Insurance and Net Worth

[jteezie]

How are the values of insurance policies factored into net worth calculations?

Here's the source behind my inquiry: Who Rules America: Wealth, Income, and Power

Ignore all the text and scroll down to the first tables and you see "(6) the cash surrender value of life insurance plans" factored into one's net worth. Seriously? I can boost my net worth by $1 million just by buying a life insurance policy and paying $22.50 a month? That can't be right, or am I already a millionaire because I have like 4 insurance policies? Something doesn't seem right.

[jpg7n16]

Originally Posted by jteezie

Ignore all the text and scroll down to the first tables and you see "(6) the cash surrender value of life insurance plans" factored into one's net worth. Seriously? I can boost my net worth by $1 million just by buying a life insurance policy and paying $22.50 a month? That can't be right, or am I already a millionaire because I have like 4 insurance policies? Something doesn't seem right.

They mean the cash value (also known as cash surrender value) - not the face value (aka payout amount, coverage amount, etc.).

You would include any cash value of whole/universal life policies into your net worth, because if needed, you could cash out the policy today. This should account for any fees associated with closing out the policy. If you have term policies, you will not have any cash value.

Def do not include the face value

From: Cash Surrender Value Definition - Investopedia.com

What Does Cash Surrender Value Mean?
The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. Also known as "cash value", "surrender value" and "policyholder's equity".

Investopedia explains Cash Surrender Value
Cash surrender value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

[MonkeyMama]

Just to point out - with whole life insurance you generally would have paid in far more than the cash value. & you can cash out the cash value at any time. So yes, that would make sense.

With term life insurance (what OP is thinking of) it has no value while you are alive, so it would not be included in your net worth.

[Robert742]

Originally Posted by MonkeyMama

Just to point out - with whole life insurance you generally would have paid in far more than the cash value.

This depends on how long you hold the policy. Generally, if you cash in a whole life insurance policy within the first 10-15 years, you will lose money or break even, due to the cost of insurance & surrender charges. Holding a good whole life (not a variable life policy, which invests in the stock market) for a long period of time can yield 4-5% a year over the cost of the premiums.

However, if you cash out the policy after 50 years, the amount of your profit is taxed as income in the year you cash it out.

Rich people use types of cash value life insurance to stash money, but they don't cash them out -- they borrow from them when needed, and take advantage of a tax-free return. This requires financial discipline and having enough money where you are never in danger of surrendering the policy.

When you are in the top 10% of wealth distribution, permanent life insurance is often a very smart financial decision. When you have so much money, and want to shelter it from the tax man, whole life insurance is your friend.

If you are like most of us, and you are struggling to build wealth, you need the higher return of investing in stocks, or the safety of bonds. Cash Value life insurance for the average guy is usually not the best use of his dollars.

[MonkeyMama]

Originally Posted by Robert742

This depends on how long you hold the policy. Generally, if you cash in a whole life insurance policy within the first 10-15 years, you will lose money or break even, due to the cost of insurance & surrender charges. Holding a good whole life (not a variable life policy, which invests in the stock market) for a long period of time can yield 4-5% a year over the cost of the premiums.

Um, no, this has not been my experience. I suppose there is a lot of terrible insurance policies out there. (I was thinking of long-term policies which don't tend to do much. If there are good ones out there, I have not come across them).

[disneysteve]

Originally Posted by Robert742

Holding a good whole life (not a variable life policy, which invests in the stock market) for a long period of time can yield 4-5% a year over the cost of the premiums.

That may be true, but buying term insurance and investing the difference in the stock market on your own can yield 8-10% over the same time period while giving you full control over the money that whole time with much lower expenses.

[Robert742]

Originally Posted by MonkeyMama

Um, no, this has not been my experience. I suppose there is a lot of terrible insurance policies out there. (I was thinking of long-term policies which don't tend to do much. If there are good ones out there, I have not come across them).

Yes, MonkeyMama, I think I remember the experience you related about permanent life insurance.

If you buy permanent life insurance because you want the protection, you don't touch the cash value, and your family collects on the life insurance proceeds, there should be a pretty good return on your premium dollars, even if you die at an old age.

But there are some terrible policies with big commissions, which are aggressively marketed. Like with any financial product, do the math. If you live pay check to pay check and can't seem to save money, you may decide at age 50, you want a $25,000 final expense life insurance policy. If you would pay $25,000 in premium dollars by age 70 for the policy, you probably want to pass on that policy, unless its the best policy you can get, and you think there is a good likelihood you will never see age 70. There may be better ways to plan for your final expenses, so some people may prefer to have a policy for a nice funeral, and then there are people like me, who don't care if you cremate me and dump me somewhere, as long as you wait until I'm dead.

When the cash value of your life insurance is in the stock market, particularly in the last 15 years, there is a very good chance you paid a lot in premiums for little cash value, even for policies held along time. When there is a long bull market these types of permanent life insurance look great, but I think they are best avoided, due to high management fees and the market risk.


There is a lot of bad press about permanent life insurance always being a rip off. If permanent life insurance protection is desirable to you -- not as a savings plan to cash out, or as a retirement strategy -- it can be obtained at a reasonable cost, if you buy the right life insurance product. But you have to vet your agent to make sure they have the expertise and product mix to work in your best interest.

