Christian Financial Perspectives
185 – The High Cost of Cash Value Life Insurance
The High Cost of Cash Value Life Insurance
Discover which type of life insurance should be best for you!
Are sky high fees making cash value life insurance a poor investment for you? Should you just buy term life insurance and invest the difference yourself? Bob and Shawn discuss the true cost of cash value life insurance, such as whole life and universal life. Life insurance is almost always a must to protect your family and immediate loved ones in the case of your death, especially from your 20’s to 60’s.
This episode highlights the various fees and charges associated with these policies, including upfront premium loads and surrender charges. No matter what you decide after listening to this episode, it is highly recommended to seek advice from a fee-based advisor or CPA.
HOSTED BY: Bob Barber, CWS®, CKA®
CO-HOST: Shawn Peters
Mentioned In This Episode
Christian Financial Advisors
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Bible Verses In This Episode
LUKE 14:28-29
Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you.
PROVERBS 22:3
The prudent see danger and take refuge, but the simple keep going and pay the penalty.
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EPISODE TRANSCRIPT
Shawn:
Are sky high fees making cash value life insurance a poor investment for you? Should you just buy term and invest the difference yourself? Let’s get some perspective.
Welcome to another episode of Christian Financial Perspectives. We’re so glad that you’ve joined us, whether that’s video or audio. My name is Shawn Peters and I’m joined as always by my co-host, Bob Barber. And today we are going to be talking about the true cost of cash value life insurance, which of course goes by many different names, the most common being whole life and universal life. And we’re going to talk a little bit about some scriptures that I think go really well with this and when it is actually useful versus when many times it gets sold. And so, really the point of this is either it’s for you if you’re considering whole universal life or probably someone that you know, hopefully this will help them make the right decision. So as with all things, we want to start with scripture and we want to make sure that we equip people to make good financial decisions using Biblical principles. So Bob, anything to add before we get into the scripture?
Bob:
Nope, I think we’re ready. Okay.
Shawn:
Luke 14:28-29, “Suppose one of you wants to build a tower, won’t you first sit down and estimate the cost to see if you have enough money to complete it for? If you lay the foundation and are not able to finish it, everyone who sees it will ridicule you.”
Bob:
So I want to say something here. The reason I picked this scripture, and we’ve used this scripture many times, but one of the reasons estimating the cost is talked about in this scripture. You’ve got to know the cost of something before you go into it, not after you’re already in it.
Shawn:
That’s right, that’s right. And our second verse, Proverbs 22:3, “The prudent see danger and take refuge, but the simple keep going and pay the penalty.”
Bob:
You could pay severe penalties with cash value life insurance, which we will talk about later.
Shawn:
That’s right. Okay. Cash value life insurance, unlike straightforward term life insurance in most cases, is sold as 1) A retirement plan alternative; 2) a college savings plan; 3) Bank on yourself plan; 4) A savings plan; and 5) Which in some cases for very highly valued estate to cover estate taxes and other complex planning cases for taxes.
Bob:
That’s about 1/10th of the population on that fifth one by the way. Okay. Because it means your estate would have to probably be over $20 million before there’s going to be an estate tax problem, a married couple.
Shawn:
So anything we should know yet on those five, Bob?
Bob:
Not really, but I know Shawn, that what got me excited about this was a couple of weeks ago you sent me a video about this bank on yourself plan.
Shawn:
That’s right. I think the current term that they’re using is “infinite banking”.
Bob:
Oh, is that what they’re using today?
Shawn:
Yeah. I think that’s what they’re calling it.
Bob:
The bank on yourself plan is what they were using 20 years ago.
Shawn:
It’s same thing, just slightly different name.
Bob:
We’ll go into this, but I think it’s important that you know this is how cash value life insurance is sold, and there’s four types of cash value life insurance policies. Their main one is variable universal life. And that has to do with, you could pick any, you have your pick of subaccounts that are like S&P 500 index or a large cap fund, small cap fund etc.
Shawn:
It functions a little bit more like a variable annuity, for example.
Bob:
It does.
Shawn:
Similar.
Bob:
Even a 401k that has all your choices in it. Okay. Another one is indexed universal life. That came out when fixed indexed annuities came out. Then we have universal life that came about, gosh, that’s been around 35 or 40 years. It’s kind of tied to the interest rates where interest rates are. So it may be getting more attractive today with interest rates being higher. And then the old kind of policy, whole life life insurance. Whole life insurance has been around, I think, probably a hundred years or longer. It’s built empires, I can tell you that. We share later in the program. Today, I was writing this thinking about this, is that the largest nicest buildings in America are life insurance buildings, life insurance buildings.
Shawn:
It’s almost like they’re making money off of that.
