With so much wrong information floating about in cyberspace, it’s a wonder any consumer can make an intelligent decision regarding life insurance. But of all the bad advice and misinformation I’ve come across, this one takes the cake. I feel dumber for having read it.
Take the following, for example: When the policyholder dies, his or her beneficiaries receive the death benefit, and any remaining cash value goes back to the insurance company. In other words, they’re essentially throwing away that accumulated cash value.
As long time readers know, the cash value of a life insurance policy is the reserve to help offset the future outlay when the death benefit is ultimately paid. It doesn’t “go back” to the life insurance company because it never left. They’re not throwing it away because it isn’t theirs to throw away.
But wait, it gets better (or worse, I should say). Just call your life insurance company and say that 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 life insurance company doesn’t want to lose your business, it will more than likely accept your request.
The author is obviously unfamiliar with the concept of insurability (and life insurance in general, for that matter). In her example, she said if the death benefit is $200,000 and the cash value is $100,000, take the cash value and add it to the death benefit so that the death benefit is $300,000 and the cash value is zero. Whiskey. Tango. Foxtrot.
First, the life insurance company will not increase its risk without subjecting the insured to the underwriting process. Second, the insured is only being charged for $100,000 of coverage. The death benefit is $200k and the cash value is $100k, so the net amount at risk is $100,000. In her scenario, the net amount at risk triples to $300k. Guess what that does to the premium.
I can’t address
all of her idiotic assertions, so I’ll end with this one: You may also choose to take out a loan against your
policy. Of course, you’re not obligated to pay back the loan since you’re
essentially borrowing your own money. However, it’s important to note that any
money you borrow, plus interest, will be deducted from the death benefit when
you die.
Her hypothesis is that there are ways for the insured to get the death benefit plus the cash value and she puts forth several cockamamie schemes that will purportedly accomplish that, only they don’t. The insurance company pays out the same amount regardless of the loan situation.
Example: $500,000 death benefit, $200,000 cash value. If the insured dies with no loan, the beneficiary receives $500k. If the insured borrows the $200k and dies with the loan on the policy, the insurance company will pay the beneficiary $300,000, but they previously paid the insured $200,000, so they pay out $500,000 under both scenarios.
I must stop writing now lest my head explode from this colossal level of ignorance.