The Options You Have When Choosing a High Cash Value Policy

joshuaMany people are unaware they have options when it comes to creating a high cash value life insurance policy. And, to be honest, I wasn’t able to offer these options for a long time, and most people in this business still do not have this ability.

So, being able to give you options has been something we are pretty proud.

But enough chatter, what are the options?

Simply put, we can choose between having more long term growth policy, or, we can choose to have a little less growth over the long term, with a lot more cash value available up front.

Let’s look at the high early option first, and then compare the two.

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High Early Cash Value

This is a relatively new option, even for me. However, it’s a great option for many people because it solves a problem. What if I need money now, but I also want to get that money growing for the future?

A high early cash value policy works wonders for these people. In the past, I would have someone come to me with one of these problems–they needed business capital, they were trying to get out of debt, or whatever else may fit into this category.

But, after seeing 40% of their capital gone in year 1 we really couldn’t make anything work. They needed capital now, and couldn’t wait.

Life insurance is a long term tool. The long term benefits were awesome, but short term, well that was the problem. It didn’t help with the short term need while providing the long term benefit.

Then, the high early cash value policy was introduced.

It solved all of these problems. Now, someone who was in a situation where they wanted to start saving today, but they needed access to capital quickly, had a product that fit.

Let’s look quickly at the first years of an example. This is on a 30 year old.

–Year– -Contribution Total- -Cash Value High Early- -Cash Value Long Term-
Year 1
$4,800
$4,187
$2,279
Year 2
$9,600
$8,781
$4,679
Year 3
$14,400
$13,559
$8,648

 

There is a big difference in cash value in the early years. In year 1, we have 87% of our contributions available in cash value in the high early cash value policy. Contrast that to having just 47% in the long term growth policy (every situation will vary please be aware of that).

So, for those who need capital right away, or for those who are just leery of the system and need to see quick cash value to be comfortable with their decision, the high early cash value policy makes a lot of sense.

It offered them use of a majority of their capital. This gives them the ability to start saving with all the advantages of life insurance, while still being able to take loans to pay bills, run a business, make an investment, or any other short term need they had.

Long Term Cash Value

There is however, a benefit to not having all those dollars available immediately on. That is, having a policy based solely on the long term outcome.

Now, neither of these have any restrictions on cash value. We can still borrow from our cash value. But, as you can see, the long term policy has less cash value available up front to use.

The nice part about either one of these policies is you are still going to have good long term growth. However, the long term policy has about .05% more growth. A small number, but it make a significant difference over a 40-60 year period.

Now, I am not comparing these to say 1 is better than the other. I am merely showing you the options and benefits.

I just want to add, quickly, that every years will make a bigger difference than the type of policy you choose. You would be much better off starting a high cash value policy now then waiting 5-10 years so that you can have a long term policy.

That being said, let’s look at the long term difference in year increments of 5. That way I can cover more time and show you how the spread works. I think for those still studying high cash value life insurance, this will also give you some good insight into how these policies grow.

–Year– -Contribution Total- -Cash Value High Early- -Cash Value Long Term-
Year 15
$72,000
$85,967
$88,062
Year 20
$96,000
$135,707
$142,859

 

This is the point where they start to break. They are about even at year 15, and then the long term begins to take off.

These numbers and percentages vary based on the starting year, so they will be different on a 40, 50, and 60 year old than someone starting at 30 year old.

–Year– -Contribution Total- -Cash Value High Early- -Cash Value Long Term-
Year 25
$120,000
$203,967
$215,842
Year 35
$168,000
$408,472
$439,330
Year 45
$168,000
$674,357
$770,346
Year 55
$168,000
$1,080,256
$1,294,190

 

Remember, we stop putting new money in, in both cases, after 35 years (at age 65). Our total contribution is $168,000. As time goes on, the difference become more significant, because we have a high rate of return.

In the last year I have documented here, our total internal rate of return on the long term policy is 5.69% annually, compared to a 5.25% in the short term policy. This gives us a difference of $213,934.

The Benefit of Having Options

I like having options. I would guess that most people do. I don’t want to be confusing at all, however I want to educate those who really want to know the differences here.

Each of these options has its place, and to be honest I’ve had a lot of clients who had, let’s say, $1000 dollars a month, so we put $500 into a short term and $500 into a long term.

It’s having the option that puts more power into your hands. I think seeing these options also gives you a better idea, also, of how whole life works and how it grows. It is definitely made to give you more and more benefit as years roll on.

Also, a disclaimer, that these numbers are based off of today’s interest rate. Historically, interest rates have been higher, however, they are subject to adjustments (we are in some of the lowest dividends rates historically).

I believe life insurance solves many of the problems we face today, and puts more power and safety into our hands. Having these options only gives us the ability to find a product that better fits our needs.

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