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There are several questions on this site that make good arguments that whole / cash value life insurance policies are not good investments (see here, here, and here).

For the most part, I'm convinced that a CVLI is a bad idea -- especially if you haven't already taken advantage of a 401K or IRA -- and that you can get better returns on the same money by following the "buy term and invest the rest" mantra. However, I'm still unsure about one thing. Could a CVLI plan be worthwhile if I completely raid the death benefit and trade that in for additional cash value in life?

Assume that I don't want to use the CVLI for insurance at all, and I'm only interested in it as an investment vehicle. I've been shown a plan with a printed schedule from the insurance company which has yearly premiums of $6,000. After 30 years, I will have paid $180,000, the "non-guaranteed" cash value will be roughly $360,000, and the death benefit will be roughly $800,000. Since the cash value comes out of the death benefit, if I receive that $360,000 while alive, then the death benefit will be reduced to $440,000.

I know that it is possible to transfer some of your plan's cash value to its death benefit funds. In fact, that's a strategy that Investopedia recommends:

If you have accumulated a sizable cash value over the life of your permanent life insurance policy and do not intend to use these funds yourself, you may choose to leave a larger death benefit to your beneficiaries. How can you pull that off? It’s usually very simple. Just call your life insurance company and say you’re interested in making a trade: You’d like to increase the death benefit in exchange for the cash value on your policy. Because the company doesn’t want to lose your business, it will more than likely accept your request.

My question is, can I do the opposite? Can I trade all death benefit value for cash value, and thereby get the entire $800,000 value in life, leaving $0 behind? Are there legal issues with this? Does whether this is allowed depend on the insurance provider?

And if I can do this, is this a good use of that $180,000, compared to the returns that I would get by simply investing in an index fund or a backdoor Roth IRA?

  • Do you have a printed schedule from the insurance company that says the cash value will be $400,000 after 30 years? Because premiums and fees come out of your payments before cash/cancellation value is calculated, I'm not following the math that says your cash value will be 400k if you've only payed in 180k after 30 years. And no, I don't believe you can ever cash in the full death benefit value of the policy just because it has reached the 30 year mark. Though I have heard of insurance companies "settling" with terminally ill patients. – Keith Feb 27 '18 at 5:41
  • Hi - yes I have a printed schedule. I haven't bought any plan and likely will not -- but the schedule shows a "non guaranteed" cash value of $380K after 30 years. I 've edited my question to be more specific. – Steve Feb 27 '18 at 5:44
  • If you cash out the policy for the cash value, the policy is then void and there is no death benefit. It does not simply reduce the death benefit; at least not for any policy I've ever seen. You can borrow against the amount of the cash value, and still keep the policy in place. But then you are paying interest on top of your regularly scheduled payments and reducing the death benefit by the amount you have borrowed. – Keith Feb 27 '18 at 5:50
  • Ah ok thanks for the clarification. So are you saying I can only borrow against the cash value? Or could I also borrow against the death benefit? In other words, is there any scenario where I get $800K minus interest? – Steve Feb 27 '18 at 5:54
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    You can generally only borrow against the cash value, especially from the insurance company. And the only way the $800k gets paid by the insurance company is if you are deceased. They will sometimes settle with terminal patients as I mentioned, but if you take the cash value of the policy it is a fraction of what it would be if you'd just saved the money with compounded interest (or other gains) yourself for 30+ years. In other words, it's only ever a "good deal" if you die before you're expected to based on the actuary tables. That's why many people call whole life a suckers bet. – Keith Feb 27 '18 at 5:59
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You cannot trade all the death benefit for CV, but you can trade most. The product you are looking for is Universal Life. The IRS makes sure there is some life insurance, but you could do like a 10k death benefit policy and put a lot of money towards the cash value. You will have to work with an agent to find the specifics.

However, you will not escape the core reasons why CVLI is such a poor investment: High fees on what tends to be debt investments. Debt investments, traditionally, have much lower returns than equities. This again can be somewhat mitigated by doing a Variable Universal Life product that allows one to invest in mutual funds.

One thing is for certain is that you will never escape the high fees when a life insurance company invests for you.

In theory one should be able to mitigate the high fees and poor investment returns of CVLI by doing a minimal death benefit variable universal life by taking some tax advantages. However, I doubt it is really possible in practice.

Although limited in yearly contributions you can duplicate this tax advantage by doing a ROTH IRA in some form.

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