So What Do I Do With My Cash Value?

by Dr. Monroe Mann, PhD, Esq, MBA, LLM, ME

Licensed Life Insurance Salesperson

What Do I Do With My Cash Value?

First, you may be wondering what cash value I’m referring to. The answer: the cash value of my whole life insurance policies. Wait! Keep reading! I know life insurance is ‘boring’, but what I am about to explain is exciting!

Far too many people think that life insurance is just a big expense with no ‘pay day’ for the person who owns the life insurance policy. Not true! The truth is that a whole life policy is an amazing investment that helps to round out your portfolio precisely because of its cash value.

Three years ago, I purchased a whole life policy. I purchased another one last year. Right now, the total cash value of my two whole life policies is about $1,000. Last year, they were below $300. By this time next year, it will be more than $2,000, and very soon, more than $5,000.

Wait, so that’s actual money? Yeah! The way a whole life policy works (and why it is more expensive that a term policy) is that you pay more money each month, but that money that is not used is then returned to you through dividends which end up building up the cash value. In the first few years, the cash value build up is very low, but with a bit of patience, you soon start to see the cash value starting to skyrocket. The cash value, then, essentially becomes a forced savings plan for you, but one with a HUGE benefit at the end for your beneficiaries. In other words, a whole life policy helps you right now, and helps your beneficiaries later. It’s a win-win.

Now, the way a typical whole life policy is priced, it is designed so that by the time you reach age 100, the cash value equals the death benefit. However, you can also purchase a policy in full in twenty years, or even in ten. Here’s a potential example with a typical healthy 40-year old male who decides to purchase a $100,000 whole life policy through a 20-year payment plan of $2,736 per year of premium, or about $228/month:

At age 40 - 42, the cash value will be: $0

At age 45, the cash value will be: $5,694 minimum

At age 50, the cash value will be: $16,631 minimum

At age 60, the cash value will be: $42,904 minimum (and… the payments to the insurance company STOP)

At age 70, the cash value is STILL growing, and is now worth $57,373 minimum.

In other words, cash value really is an investment, because you are no longer paying in any money, but the cash value continues to grow.

Now, I purchased my policies about three years ago, and I bought traditional whole life (rather than a 20 pay), so the payments are much lower, the cash value grows a bit more slowly, and the payments continue for life.

But… that last point is not a big deal, as I am about to explain. I am now finally going to answer the question: what do I do with my cash value?

1. POLICY LOAN: Right now, I have a credit card with two thousand dollars on it. The interest rate is a little high. Although I am paying it down, it’s not going down as quickly as I would like. Well, I can take out a policy loan on my cash value at a flat rate of 5%. This interest rate is considerably lower than the credit card. So, once my cash value rises and my credit balance decreases to the same amount, which will happen very shortly, I will use a policy loan to fully pay off the credit card, and then repay the insurance company at a far lower rate. Of course, a policy loan can be used for any purpose whatsoever. Your whole life policy essentially becomes your own private bank, where you can get a low-interest bank loan for anything you want to do, without bank approval. Pretty cool. Best parts: no fixed payment plan; no credit check; the loan doesn’t show up on your credit report; you can’t be turned down; and no approval process! You make a phone call, and the money is yours. Awesome!

2. EMERGENCY FUND: Even when I take out a loan, the cash value is STILL growing, as if I had never taken out the loan. And the cash value will be growing again as I pay back the loan. So very quickly, I will again be increasing the balance in the cash value, and that cash value can act as an emergency fund, should I need money quickly. This is NOT a loan. In other words, I can just take the money out if I need to, and it’s my money, and I don’t have to pay it back. That’s something many people don’t realize: the money in the cash value is yours. You can do what you want with it, and the death benefit is simply reduced accordingly. Usually, a policy loan is a better move, but the choice is yours. Technically, the life insurance companies have the right to wait 6 months prior to giving you the money, but that is rarely enforced—it’s there to avoid bankruptcy to the insurance company if suddenly there’s a run on the bank type of situation.

3. BUSINESS LOAN: You can also, in certain circumstances, use your whole life insurance policy as collateral for a loan from another bank. But in most situations, it makes more sense to take out a policy loan directly from the insurance company.

4. PAYMENT OF PREMIUM: Eventually, my cash value is going to grow to be a significant amount of money. I don’t have to wait 30 years---even just five years from now I’ll see a big chunk of change there. And the dividends will continue to be paid to me every year. I can, at any time, tell the life insurance company to use my cash value to pay my monthly premium costs.

5. REDUCTION OF PREMIUM: Another great option to consider is reduction of premium. Right now, I am using my dividends to add to my cash value and to increase the amount of my whole life policies’ death benefits. However, I can also direct the insurance company to use the dividends to reduce the amount of my monthly premium payments, so that I pay less money each month.

6. PEACE OF MIND: Perhaps the greatest benefit of that cash value is peace of mind, provided to me through the knowledge that the cash value itself is giving me (and not the beneficiary) many benefits right now while I am still alive. It’s a financial cushion in case of a problem. It’s collateral for a loan. I can take out a policy loan for anything I want. I can decide to stop paying premiums if I need to or want to. I can reduce the amount of the monthly premium paid. I can breathe easy at night knowing that I am not wholly dependent on my monthly income from my job—I have a safety net on multiple levels, and a personal bank ready to jump into action whenever I need it, should the need arise.

By now you should know the reason why whole life cash values are so valuable. And why I wish I had started twenty years ago, instead of waiting until I was 37.

I’m hoping that if you’re reading this, you will be wiser than me: take my advice and get whole life insurance now. Don’t wait. The sooner you start will be another few thousand dollars added to your cash value, and another year of greater peace of mind accrued!

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