Life or Death (Insurance)?

life and death

I think we should refer to things for what they are and what they intend to do.  Don’t you agree?  Let’s examine life insurance.  Most people are familiar with the names Term life insurance and Cash Value life insurance.  Both are called life insurance yet they are completely and fundamentally different.  Term life insurance does one thing—it provides tax-free money to your family when you die.  The “Term” part of Term life insurance means that the premium is set for a specific period of time.  Premiums are set by the insurance company and the owner decides how long to set the term period.  The longer the term period, the higher the premium.  The policy does not expire at the end of the term period, instead the insurance company sends a letter informing the owner that the term period is expiring and a new premium is required to keep the policy in force.  The new premium represents an increase over the term premium and is usually dramatic to the point that most people either can’t pay it or won’t pay it.  The insurance company sets a new premium each year moving forward and the owner decides if they want to pay the premium or not.  When the premium is no longer paid, the policy dies.  Term life insurance is a product that is engineered around death.  Either the owner is going to die and the beneficiaries benefit or the policy dies and the insurance company benefits; after all it has collected premiums for the “Term” and now has no future obligation.  With so much emphasis on death, wouldn’t it be better if this was called DEATH insurance instead of life insurance?  One could purchase a disability rider on the policy.  It would provide a life benefit in the event of a disability where the insurance company would be obligated to pay all future premiums while the owner is alive AND the death benefit when the owner dies.  A disability rider requires an additional premium and the insurance company does a very interesting thing when there is a claim on this rider.  I will discuss this a little later.

Let’s move on to Cash Value life insurance.  Cash Value life insurance and Term life insurance are completely and fundamentally different.  Term life insurance is a PRODUCT designed to do one thing; provide a death benefit.  Cash Value life insurance also provides a death benefit, but it is more than just a product.  It is a PLAN!  A PLAN designed to provide benefits during every phase of our financial lives.  Those phases are contribution, accumulation, distribution, and transfer and all of us have the same phases.  With a Cash Value life insurance plan, the owner decides how much to contribute to the plan.  The death benefit aspect of Cash Value life insurance plan allows the insurance company to determine the minimal contribution needed from the owner and it also allows them to calculate the maximum contribution the government allows.  An owner can contribute more than the government’s maximum but the policy loses some of its tax advantages, which now leads us to the accumulation phase of the plan.  With a properly designed Cash Value life insurance plan, the owner will be able to take advantage of tax-deferred growth of the cash value and tax-free access to the cash value as well.  The owner has several different options on how to accumulate cash value.  They can lock in an interest rate that the insurance company would pay, the cash value can be tied to an indexing strategy, it can be invested in mutual fund like accounts to capture market rates of return, or the owner can invest in the insurance company and earn dividends if the company is profitable.  With a properly structured Cash Value life insurance plan, the death benefit increases with the cash value growth so that plan maintains its tax advantages of tax-deferred growth and tax-free access.  Also during the accumulation phase, the cash value provides a collateral position that allows the owner to obtain lower financing rates on loans for major purchases like cars, college expenses, appliances, and vacations.  It’s not so hard to understand as it may sound.  During the owner’s distribution phase of their financial life, the plan can provide a guaranteed lifetime income stream like an annuity would provide or the owner can coordinate tax-free withdrawals from the plan with withdrawals from other taxable/tax-deferred accounts in an effort to keep income in a lower tax bracket.  Lastly, with a cash value life insurance plan, death insurance is already built into the plan ensuring that tax-free money will be passed to the plan’s beneficiary. 

Cash Value life insurance is a PLAN designed to provide many lifelong benefits and increase efficiency in a person’s financial LIFE.  It’s not a product designed for one purpose the way death insurance is.  I forgot to mention that a Cash Value life insurance plan also provides other living benefits too.  They include:

  1. The ability to spend most of the death benefit value on long term care expenses associated with chronic illnesses.
  2. The ability to spend most of the death benefit value if diagnosed with a terminal illness.  Most death insurance policies will allow for this also.
  3. Unrestricted access to the cash value in the plan.
  4. Disability benefits.  One can purchase a disability rider with a Cash Value life insurance plan that shifts the plan contributions to the insurance company in the event of disability.  The owner continues to receive ALL the benefits of the plan without paying anymore into it.  The plan doesn’t die.  Earlier I mentioned that you can purchase a disability rider with a death insurance policy and the interesting thing most insurance companies will do is that they convert the death insurance policy into a Cash Value life insurance plan.  Interesting! 

I’m sure you will agree that a Cash Value life insurance plan has more to do with life and solving life’s problems than a death insurance policy.  Why is death insurance referred to as life insurance then?  Confused?  You’re not alone.  Starting today, I’m going to start referring to Term life insurance as DEATH insurance and Cash Value life insurance as a Cash Value LIFE insurance plan.     

This article is not intended to devalue the benefit of death insurance only simply to identify that we should refer to things what they really are instead of what they are not.  Keep it simple!  I personally own two cash value life insurance plans and a death insurance policy.  I was the beneficiary of a death insurance policy 10 years ago when my wife passed away.  We live in a world where people are not taught to control their own personal financial economies and we are seeing problems manifested because of that.  A Cash Value life insurance plan can help solve these problems!   

Guarantees mentioned herein are backed by the claims-paying ability and financial strength of the issuer.


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