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Cash value life insurance can be an important financial planning tool, especially if you’re looking to pass along significant wealth to your heirs. These types of policies can also be used to supplement retirement income or provide a death benefit to family members to pay estate taxes.
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Cash value life insurance policies typically earn interest or investment gains and grow tax-deferred. What’s more, if you have built up cash value you can take money from these policies for any reason
But these types of policies require a smart buying decision up-front, especially because policy amounts can be high and financial goals are long-term. A wrong pick, such as a policy that charges high internal fees, can easily cost you tens of thousands of dollars over time.
We looked at five important measurements of quality using data provided by Veralytic, which publishes life insurance pricing and performance research and product ratings. Universal life, whole life and variable life insurance policies were evaluated. All of the carriers on our list won top ratings.
Why we picked it: Highly competitive costs across 84 percent of Pacific Life’s products and access to cash value earned Pacific Life a top spot.
Pacific Life has lower and more stable policy costs than other competitors. This is paired with a superior performance of investments that build the cash value.
Potential drawbacks: Some of Pacific Life’s newer indexed universal life insurance products have much higher internal costs than other products.
Why we picked it: Lincoln Financial has strong cost competitiveness across 83 percent of its cash value life insurance products.
Low internal policy costs translate into lower premiums and greater growth of cash values over time. The company’s stable pricing means the need to pay higher premiums in the future is less likely and you’ll have better chances of getting the cash value shown in the policy illustration.
Potential drawbacks: Only about half of Lincoln Financial’s cash value products have superior historical performance of underlying investments. Some of its new indexed universal life insurance products have much higher internal costs and a greater risk than other products.
Why we picked it: Protective has excellent pricing compared to top competitors and strong historical performance.
Nearly all (96 percent) of Protective’s cash value products are superior in low internal policy costs, which means lower premiums and greater growth of cash value over time.
Potential drawbacks: Policyholders generally have less access to cash value and the company’s financial strength ratings have not always been as high as other competitors.
Why we picked it: Very good pricing stability.
Prudential’s policy illustrations are consistent with actual historical performance an impressive 95 percent of the time. A good combination of claims-paying ability and competitive costs earned Prudential a top spot.
Potential drawbacks: Prudential has shown only average performance of its investments underlying cash values for most products and the company does not disclose performance expectations for its whole life insurance products.
Why we picked it: Superior pricing stability and financial strength.
Transamerica has an excellent track record when it comes to stable pricing and high financial strength ratings. Policyholders have good access to cash value.
Potential drawbacks: Some of Transamerica’s peers have a better historical performance of assets underlying cash values and the company has been sued for significantly increasing internal costs for certain policies.
Mutual of Omaha
Why we picked it: Excellent financial strength combined with low costs and a strong historical performance of invested assets underlying cash values.
The low internal policy costs can result in lower premiums and greater growth of cash values over time.
Potential drawbacks: Accessing cash value via withdrawals or policy loans may be more limited compared to other insurers. Policyholders also face a risk of possible premium increases for large face amount policies due to Mutual of Omaha’s greater reliance on undisclosed reinsurance companies.
What Lies Beneath
Cash value life insurance policies are often complex products, and it’s what’s under the surface that can come back to bite you later. Without a trusted financial advisor, it can be extremely difficult to identify and evaluate the important parts of a policy, especially more complex types of universal life insurance.
Using data provided by Veralytic, we rated cash value life insurance policies on the following measurements, putting scoring weight on cost competitiveness.
Cost competitiveness: Here we measured premiums and internal policy charges, including the cost of insurance, fixed administration expenses and cash value-based wrap fees. (Cash value-based wrap fees are charged as a percent of the cash value component. High wrap fees will eat into your cash value.) Internal charges are an important but often overlooked part of a policy. If the policy has a low premium on the surface but high internal costs lurk underneath, your cash value gains will be lower.
