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Q: Should I Keep My Cash Value Plan?

2011 December 3

Dave Ramsey never recommends keeping a cash value policy (including whole, universal and variable life) regardless of how long or short you have had it, unless you are unable to qualify for a new competitively priced term life policy.  He feels that you are just compounding the mistake further by keeping it. The basic premise for cash value plans is that you will need life insurance your whole life so the plans overcharge you in the early years to pay the higher costs in the later years.  Dave’s opinion is that if you buy term life insurance then you avoid this overpayment period and use the savings to attack debt and to build savings. This is why Zander Insurance only offers term life insurance and helps Dave’s listeners find the most competitive rates available.

Over 15-20 years with your debt eliminated and your savings grown, you no longer need life insurance.  The insurance industry has convinced the public that you have to have life insurance for your whole life.  Both Dave and Zander Insurance feel you only need life insurance for a period where your premature death would cause your family financial hardship.  Once you are out of debt and built wealth, the need for life insurance is eliminated and there are so many smarter things to do with your money.  You can visit Zander Insurance and click on Term vs. Cash Value which will provide additional information.

Dave has long recommended using the cash value in the plan to intensify your debt reduction efforts, help establish your emergency fund and then take advantage of better investment options.  The savings you have in the cash value is typically earning a poor rate of return and it makes no sense to save money or leave it sitting while paying a much higher rate for credit card or other debt. The use of term life insurance is just one step in the overall process to get yourself out of debt and grow your savings.

When you attempt to cancel most companies will try and imply that dropping the policy will have “serious” tax consequences.  In reality there is very rarely any tax due, and if there is it is based on the amount you receive back that is in excess of the premium you paid. The advice we give Zander Insurance clients is to add up the number of years you have paid the premium times the annual cost you can quickly determine the extent of any tax that may be due.   The tax liability is only on the gain over the amount of premium paid, not the entire cash value amount. However, you need to include any dividends received during the policy term in addition to the cash value.  Even if a tax is due or surrender charges applied, Dave advises cancelling these plans and moving on to more effective strategies.  The key element for you to consider is to make sure you have the correct amount of life insurance that your family needs.  You need to see your mistakes behind you and move on toward more productive financial decisions and processes. Remember both Dave and Zander Insurance never recommend canceling an existing plan until you receive the new policy you are considering and you have reviewed it to make sure it meets your individual needs.

One Response leave one →
  1. Barbara permalink
    October 29, 2012

    Yes, this is what kind of information I needed to make a decision. I can cash this policy in and be able to pay ALL credit card debt off with the cash value. But I must first take out a term life policy to secure the other debt first. I also did not mention I had a smaller life policy with my company that is a basic life which is attached to my health policy.

    My goal here is to get old debt paid off now, secure a policy to at least cover my current debt and pay for all my funeral costs. I just buried my mother last year – I know this cost.

    Thank you very much for assisting me with this. I did use your instant quote and found amazing information: I can a term life policy with more coverage at the same cost I am paying now with my Universal Life policy.

    Any information on selling a second house quickly???

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