Cash Value Life Insurance – Advantages and Disadvantages
Cash value life insurance has been a big controversy amongst financial planners over the years. Some say it is a great tool because you can build a retirement account to offset your retirement income on a tax free basis. Others say it is a terrible investment because of the fees associated with the product, and that you would be better off investing the money directly into a mutual fund or some other type of investment with much lower fees.
Anyone advising you to buy or not to buy cash value life insurance without first reviewing your taxes, income, goals, investments, pensions, current insurance plans, as well as other factors is merely a sales person and you need to be getting advice from a professional investment advisor.
Here are things to consider when deciding if cash value life insurance is right for you:
- Are you maxing out employee retirement plans? If your employer offers you a matching plan, you should take advantage of all the free money that you can. For example: if your employer matches you one dollar for every four dollars you put in the plan, you are automatically making 25% on your money before you’ve even made a return on the market. Taking advantage of all the free money you can would be ideal, up to the maximum that your employer allows.
- Taxes – Your current tax bracket and effective tax rates should be reviewed and compared to a mock tax return based on when you are planning to retire. If we know your current deductions and exemptions, and can determine if you are going to be in a higher or lower tax bracket at retirement age, we can better identify what type of accounts you should be in for the long run.
- Fees – When reviewing a cash value plan, it is important to discuss fees and if the fees outweigh the benefits. While considering fees, you should also consider the tax savings you will receive. Let’s say you have a choice between two investments: one that costs you $500 a year and another that costs $1500. Most would lean towards the one that costs less per year. However, if the investment that costs $1500 will give you the ability to save $4000 a year in taxes when you retire, this is something you should not ignore.
- Are you maxing out what you can put into retirement plans? Some people are maxing out what they can put into their available retirement plans and may need another avenue to continue saving for retirement in a tax-efficient manner.
These are some things that should be considered along with many others when deciding on a cash value life insurance plan. If the advisor is making a recommendation before hearing the details of your situation, you know they are biased and you are dealing with a sales person. You should seek advice elsewhere and consult a professional investment advisor.