Thursday, January 16, 2020

Life Insurance Myth: The Company Keeps Your Cash Value When You Die

There’s a lot of noise on the internet about life insurance.  Some of the things I read makes my eyes roll.  I'm going to shed some light one of the myths/misconceptions thrown around on the internet and accepted as truth by the misinformed.  

Here's what I came across this week:

The cash value belongs to the insurance company, not you. No matter what anyone else tells you, you don't get the cash. I'll keep it brief but here goes:  When you die, the insurance company gets your cash value. Full stop. Your heirs only get the death benefit.

Ugh... Stop it, please.  This faulty thinking would have you believe that when you sell your home, you get to keep the purchase price AND the equity… yikes.  Obviously, that’s not how it works in reality.

The cash value is yours.  It belongs to one else!

To better understand why cash value belongs to only you, you need to understand how life insurance actually works. 

Let’s start with a simple Term policy because it has no cash value.  Term policies pay a death benefit only.  That’s it and it will do so for only a period of time which means 99% of the time, you will outlive this policy.  (Ironically, all that cash you paid for the Term policy is kept by the insurance company...)

Unlike Term policies, Permanent life insurance builds cash value and how this happens is where the confusion starts and stays.  The first thing you should know is that there are two types of permanent life insurance policies:  Whole Life and Universal Life (including Indexed Universal and Variable Universal).

Of these two types of permanent policies, it's extremely important to understand that only Whole Life cash policies can endow.  (There are other major differences between Whole Life and Universal Life but for the purpose of this blog post I will stick to the subject line...)

Endowment is a huge deal.  It means the cash value will eventually equal the death benefit. 

This is an important detail because it means as the pages in the calendar turn, the cash value is replacing a portion of the death benefit in a Whole Life policy. 

If you live to end of the contract period, typically age 121 on current Whole Life products, the life insurance company will simply cut you a check for the cash value at the very end.  Congrats, you made it to endowment!

A great analogy in how this works is a comparing endowment to a mortgage.

Every mortgage begins with majority of every payment going towards interest and a very small percentage of principal that which builds equity.  Over time (a really, really long time) eventually your equity starts to build faster and faster until the mortgage balance is paid off.

A similar thing happens with a Whole Life policy.  

In the beginning, Whole Life policies are front loaded just like a mortgage.  As a result there is very little cash value available right away because the majority of the premium is supporting the cost of a permanent death benefit.  There leaves very little left over to create early high cash values.  In fact, it may take you years to build any cash value if you've purchased a Whole life insurance policy designed for maximum death benefit which is the way the majority buy Whole Life. 

For this reason, the Dave Ramsey's and Suze Orman's of the world lambast traditional Whole Life policies as the worst financial  product ever.  BUT... you'll never hear them or their followers talk about minimizing the death benefit of a Whole Life policy and using a Paid-Up Addition (PUA) Rider to create high early cash values which is what you would get with an Infinite Banking designed Whole Life policy.  This is a glaring omission from supposed experts who should be able to explain how Paid-Up Additions work in a Whole Life policy to create cash value right away.

(DISCLOSURE:  I am an Infinite Banking authorized advisor with the Nelson Nash Institute and have been teaching the strategy since 2007.)

As the years pass (even if you have a traditional Whole Life policy with no PUA rider) your cash value will start accumulating because a Whole Life has a fixed guaranteed premium and cash values are guaranteed to grow increasingly larger every year. This being the case, the cash value will eventually equal the death benefit (endowment).   Guarantees are a big deal.

If you're wondering why Universal Life policies don't endow, it's because their cost "chassis" is built on a 1 year renewable term which gets more expensive as you age.  The long-term danger of owning a Universal Life policy is that the rising costs will eventually deplete the cash values putting the owners in the uncomfortable position as they get older of choosing to keep up with rising premiums to maintain their death benefit (that they thought would be permanent) or have the cash values depleted to cover the rising costs.  

In my opinion, Universal Life policies should not even be considered in the permanent life insurance category because the rising cost of insurance eventually depletes the cash values.  This is why Universal policies can't endow.  

Here’s the Big Takeaway #1: 

Your cash value is the net present value of the future death benefit.  REPEAT.  Your cash value is the net present value of the future death benefit.

Part of the net present value is the time factor.  If you have a Whole Life policy right now, even those Whole Life policies without a Paid Up Addition's Rider, your cash value is working its way every year to becoming equal to the death benefit by the end of the contract.  If you have any type of Universal policy, we should probably talk...


This means the cash values will eventually be paid to your beneficiaries.  So no, the life insurance company does not ever get to keep your cash values.  When a person dies short of endowment, the insurance company covers the difference between your cash values and the death benefit.  That is their contractual obligation to you and your listed beneficiaries.  

Remember when you sell your house, you don't get the purchase price AND the equity!

Going just a bit further because learning is fun, having a cash value policy is like investing in reverse if such a thing existed.

Let’s say your goal is to have a $1 million net worth by the time you’re ready to graduate to the big classroom in the sky.  Investments are inherently risky.  Nothing is guaranteed.  However, a permanent life insurance policy guarantees you’ll have that $1 million estate to pass on to your heirs instantly no matter how your investments turn out or what happens in your life (Not even death or taxes can get in the way.  How cool is that?!).

This may already be a lot to chew on so please pay attention because I’m coming to my 2nd point.  This is where people really fall for the claim about life insurances keeping the cash values.  Beyond how a cash value policy will endow over time (get closer and closer to equaling the death benefit as you age), there is another life insurance term you need to understand.

Big Takeaway #2

The difference between the cash value you are accumulating and what the policy will pay out is called the “net amount-at-risk”.  The key word there is: net.  The net is the difference between the death benefit and cash value.

Who is actually “at-risk” for paying out the money beyond the accumulated cash value?  Well, it’s the life insurance company because you transferred the risk of performance (creating that $1m estate payout) to the people at the life insurance company in exchange for a premium.  You essentially exchanged a guaranteed future outcome for a portion of your present cash flow.

Here’s an example:

Keeping this simple and high level, let’s say you have a cash value policy purchased years ago with a (C)$1,000,000 death benefit.  Over time you’ve paid premiums and accumulated (A) $350,000 of cash value.  The net amount at risk to the life insurance company would then be (B) $650,000. 

Getting back to “No matter what anyone else tells you, you don't get the cash”, this is wrong because the cash value goes to your beneficiary along with the net amount-at-risk the life insurance company has to come up with to honor the death benefit payout. 

Just add the two amounts together to equal the death benefit.  (A)$350,000 + (B)$650,000 = (C)$1,000,000 death benefit. 

To make sense of it, you simply have to understand A + B = C.  

Or if you prefer, C - A = B.

In summary, there are 2 things to understand here.

1.                  Endowment.  The cash value will equal the death benefit at age 121 (or age 100 for policies bought when products only insured to that age.)  Be 100% positive you have a policy that endows.
2.                   Net Amount At-Risk.  Until endowment happens, the net amount at risk is the difference between the cash value and the death benefit.  (C-A=B)

With these 2 points, you now understand why the life insurance company does not keep your cash value...EVER!  It is paid out as part of the death benefit when you die or back to you if you live to endowment.

Congratulations on now being smarter than the average person buying life insurance!

If you think you might have a Universal life policy, please double-check! I've lost track of how many people I've talked to who have told me they have a Whole Life policy only to discover they bought a Universal Life policy.  

I'm available to help answer your questions.  You can find me at

Thank you,

John Montoya