Nearly every life insurance blog I come across can’t avoid talking about the benefits of cash value when whole life is the subject of conversation. I’ve never heard an author discuss the dangers of cash value, which do exist. One reason for this lack of information is that so many authors give very basic, top-level explanations of a product. Countless websites recycle and regurgitate the same basic information about cash value benefits without taking a deeper dive into the potential harm. Another reason for this lack of information is that many authors are certified financial planners who usually only deal with high net worth clients. Their lack of client diversity gives them a narrow perspective for the use of a product. With that being said, let’s discuss the dangers of life insurance cash value.
Many seniors buy whole life policies that barely cover the cost of a funeral. Cash value is used to secure policy loans. If the insured dies before a policy loan is paid off, the unpaid portion of the loan is subtracted from the death benefit. If the policy barely covered the cost of a funeral, then any subtraction from the death benefit could severely jeopardize the purpose of the policy.
Cash value poses a problem for people of low income. Any unexpected expense becomes a financial emergency for this group of people, which causes them to look for a policy loan. If the premium was barely in the budget, the additional expense of a loan repayment may be too much. The most likely result of this scenario is a cancellation.