A Case Study
Let’s assume Jane is a 45-year-old high income earner who has a substantial death benefit need and is interested in purchasing a cash value life insurance policy.
Initial Death Benefits
Jane pays $50,000 of premiums for 20 years. Rates of returns vary and death benefits vary by product. Hypothetically, with the premium Jane intends to contribute and assuming she is in very good health, her planned premium may allow for an initial death benefit of approximately $1,500,000 (remember, our goal is to minimize such initial death benefit so as much as possible of her premium goes towards cash accumulation for later use), such death benefit would be paid to her beneficiaries income tax-free if she dies prematurely.
Cash Accumulation
Jane did not buy this cash value policy only for the need of death benefit, she bought it for the potential of cash accumulation as well. To meet her twin goals, designing the policy the right way is most important. Even though the initial death benefit is $1,500,000, the death benefit increases for 20 years to accommodate the premium contributions without causing the policy to be classified a MEC.
Cash Distribution
Then in year 21, the death benefit no longer increases. With 20 years cash accumulation, the cash value of the policy could be approximately $2 million with a death benefit of close to $3.5M, resulting in a potential $2 million to supplement Jane’s other income. Of course, this is a simplified scenario (actual results will vary) to illustrate how a cash value policy could work for Jane in this strategy.
Cautions
Actual results may vary based on actual returns and individual circumstances, for example, a whole life policy could have more stable returns while an index universal life could have a closer link to stock market performances. It's important for the plan designer and Jane to take care to manage the policies to help achieve the desired results. Additionally, a personalized life insurance illustration should always include assumed rates of return selected by the client, the impact of 0% investment performance, and maximum guaranteed charges.
Conclusion
This case study highlights the flexibility offered by the additional source of retirement income in cash accumulation life insurance. The cash value could be used to help pay off a mortgage, go on a cruise, or help offset unexpected expenses during retirement such as unexpected health care costs. Whether the cash is used for leisure, general outlays or extraordinary expenses, or not used at all, having the cash available is important for someone who desires to have a diversified sources of income during retirement life.