I get hate comments once in a while, and while it's easy to pick on some of them, sometimes people do bring up important points that are not understood very well by the general public. Sometimes, just sometimes, I think of something to say to the legions of Suze Orman and Dave Ramsey fanatics. I received this comment on one of my posts concerning life insurance:

Source: /2009/03/buy-whole-life-vs-buying-term-insurance-and-investing-the-difference.html

SPOKEN LIKE A TRUE TRASH VALUE AGENTSPOKEN LIKE A TRUE TRASH VALUE AGENT, WHY DIDNT YOU TELL THEM ALMOST ALL OF THE CASH VALUE TYPE LIFE INSURANCE SUCH AS WHOLE LIFE UNIVERSAL LIFE AND VARIABLE LIFE SOLD TODAY KEEPS YOUR MONEY FOR THE FIRST 2-3 YEARS??>>WHY DONT YOU TELL THEM YOU EARN ONLY 3-4%??>>WHY DIDNT YOU TELL EVERYONE YOU ARE CHARGED TO BORROW YOUR OWN MONEY???? AND AT A RATE OF 6-8%!!!!>>WHY DIDNT YOU TELL THEM THEY KEEP YOUR CASH VALUE IF YOU DIE??!?!?>>HOW DARE YOU TAKE ADVANTAGE OF OTHERS

Posted by: Samuel Sweis

Dear Sam,

This isn't an argument:

>>>SPOKEN LIKE A TRUE TRASH VALUE AGENT<<<

That, above, is a pathetic attempt at putting down my sound, reasoned, argument using childish antics.

I'll try to address your questions:

>>>SPOKEN LIKE A TRUE TRASH VALUE AGENT, WHY DIDNT YOU TELL THEM ALMOST ALL OF THE CASH VALUE TYPE LIFE INSURANCE SUCH AS WHOLE LIFE UNIVERSAL LIFE AND VARIABLE LIFE SOLD TODAY KEEPS YOUR MONEY FOR THE FIRST 2-3 YEARS??<<<

In what sense do you mean "keep"? The insurance company invests the premium dollars you give them and then they credit interest to the policy. That money is yours and they give it to you. The fact that you might have a low available cash value in the early years of the policy reflects the fact that nothing is free. Over the life of the policy, the cost for doing business is normally between 1-2%,sometimes 3% if you are working with an expensive company. Banks and brokerage firms do the same thing, except that they spread the fee out over a lifetime of your investments. So, instead of charging you 2% on a $500 premium, the brokerage charges you .5% on $500,000 for as long as you stay investment with them.

>>>WHY DONT YOU TELL THEM YOU EARN ONLY 3-4%??<<<

Because sometimes you're earning more than that, silly. However, you're right. Sometimes you do earn 3-4% in these policies, which is why I think it's fair to understand that the underlying investments in many cash value policies are bonds.


>>>WHY DIDNT YOU TELL EVERYONE YOU ARE CHARGED TO BORROW YOUR OWN MONEY???? AND AT A RATE OF 6-8%!!!!<<<

Because you're not charged to borrow your own money back. Policy loans are a loan AGAINST THE VALUE of your policy. Like a home equity loan is a loan AGAINST THE VALUE of your home. The insurance company is loaning you money and securing that loan with your insurance policy which is why you never need to fill out any application forms or do a credit check.

The money never actually leaves the policy. Instead, it stays in the policy and continues to grow at interest. So, your net interest charged to a loan is normally much, much less than 6-8%. In fact, it's virtually impossible to get a  loan that is cheaper than a life insurance policy loan because many of them are 0% or arbitrage loans where you EARN money when you take a policy loan.

Even if you had to borrow your own money back once it was inside the policy, ask yourself this: "would I rather pay 15% capital gains tax on my investments, a minimum 10% ordinary income tax on my investments, or 0-3% simple interest on my investments?". Most people would choose 0-3% over 10%, 15%, 25%, or more when it comes time to spend that savings. It does not sound like you would be open to doing that. That's too bad. You sound like someone in need of good financial advice.


>>>WHY DIDNT YOU TELL THEM THEY KEEP YOUR CASH VALUE IF YOU DIE??!?!?<<<

Because the life insurance company DOESN'T keep your cash value when you die. They give it to your family in the form of the death benefit. The cash value is a reserve against the death benefit. Your death benefit is a cash advance of sorts against your future savings. Your cash value effectively becomes your death benefit at your death. Actually, it works out to be much better than your cash value while you're alive, since the death benefit is higher than the cash value. What you are asking is for the life insurance company to pay you two death benefit claims for the price of one. You've probably heard the phrase "you can't have your cake and eat it, too". Well, you can't have your cash value and your cash advanced death benefit, too. It just doesn't work that way.


>>>HOW DARE YOU TAKE ADVANTAGE OF OTHERS<<<

I'm providing free information to everyone who visits this blog. I hardly think I'm the one "taking advantage" of anyone.

You might also like

1. Universal Life Policy: Is This Flexible Insurance Contract Right For You?
2. Whole Life Insurance vs Term Life Insurance vs Universal Life Insurance
3. Dear Dave: Estate Planning
4. Life Insurance: Myths & Facts
5. Life Insurance & Common Sense

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This entry was posted on January 14th, 2010 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Insurance & Savings, Retirement Planning