There are reasons why permanent insurance might be worth its cost to you. Agents can tell you stories of older clients in their 50s & 60s wishing they had purchased permanent life insurance. Of course, it is easy to wish you spent your money differently after it has been spent, and the same lack of money management skills leading some older people to have wished they purchased permanent life insurance, would be the same reason they wouldn't have kept up the payments on it, if they had purchased it.

However, people sometimes find themselves parents with dependent children at a much older age than anticipated. I know I'm planning on having several children with my 20 year old trophy wife when I am in my 80s. Some people see the money they saved all their life depleted by illness or a stock market crash, and the loss of one spouse can put the surviving spouse in a desperate financial situation.

Unfortunately, the types and products of permanent life insurance can be complex, and you have to do your own research to be able to tell good advice from bad advice, when speaking to agents.

I will eventually get around to blogging about how to navigate the perils of life insurance. Permanent life insurance might turn out to be the best decision you ever made, but since it is much more likely to be the worst decision you make, because of the products pushed by a lot of agents, its safer to buy term only, and not risk making a costly mistake.

[Robert742]

Originally Posted by disneysteve

That may be true, but buying term insurance and investing the difference in the stock market on your own can yield 8-10% over the same time period while giving you full control over the money that whole time with much lower expenses.

Yes, DS, permanent life insurance is better at preserving wealth and reducing taxes, for people who are already wealthy, and are better off with a lower, tax-free return on some of their money.

A bond portfolio gives you more control of your money, and a similar return, rather than holding a whole life insurance policy for many years and cashing it out.

[jpg7n16]

Originally Posted by Robert742

Yes, DS, permanent life insurance is better at preserving wealth and reducing taxes, for people who are already wealthy, and are better off with a lower, tax-free return on some of their money.

Wait a sec - cash value policies are better at preserving wealth than investments + term insurance?

You mean the cash value your heirs lose when you die, vs the investments they get when you die? How does that 'preserve' wealth?

If you own a cash value policy (unless you pay an extra fee) when you die, your heirs get the face value of the policy and forfeit any cash value. If you borrowed the cash value, it is repaid from the face value, reducing the benefit to your heirs.

What Happens to the Cash Value When You Die? | USA Coverage
What happens to the cash value of a life insurance policy when the insured dies?

Focusing on saving taxes is misleading - for example, I could guarantee you that I'll save you $15k on income taxes this year.** You must look at both the cost and the benefit. What is the cost of that tax savings?


**Savings on income taxes will only occur if you give me $50k, and then I'll pay $15k of your taxes for you.

[Robert742]

Originally Posted by jpg7n16

Wait a sec - cash value policies are better at preserving wealth than investments + term insurance?

You mean the cash value your heirs lose when you die, vs the investments they get when you die? How does that 'preserve' wealth?

If you own a cash value policy (unless you pay an extra fee) when you die, your heirs get the face value of the policy and forfeit any cash value. If you borrowed the cash value, it is repaid from the face value, reducing the benefit to your heirs.

What Happens to the Cash Value When You Die? | USA Coverage
What happens to the cash value of a life insurance policy when the insured dies?

Focusing on saving taxes is misleading - for example, I could guarantee you that I'll save you $15k on income taxes this year.** You must look at both the cost and the benefit. What is the cost of that tax savings?


**Savings on income taxes will only occur if you give me $50k, and then I'll pay $15k of your taxes for you.

The face value of the insurance policy is always more than the cash value. The cash value is what makes the cost of insurance affordable when you are 95 years old. Would I be willing to "lose" one dollar to get two dollars? Yes, I would. If you want to pass money on to your heirs, permanent life insurance is often the best way to do it. Say you could have 5 million in a stock portfolio, or 5 million in cash value in a permanent life insurance policy with a 6 million face value. You die and want the money to go to your son. The 5 million in stocks would be subject to estate tax. The life insurance proceeds would be 6 million tax free. There are other strategies for estate planning, but if passing money to your heirs is important to you, you should be at least considering permanent life insurance.

Like with any strategy, you need to look at the cost versus the benefits, and run the numbers, taking into account the tax benefit, and other factors. Obviously, don't spend more money just to get a break on taxes -- it has to net you more money after taxes to be worthwhile. Yes, you need to question the assumptions made in an insurance agent's sales pitch.

Life insurance is great for wealth preservation, but not for wealth accumulation. If you are fully funding your long term investment goals, you find value in permanent life insurance, you still have more money, which you won't need short term, you don't want more risk of the stock market, you are okay with a 4-5% return on money (if you get a good whole life policy) you don't really need to use, look at cash value life insurance.

As I said, it can be good strategy for the wealthy.

Personally, I want to punch an agent in the face every time I hear an insurance agent pitch life insurance as a way to get "tax-free" income in retirement. Because for most people, even people with great incomes, cash withdrawals & loans from permanent life insurance result in a surrendered life insurance policy, a taxable event, and a very poor financial decision.

