing the aspects of cash accumulation of policy and must analyze the projected policy developments well into the future. We have provided several resources in the first step of this process. But until now we have said very little about the other. It has come up in passing several times, but today I want to focus specifically on it because it is a subtle, but extremely important element for building long-term maximized value in an entire life policy.
Analysis with leverage in mind
Extracting value from an entire life policy often means leverage. This comes in the form of taking out an insurance loan against the cash value of the insurance. This unique feature of life insurance unleashes a very powerful opportunity to build not only wealth but also income generation. The loan function in a life insurance policy insures cash value accumulated in your insurance as security from a loan issued by the insurance company. With this in mind, the more cash value you have, the more you can pledge an ever-increasing loan balance. This aspect of life insurance means that it can be extremely competitive with other savings / investment methods for accumulating pension income assets. But one of the tricky considerations in mortgaging assets for loans is the future value of said assets. For example, when someone takes out a share loan for their home, they do so in the hope that their home will increase in value over time. The same applies when someone provides security for a loan (a common practice among companies to raise the capital needed for other investment opportunities). One cool thing about whole life insurance is that we have a roadmap that shows us approximately what the asset will be worth well into the future and we can use the expected growth in the asset (ie the cash value) to extract larger amounts of value from the policy ̵
Example Three Policies Compared
Several years ago, I ran some life insurance illustrations for someone who wanted to evaluate three whole life insurance options for a cash value focused purchase. He was 38 years old then and was hyper-focused on building as much cash value as quickly as possible. But we also had a long conversation about the desire to use this policy for pension income at some point. In fact, the focus on early cash value always amazed me because he had no plans to move the money in the short term. Here is a comparison of year 1 cash values from the insurance accounting: f If you look at these three whole life handlers we can see that you are ahead the first year ; this happens to be the Guardian's policy. It is easy to assume that this gives the Guardian the advantage and that the policy is probably the best option. I think many people assume that the whole life policy with the most cash value from the beginning will continuously put together this higher amount of cash value and ultimately come before the others. Although this is intuitively meaningful, it is rarely true. If we look at the general ledgers at more advanced years (100 years especially in this case) we see that the order of who has the most cash value changes dramatically: Now, Penn's mutual policies have a significant lead and the MassMutual policy also comes significantly beyond the Guardian's policies, which have almost half the cash value that the other two life policies have. What gives? The whole life policy tends to become more effective over time. Some whole life contracts are better at this than others. But there is an even more important subtle point that I wanted to serve as the center of today's discussion. time. When evaluating life insurance for cash value accumulation, it is common for people to compare the estimated values at the age of 10, 20 or maybe 65 (usually because this is about the time many people think they will retire). Although it is okay to compare cash values at this time, we ultimately want to buy full life insurance for cash value because we want to extract value from it for a lifetime. Just looking at how much cash value is in the policy at any arbitrary stop along our journey (say, for example, year 20) tells only part of the story. We can be too short-sighted by using this approach and with a view of the lifetime value that is available to us. Keep in mind that extracting value from entire life insurance usually involves insurance loans. These loans simply balance the cash value of a life insurance policy against the rest of an ever-growing outstanding loan. The plan is that the insured eventually dies and the death benefit withdraws the outstanding loan balance – pays everything that remains after payment to the borrower. To do this means that we ultimately want to achieve the highest value when death takes place. We never really know which option gives the highest value, but we can make educated guesses about which option wins by comparing these general ledgers. Policies that report higher cash values in advanced years have a higher probability of giving the insurance owner more value during his lifetime. This, of course, requires a review of the underlying assumptions about how values accumulate in a life insurance policy. But with this cash, this analysis remains solid.
Short-term focus with realistic plans
We talk to many people who plan to use their entire life policy for some form of investment acquisition in a self-bank-esque strategy. For many of these people, short-term accumulation of cash values is extremely important, but sometimes they break the rules above because they have difficulty thinking more long-term. For example, the policy that has the most accumulated value after year 5 is the winner because it gives me the most money to use to build my real estate empire, which I would like to do sooner rather than later. The problem is that the difference between insurance values from one life expectancy to another within this time frame is usually relatively small – maybe a few thousand dollars, as we see in the example above. These people are literally approaching the entire lifeline with a plan to potentially lose millions in lifetime value for a few thousand dollars in the short term. It takes a lot of investment strategy to overcome the difference. Also, I have never sold an entire life policy to someone who utilizes every dollar within five years and really but that to work on making something useful for an investment strategy. In other words, the probability of needing every available dollar per year five (or whatever year it is) is very low.
The whole life is still mixed important
I want to be clear about something in connection with this discussion. Just because I say that the absolute absolute cash value in the short term may not be the best option does not mean that I suggest we ditch the mix because a non-mixed lifetime policy will catch up with a mixed much longer period. There is undoubtedly still a lot of value in having as much cash value as we can reasonably make available in the short term, but we must balance it with long-term value. Because what whole life insurance policies can unlock for someone can be life-changing, and we have a plan that looks both short and long term to maximize what we can accomplish with whole life insurance policies.