Bob:
Yeah, I think so. Exactly. You think about cash value life insurance, there’s a lot of fees and expenses, and that’s what we’re here to really educate you on. We’re here about educating you with wisdom. So we’re going to go through a lot of the cost of a cash value life insurance plan. Remember, that’s just universal life, variable universal life, whole life, or indexed universal life. The number one thing up front is that even before your money goes in, Shawn, there’s an upfront premium load in sales charge that compensates for the sales expenses. This is for marketing the policy. The high commissions that are paid to the life insurance agent that sells this. And also most people don’t realize this, there’s state and local taxes that actually come with cash value life insurance, and they’re deducted from every single payment made to the policy before it’s even applied to it. So right up front, it’s usually a 5-7% charge, which is pretty high.
Shawn:
Kind of look at that as when people have a mortgage payment earlier in the loan, there’s obviously a pretty high percentage of the regular payment that goes to the interest. So you’ve got to pay well over and above that if you want to actually try to pay it down in the capital faster. So same thing here. So you have that premium that you’re paying, but there’s quite a bit in fees, it gets taken right off the top.
Bob:
So if you’re paying a $200 a month premium or payment, they call it premiums in the insurance industry, then you could think about $20, probably around $20, $15-20 of that has already just kind of taken off the table. Okay. Next are the ongoing administrative fees, which can also, that comes out, too. So now, you’ve had this upfront load come out. Now you’ve got this ongoing administrative fee that’s used to pay the policy costs, all the accounting and the record keeping that goes into this. And these are usually deducted monthly or some cases it’ll be annually, which is another charge.
Shawn:
That’s right. So next, number three, we have mortality and expense risk charges. So when a life insurance company issues a policy, they estimate you’ll live to a certain age based on your current age, gender, and health. A mortality and expense charge compensates them if the insured does not live to the estimated age. This charge is generally once a month.
Bob:
So now we’re at three different charges. Right?
Shawn:
That’s right. We’re already at three different charges.
Bob:
There’s a lot being taken out. Next is if the sub-accounts are in there, there’s high fund management fees. You’ll notice that the fees are higher inside of a variable universal life than it is outside by itself or like an ETF that you could buy really low cost out in the marketplace.
Shawn:
So effectively it’s another fee where those funds that you’re in, you’re getting charged to be in those funds within that life insurance policy.
Bob:
Charged a little bit more possibly than you are if you’d just gone direct to those funds. Okay. A little bit in there for the insurance company and then…
Shawn:
We thought taxes were bad.
Bob:
Yeah, I mean this just, it really starts taking out, it’s chipping away more and more and more chipping away. And then we do have, which is kind of like the mortality expense charge, but it’s the actual life insurance cost itself, which if you buy term and invest the rest, you’re still going to have that life insurance cost. But this is based on your age and your gender, your underwriting classification. How healthy are you when they’re issuing the policy?
Shawn:
Well, and of course this particular cost compared to term is also going to be quite a bit more expensive since term at least has a fixed term or period like the name implies. But with these different types of cash value life insurance, they don’t have an expiration. So just comparing apples to apples, it’s still going to have a slightly higher insurance cost itself.
Bob:
And again, this charge is assessed monthly.
Shawn:
That’s right. So another monthly fee. So the last one are high surrender charges and fees that are deducted from the cash value if you surrender or terminate the life insurance cash value policy during the surrender charge period, which usually varies between 10-15 years, a fairly long time.
Bob:
That’s a long time. It really is. So you go put $20,000 or $50,000 in one of these, it could be a very, very long time before you can get that 50k plus all the earnings that it’s making back.
Shawn:
That’s right. And they do that obviously, because the insurance company doesn’t really want you to pull the money back out or surrender it early.
Bob:
And you’ve got to evaluate all these different fees that go into it. It’s very, very important to do that. I mean, the question is, should you buy cash value life insurance as a retirement, college savings, bank on yourself, or savings type of plan? And Shawn, in almost all cases, the mathematical answer to this question, you know me, I always say it’s just math, is a resounding no. No, you shouldn’t.
Shawn:
So almost all cases when you look at the math, the answer is no, you should not.
Bob:
Right. You’re better off buying a much less expensive straight term, 10 or 20 year level term policy.
Shawn:
You could even do 30 if you wanted, especially if you’re starting younger.
Bob:
When it first started off with term, it was just annual renewable term, and then they went to the level 5, 10, 15, 20, and now, yeah, you can go all the way 30 years out and if you’re in your mid thirties, buy a 30 year term and they’re going to, I mean the prices are so much lower than buying whole life. Take that difference, because you’re buying it pennies on the dollar.
Shawn:
Oh yeah. I got a 30 year term life insurance when Jenna and I first got married. And so I’m still in my twenties and I mean it’s super cheap. I’d have to go look at the bill, but I mean it’s very, very cheap. And then when I went to get an additional policy, another 30 year in my early thirties after Rhonan was born, it was quite a bit more expensive, but still very cheap. It was more than what it was in my twenties, but still even in my thirties, getting another 30 year to add some additional coverage on there just in case something happens to me and the house gets paid off, the kids have money, and it’s crazy how cheap it still is, even in your thirties.