[jpg7n16]

Originally Posted by Robert742

The face value of the insurance policy is always more than the cash value. The cash value is what makes the cost of insurance affordable when you are 95 years old. Would I be willing to "lose" one dollar to get two dollars? Yes, I would. If you want to pass money on to your heirs, permanent life insurance is often the best way to do it. Say you could have 5 million in a stock portfolio, or 5 million in cash value in a permanent life insurance policy with a 6 million face value. You die and want the money to go to your son. The 5 million in stocks would be subject to estate tax. The life insurance proceeds would be 6 million tax free. There are other strategies for estate planning, but if passing money to your heirs is important to you, you should be at least considering permanent life insurance.

Wait a sec (again) - #1 - the estate exemption covers $5 million per spouse, meaning that this scenario would be estate tax free either way. #2 - you assume that the cash value of a life insurance policy grows at the same rate as a stock portfolio (even though it took you 10-15 years to "break even" in the cash value) #3 - if you have a $6 million face policy, the cash value is irrelevant (my point being that you aren't in favor of specifically cash value policies, you are in favor of life insurance in general; as term insurance has income/estate tax free proceeds as well) #4 - you speak of a strategy for the super wealthy, meaning if you have over $10 million in estate assets, have an additional $5 million you are considering tax implications on, and yet choose to get your investment advice from an internet forum, rather than the CPA you pay, then and only then this strategy is for you? #5 - you must be very careful about who owns the policy, as the face value could be included in your estate even if you designate a different beneficiary. Again, you should be speaking to a CPA/estate attorney if you suspect this applies to you.

I think the rest of us are addressing the needs of the most common readers of the thread. There are certain circumstances where a whole life policy makes sense, but those are few and far between (business arrangements, estate liquidity for those subject to estate tax, etc.), and if you suspect any of those may apply to you, you should ask your CPA about it.

Even your "run of the mill" millionaire wouldn't benefit from this at all. Much less the average person. If you have $2-3 million in net worth, you gain absolutely nothing from the tax free nature of life insurance proceeds. They wouldn't have been taxed either way.

Estate Tax

Personally, I want to punch an agent in the face every time I hear an insurance agent pitch life insurance as a way to get "tax-free" income in retirement.

I believe you actually made that same statement earlier in this thread...

Originally Posted by Robert742

Rich people use types of cash value life insurance to stash money, but they don't cash them out -- they borrow from them when needed, and take advantage of a tax-free return.

Oh how far off topic we go...

[Robert742]

LOL, yes, I have that thought about punching insurance salesmen in the face often, so I apologize if I am repeating myself.

The problem life insurance agents have, is there are few super wealthy clients, so cash value life is pitched to people better off using other strategies. Most people taking loans against the cash value of their life insurance lapse it. Rich people can use cash value life insurance to game the tax code. When life insurance agents use the lure of "tax free income" from a life insurance policy, to recommend it as a retirement strategy for a middle class family, it annoys me greatly.

But if you are very wealthy and disciplined, and have lots of other sources of cash, you can take loans against the cash value, without having to worry about the policy lapsing. It is not contradictory or "off track" to point out some people can use their cash value safely, while it is a recipe for disaster for most people.


Cash value life insurance can be good for people who have the problem of too much money, and I know most people don't have this problem. This situation doesn't apply to most people on the board, but this thread started as a discussion of life insurance and the assets of the super wealthy.

For the example I used, I thought 5 million was above the current exception for estate tax. But my mentioning the estate tax, which is important to those people to which it applies, was more of an aside. I'm trying to clear up the idea that cash value in a life insurance policy is an investment you are losing. Though you make a good point that maybe a less costly type of permanent life insurance, which builds little cash value, might be a better way to pass money to heirs. As I said before, you should run the numbers.

The point I was trying to make is the face amount of the life insurance is always more (usually a lot more) than the cash value. 6 million dollars for 5 million dollars is a good deal. I made no assumptions about how the 5 million was accumulated.

If you want to get 5 million dollars, invest in the stock market for its much superior long term returns, and you can achieve your goal with a lot less money than trying to do it with cash value life insurance. But if you already HAVE 5 million dollars, and want to pass 5 million dollars to your heirs, consider permanent life insurance.

For some wealthy people, preserving their wealth and tax planning is more important than getting stock market-like returns. Yes, a CPA is the person you want to talk to about tax planning. But CPAs don't have expertise in life insurance. Work with your CPA, life insurance agents, or hire a life insurance consultant, particularly if you are in the top 10% of the wealth pyramid. Don't depend on any ONE person, and certainly not a single person telling you what to do on Internet message boards.

I post here about life insurance as a counterpoint to the usual "buying any type of life insurance other than term is a rip-off" mentality. This discussion of cash value life insurance may not apply to anyone here, but neither is it likely the details of estate taxes will apply to them.

It's good to keep an open mind. Everyone should consider their situation,values, individual goals, and know their options. "Run of the mill" millionaires may decide cash value life insurance is a good solution for them, if they look at it objectively.

I'm not comfortable telling all people with 3 million dollars they should not consider cash value life insurance, but you don't seem to have this problem. You need to look at the specifics of a situation before you can pronounce they gain absolutely nothing from cash value life insurance.