Is Cash Value Life Insurance (Whole Life or IUL)... a Scam?
- David H. Kinder, RFC®, ChFC®, CLU®
- Sep 20
- 5 min read
I've written a lot about life insurance here on this blog. Some people even consider me to be an 'expert'. (I don't necessarily believe that, but I do appreciate the sentiment.) Why write about this now? 1) Financial Entertainers are always making the rounds on this topic and they often classify all cash value life insurance and annuity contracts... as not in your best interest and they never recommend them.
And the public usually trusts them on that recommendation.
Why?
Because they don't have any commissions at stake in sharing their opinion. Let me get this out there: Yes, I earn commissions for selling life insurance and annuity contacts. So yes, I have a bias that some might say is driven by commissions.
2) There is an attorney that is making the rounds regarding improperly represented Index Universal Life insurance contracts and the promises that amateur agents are making in how they describe these contracts and that the designs they use... won't possibly have these contracts perform nearly as well as they say.
(This same attorney did misrepresent some things in his own posts, so while I wouldn't call him an expert, it's always good to know how to protect oneself from possible litigation.)
Is cash value life insurance a scam? It depends!
Depends on what? What you're comparing it to.
Too many people (consumers, financial entertainers, and even financial advisors) compare cash value life insurance to investment performance.
Due to the costs associated in cash value life insurance, the investment IN MOST CASES will outperform the same performance of a cash value policy on a dollar-for-dollar accumulation basis.
And this is usually where the comparison ends as if that's all there is to the story.
Because more money is being in a better position, right?
What is usually omitted from such an 'analysis' (usually from a simpleton)?
Tax-free access to the cash values at any time. Unlike with IRS regulated retirement plans such as a 401(k) or IRA, there are no federal taxes, state taxes, or early withdrawal penalties to access your cash prior to age 59.5. Why is access to capital a good thing? You never know what can happen - emergencies or opportunities.
You can borrow against your policy as collateral and your policy will continue to grow as though you haven't touched it... aside from loan interest if not paid out of pocket. Yes, loan interest will eat up against the policy... but you can pay that loan interest out of pocket and restore your policy's performance. Yes, it still won't match the performance of a traditional investment dollar-for-dollar, but you can restore your policy's performance and replenish your policy by repaying your loans for future access again.
Your cash value policy can be self-completing in the event of a disability. This means that the insurance company will pay your premiums and contribute cash to your policy when you are disabled and cannot work! This is known as a disability waiver of premiums and it's a huge secret that most people don't know about. There are various versions of this rider, but usually, 6 months after being diagnosed with a disability - and you have the rider on your policy - the insurance company will pay your premiums for you for as long as you are disabled. Please show me any other investment or asset that will continue to make contributions for you in the event of your disability. I'll wait. <crickets>
Through the tax-exempt nature of loans against cash value life insurance contracts, your borrowed funds in retirement avoid taxation, specifically: Federal taxes, state taxes, local city and county taxes, taxes on social security, and Medicare IRMAA premium increases. This makes these contracts far more valuable from a tax perspective by legally avoiding incurring those taxes on this source of cash flow from your policy. An exception: In my own calculations, I believe that it would cause HARM to do this kind of strategy for anyone who retires with less than $500,000 in retirement assets. I believe that moving assets into these policies will cause more harm than good for those with lower asset levels. Regarding the "One Big Beautiful Bill Act (OBBBA)" and Social Security: It did NOT make Social Security income-tax free as Trump promised during his 2024 presidential campaign. The "One Big Beautiful Bill (OBBBA)" DID introduce a new Additional Seniors' Deduction immediately effective for people age 65 or over up to $6,000. If both spouses are 65+, that can be $12,000 total. That can offset the income taxes on social security benefits greatly... but it phases out above certain income levels. Over $75,000 for individual filers and $150,000 for joint filers. It helps offset the otherwise incurred tax on Social Security retirement benefits, for those within these income limits.
Critics of cash value life insurance blame the contract and the agent.
They blame the agent for being "commission hungry" for putting the wrong people in these contracts. There is some truth to that, but these contracts can help many more people than these critics believe.
Are these contracts scams? It depends! (I hate saying that.) Here's my litmus test for a cash value focused contract: Can it make sense to have less money in the life insurance contract vs having more money elsewhere for what that money is earmarked to do? If so, it's a great fit! If not, maybe it's not the best time to have such a contract. But then again, does it make sense to cancel the contract entirely? Maybe not!
There are many considerations to be factored in.
What about a protection-focused contract? These are focused more on securing the death benefit. Again, it depends on the purpose and if that purpose still merits having a cash value contract to secure the funding of that purpose.
On a regulatory standpoint: cash value life insurance has been sold in the United States for just about 175 years. If they were truly predatory and scams (meaning that they don't pay out a death benefit subject to the contract's provisions), the regulators would have a field day with them.
We have 50 state regulators and the NAIC (National Association of Insurance Commissioners) to help regulate the insurance companies, contracts, and the insurance agents. Maybe the agents may need more training and realize how to conservatively present their contracts... and that can help engender more trust in our profession?
Bottom line: I do love cash value life insurance and annuities... but they have to make financial sense for the person I'm working with. If not, they're not getting them - at least not from me.
