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This is a great question and I'll need a thread to address it.
I'll start by saying that we need to view cash value life (CVLI) as a product structure and divorce ourselves from any residual negative or positive opinions we have of it. It is just a contract. https://twitter.com/BlairHduQuesnay/status/1338569173358833665
I'll start by saying that we need to view cash value life (CVLI) as a product structure and divorce ourselves from any residual negative or positive opinions we have of it. It is just a contract. https://twitter.com/BlairHduQuesnay/status/1338569173358833665
There are some important elements of the product structure. Tax laws, cost of insurance, investment expenses, portfolio quality, sales costs, administrative costs and lapsation transfers. I'm going to focus on simple permanent products to avoid added complexity.
Think of permanent as a term life policy and a savings account. Because it is permanent, you're saving within the policy for future term insurance payments. These rise with age which is why when young you pay part of the premium covers current mortality expenses and part is saved
This is where it gets interesting. The savings account grows over time and is not taxed annually. This is a significant tax advantage especially for fixed-income assets which are highly tax disadvantaged in qualified accounts. This is a significant benefit to many investors.
Bonds are currently more attractive than equities within permanent policies because the net improvement in return is greater. Hold equities in taxable, Roth or traditional accounts. CVLI is especially attractive for bonds when clients have maxed sheltering opportunities.
Cost of insurance can be quite low - with good underwriting and low expenses it can be less than term. Cost of managing assets within the general account portfolio of an insurance company are a fraction of what most advisors charge in AUM.
Commissions create front-loaded compensation. There will eventually be a crossover point where total costs are less than 1% AUM. This brings me to my next point - CVLI only makes sense if you own it a long time. Especially with the lapsation transfer to long-term policy holders.
What's that? This is a great article that explains how many consumers lose out by failing to make premium payments. Don't buy a policy if your income is volatile and you might lapse. https://faculty.wharton.upenn.edu/wp-content/uploads/2016/11/Insurance41.pdf
In my own research, I find that the net after tax return on a lean policy which in which premiums are front-loaded (to the MEC limits - read about it) can be a very attractive way for a high-income client to build fixed income non-qualified wealth.
I have analyzed historical data that I've compared to term costs and net performance on intermediate-term non-qualified corporate bonds. If you're buying term protection and investing in non-qual bonds you need to consider the CVLI product structure.
If you hold the product until death, it is essentially investing in fixed income assets in a Roth account. In fact, you can access assets in retirement below the basis (which includes the equivalent of term premium payments) and not pay income taxes. This is a nice option.
Why is access to liquidity in CVLI nice? Unlike tapping home equity, there are no high transaction costs. You can hold less liquidity in retirement because you can choose to turn a legacy goal account into current spending. You can also choose to annuitize cash value.
Finally, lapsation transfers seem to show up in the long-term performance of policies. There are VC firms (see @RajivRebello) that buy these mature policies because the expected return is so high. Fiduciary advisors should almost never liquidate a mature policy.