Bob:
It’s cheap for a 30 year old. It’s not cheap at 61, though. Y’all I’m there now, but thank goodness I don’t need life insurance anymore. The kids are out of the nest. We have adequate savings and investments, we’re debt free, so we don’t need life insurance anymore.
Shawn:
Well that’s really the point when you hear people say, “Buy term and invest the rest,” the reason for that is when you look at a chart and you’re looking at over time, basically your term life insurance in this case is to help cover the assets that your family might need if something should happen to you prematurely. But over time, as you continue to build your savings and your investment assets, that number will be higher and higher than your term to where eventually when the term turns out you don’t need it. That’s kind of the whole point is to help you get over that difference.
Bob:
The whole goal is you start off with this amount of insurance you can see here and you’re this much in savings and they flip flop.
Shawn:
Exactly.
Bob:
And then the savings comes up here and you’ve got your insurance down here. And it makes sense because the older you get the insurance companies, there’s mortality tables, they know you’re getting closer. We’re all going to die someday. And the older you get, the less years you have.
Shawn:
So you’re saying someone at 85 is more likely that they might not live another 30 years than someone in their thirties?
Bob:
Exactly. All these expenses that we went over today are very important to understand and know. I do want to say this, though. There are some cases for those that want permanent life insurance…
Shawn:
Where it makes sense.
Bob:
It makes sense. Right. Because you have a level premium your whole life. Also, if any health issues change, it’s there with you. It’s not going away. Other reasons may be, like we mentioned at the beginning, if you have a major estate tax problem, but today, husband and wife together combined, estate planning, you have to be over 20 million. That means 1/10th of the population needs that.
Shawn:
If you need the life insurance for that. Congrats. You’ve done pretty well.
Bob:
I do want to mention that there is 99% of the cases we’re saying buy that term, but in whole life, universal life, index life, there is a clear winner in these policies. You want to say who the clear winners are, Shawn?
Shawn:
In someone actually buying one of these cash value life insurance, right?
Bob:
Yeah.
Shawn:
The sales person and the insurance company.
Bob:
Exactly.
Shawn:
Because the sales person gets the huge commission. The insurance company gets to collect not just your premiums, but all the extra fees and expenses for years on end, like we talked about before. It could be 15 years, even if you wanted to get out of it, or you pay a bunch of penalties. Yeah. I mean, why do you think insurance agents and insurance companies love it so much?
Bob:
And that’s one of the reasons a good old farmer told me one time that the insurance companies and banks are built of marble and granite and our homes are built of sticks and stones. So bottom line is count the cost. Like we said in the beginning with the scripture we shared. Count all the costs before entering into a cash value life insurance policy such as whole life, universal life, et cetera, and have a fiduciary fee-based advisor or CPA that does not sell life insurance. There’s no reason for them to analyze the real facts about what you’re getting into. It’s very, very important. Don’t have a commission-based life insurance person.
Shawn:
Yeah. I mean it’s a conflict of interest. I know that maybe should seem obvious, but the point is don’t ask someone for advice about whether or not you should buy a product that they directly benefit significantly from financially. It’s not a good idea.
Bob:
And they are taught Shawn in class after class how to make it look appealing, and they’re very good at what they do because they spend hours of teaching how to sell these policies.
Shawn:
Yes. Because it’s about selling the policy, not what’s doing right for the client.
Bob:
In the end, folks, life insurance is very important. It’s very important for somebody, especially like you, Shawn, you’re younger, you haven’t gotten to the millions yet or even the hundreds of thousands yet, okay. And with that term policy, immediately you’re covering your family. I have seen many, many cases, I’ve been around a long time in this business, over 30 years, and I’ve seen families saved where the breadwinner has had a unfortunate either accident or a disease like cancer strike them and take their lives. And thank goodness the life insurance was there. As a general rule of thumb, I always say multiply your annual income times 10-15x and that’s the amount of insurance you should need. So if you’re making a hundred thousand a year, you need about a million to a million and a half of coverage, and it’s not going to be much with a term policy. Go with a term policy. And by the way, don’t forget to invest the rest. I would say if you got a good 401k, invest in that 401k and take that match that your employer’s giving.
Shawn:
Max that out as much as you can. That’s right.
Bob:
I hope this has been educational today.
Shawn:
Yeah, hopefully. If this doesn’t apply to you because you’re not considering one of the cash value life insurance, I’m sure you know someone that is considering it or has talked about it or will come up in conversation at some point. So hopefully this will help them as well. Alright, well thanks as always for joining us and God bless.
[DISCLOSURES]
* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.
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