Eva Levine asked 12 months ago

Bill: 
What do you think of using CV as a family bank, and as it is being practiced?  Thanks.

1 Answers
admin Staff answered 10 months ago

There is nothing inherently wrong with using cash value life insurance as a bank. That being said, I too often see the benefits of it overstated. Many times consumers are fixated on the crediting rate of an insurance contract and believe, or are led to believe, the stated dividends or crediting rate is what they are actually earning on their premiums and that is not the case. In fact, often the policy is “underwater” for ten years or so, meaning the cash value is not even equal to the cumulative premiums. Accessing money from “insurance banking” is generally through a withdrawal or a loan. I find that many consumers do not understand the consequences of this and how important it is to meticulously manage a policy, especially a policy with loans on it. If this isn’t managed correctly, adverse tax consequence could be catastrophic. Finally, it is very important to understand what one is actually “getting” from the arrangement. It needs to be evaluated similarly to any other financial transaction and that is not always being done. There isn’t anything magic about life insurance. It is a dollars in, dollars out transaction. An involved financial analysis regarding opportunity cost, tax consequences, actual calculated internal rate of return, all upsides and potential downsides of the plan, etc. in of paramount important. Bottom line: it is neither good nor bad except as it helps you accomplish your goals relative to realistic alternatives and your risk tolerance.