Access to cash value: This measures the liquidity of cash value and restrictions on accessing it. For example, some policies build cash value more quickly in the early years, but the insurer could have higher internal fees that offset this liquidity.
Financial strength: This measures the insurance company’s financial strength ratings from four major ratings agencies.
Pricing stability: We evaluated whether a company’s historical experience with pricing (the cost of insurance, policy expenses and the illustrated earnings rate on cash value) appear to be adequate and reasonable. If there’s a lack of stable pricing, you could be hit with higher fees in the future, which can pummel your cash value or even force you to pay extra premiums into the policy.
Historical performance: Cash value life insurance is the long game. So the historical performance of the company’s investments are important. The insurer’s ability to make strong investment picks will affect the growth of the cash value within your policy.
Tips for Life Insurance Buyers
Barry Flagg, founder of Veralytic, recommends these tips if you’re shopping for cash value life insurance.
1. Carefully choose a life insurance agent
Because of the complexity of cash value life insurance, it’s best to work directly with an agent or broker rather than going the do-it-yourself route, says Flagg.
It’s critical to pick an insurance agent or broker who’s upfront and honest. For example, if the insurance professional fails to voluntarily disclose how much you’ll pay for internal policy charges, you should consider finding another professional to worth with, Flagg says.
The Insurance Information Institute suggests looking for an agent or broker who:
Is licensed by your state’s insurance regulator
Lays out your life insurance options in easy-to-understand terms
Fully grasps your financial circumstances
Doesn’t pressure you into buying a policy
In addition, look for an agent who’s registered with the Financial Industry Regulatory Authority (FINRA) and who offers product recommendations that aren’t limited to just certain product types. You can also check for additional information at BrokerCheck.com.
2. Avoid comparing only premiums, cash values and death benefits
A life insurance policy illustration will map out a number of components of the policy over time. When you compare premiums, cash value projections and/or the death benefits of cash value life insurance, you’re comparing hypothetical scenarios, Flagg points out.
It’s not in your best interest to compare those factors, he says. Why? Because the jumble of hypothetical figures doesn’t take into account key components of the policy like earnings rates, the actual cost of insuring you and the administrative expenses that will be charged.
These factors will play a significant role in how much your cash value will build and how much you’ll have to pay to keep the policy in force. When costs are high, more of your money goes toward expenses and less goes toward the policy’s cash value.
Flagg stresses the importance of comparing internal policy costs like fees and the cost of insurance. But don’t compare these internal costs among two or three insurers, he says, which won’t give you an accurate picture of the policy. Rather, stack up an insurer’s costs against industry benchmarks.
3. Pay attention to separate parts of the policy illustration
A policy illustration contains projections of what might happen along with what’s guaranteed to happen at a minimum. For example, a policy projection might paint a rosy picture of how cash value could grow and eventually supply ample extra retirement funds.
On the other hand, an illustration might show that cash value growth that’s guaranteed is so low that you wouldn’t get any retirement funds. As such, make sure you understand the costs and policy performance requirements that are underlying actual promised projections.
“That’s why I invented Veralytic,” says Flagg. “When car buyers want to make an informed decision, they ask for a Carfax. When buyers of life insurance want to understand whether internal policy costs are competitive and performance requirements are reasonable, they can ask their financial advisor for a Veralytic report.”
We used data provided by Veralytic to rate 25 large life insurance companies that sell cash value life insurance. Veralytic maintains a database of thousands of life insurance products and measures the competitiveness of each product against industry benchmarks to score each policy. The five measurements scored were cost competitiveness, financial strength, access to cash value, pricing stability and historical performance.
We did not include companies that sell all or mostly term life insurance products. Direct writers, meaning they sell policies directly to consumers or only through their own agents, were also not included.
John Egan is a freelance writer, editor and content marketing strategist in Austin, Texas. His work has been published by Experian, Bankrate, National Real Estate Investor, U.S. News & World Report, Urban Land magazine and other outlets.