Updated: Oct 30, 2021
I recently wrote an article about CASH VALUE and the COST OF INSURANCE INSIDE YOUR LIFE INSURANCE POLICY https://www.carranofinancial.com/post/cash-value-vs-cost-of-insurance-in-your-life-insurance-policy where I describe how the cost of insurance can implode the cash value inside your life insurance policy if not funded properly.
Well, another way to implode your life insurance cash value is to take policy loans. This will accelerate the implosion of an improperly funded life insurance policy, but even a well funded life insurance policy is susceptible to it's owner's thirst for cash.
I have always advised my clients to overfund their policies and not to lean on the policy as the first place to go when you get into a jam. Of course, in these times, one can imagine how many families are doing just that. I'm quite sure there will be a record number of policies lapsing in the coming months.
The policy loan feature is typically a hot button item that an insurance agent will emphasize when proposing an insurance policy. When the agent presents the policy illustration for the client to review, the client can see the guarantee values as well as the non-guarantee values. The non-guarantee values will show what the policy cash surrender value will be on a NON-GUARANTEE BASIS, meaning if things go as planned, this policy will do better than the GUARANTEED value in the future.
If you have taken a loan from your life insurance policy's cash value, you should be very aware of the potential devastation your policy might face years down the road. I always recommend paying back the loan to the policy as fast as possible, because the cost of insurance inside a permanent life insurance policy is not level. The cost goes up every policy anniversary date. For example, your policy might cost you $100 per month in your 30's, but the same life insurance policy will most likely cost you hundreds more per month in your 50's and beyond.
If you've taken a loan from your life insurance policy, you should make sure you understand the current status and future projections of your policy by asking your agent or broker to provide an IN-FORCE PROJECTION to you. You can also do this by meeting with your financial planner and asking for assistance in this matter.
In some cases (if not many), the client should have purchased term insurance, but was persuaded to go with the permanent policy in order to be able to utilize the cash value as a savings tool/account. I have saved more than a few clients from having their policies lapse and losing the remaining cash value by performing the IN-FORCE PROJECTION. That's not to say that there isn't a good reason to purchase a permanent policy. I just don't think using the cash value/loan provision feature as the driving force to purchase permanent life insurance is logical. Another option a client has is to purchase a permanent policy with a guarantee that the policy will not lapse, which is called a (GUL) guaranteed universal life policy.
By running the in-force projection, you can immediately recognize when a policy will lapse. It might be years away or just months away. Often, the cash value inside the policy will be in the thousands, but the projection will still illustrate that based on current circumstances, the policy will fail in the future. It is best for the client to have this information as soon as possible, so he/she can make a decision as to whether or not to put more money into a policy that will most likely fail/lapse.
If the client is healthy, he/she can obtain new coverage and either cash out the old policy or do what is called a 1035 exchange https://www.irs.gov/pub/irs-drop/n-03-51.pdf to fund the new policy.