UL&WL: Death Benefit - Cash Value = Unfair to Beneficiaries!

[DHK]

You REALLY owe it to yourself to pick up this book, or subscribe to the Virtual Sales Assistant (it's included in the subscription):

The Tools & Techniques of Life Insurance Planning, 5th Edition

Here's a few paragraphs regarding policy loans from the book:

The ability to use the contract as a source of emergency or opportunity cash is one of the most valuable attributes of permanent life insurance. Virtually all cash-value policies include a policy loan provision.[1] As property, the policy can also serve as collateral for a loan from a bank or other lender but more often the insurer will provide the cash under the more favorable terms of the policy's loan provisions.[2]

When a policy owner borrows money directly from the insurer what is actually occurring is something other than a loan in common parlance. The difference is this: In a true loan the borrower must agree to repay the money. A policy loan does not require repayment. It is more like an advance of the money the insurer will eventually pay out under the contract.[3] The policyholder is receiving an advance – of his own money.

Even though federal tax law treats a policy loan as a classic loan, it is not. A debt, per se, never exists and the policy owner and insurer do not have a traditional debtor-creditor relationship. During the insured's lifetime, the insurer is always 100 percent secured against loss because the amount that the policy owner can borrow can never exceed the amount the insurer would have to pay the policyholder if he chose to surrender the policy. In fact, during lifetime, the loan can never exceed that amount (less the interest payable on it). Furthermore, the insurer can (and will) deduct the loan value, plus interest from the proceeds otherwise payable if policy owner has not repaid the loan before the death of the insured.

[...]

Why does the insurer charge interest on an advance of money that will someday be paid to the policy owner? Because the insurer's statement of what policy values will be year after year is based on the assumption that the insurer will have a reserve (i.e., an amount in excess of that needed to pay for the current year's costs) to invest and earn interest so that the insurer can keep its future contractual promises. If premiums unused for costs in early years are not on hand, the insurer cannot invest that money and pay the amounts promised in the future. The charge made to policy owners who accept these advances puts the insurer back where it would have been had it been able to invest the money. (In fact the interest rate may be somewhat higher than the amount assumed by the insurer in calculating policy loan values because the insurer needs to pay for administrative costs in making, keeping track of, and repaying these loans and, to some extent, to create a disincentive to borrowing.)

Policy owners may repay a policy loan at any time while the insured is alive (subject to a minimum payment for administrative aggravation and cost purposes). Once the insured has died (or the policy has been placed on extended term status), typically the insurer will not accept repayment of a loan.[9] If the policy owner does not repay the advance, the insurer will reduce either the cash value of the policy available to the policy owner or the death proceeds paid to beneficiaries.

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If a client pays $40 a month for $40,000 in whole life protection, the beneficiary should get at least $40,000 upon death, assuming the insured was still paying $40 a month at the time of death. Ideally the cash value should be added to the $40,000, but it's criminal (or should be!) to deduct a cash value loan from the death benefit of a whole life policy.

As far as this, you really need to learn the term "net amount at risk".

Death benefit = "net amount at risk" + cash values - any outstanding loans.

 

[Golfnut2112]

If you want the cash value to be included in the death benefit buy a UL with death option B.

 

[AllenChicago]

As far as this, you really need to learn the term "net amount at risk".

Death benefit = "net amount at risk" + cash values - any outstanding loans.

OK, DHK. I read up on what "Net Amount at Risk" means at it pertains to life insurance, along with your and other agent's recommendations.

Since less than 10% of my income is from Life Sales, there's no need, or desire, to study the fine details of life insurance design. However unfair Cash Value treatment of regular Whole Life plans are to the consumer, they have their place..especially with older clients who need "final expense" funds.

The next time I need to write a larger policy, it will either be a UL with INCREASING Death Benefit, or a Term w/Return of Premium.

Thanks again for everyone's guidance!
-Allen