Does An Overfunded Whole Life Policy Make Sense For You? 

Cash value life insurance has been around for decades.

If you are reading this article, it’s likely you are looking for the Best Whole Life Insurance Policy. Or you are in the middle of your research looking for more details on Cash Value Life Insurance.

This article will help you decide is Overfunded Life Insurance is for you? 

Also, we will list alternative that may fit your plan much better than an overfunded policy.

Quick Overview Of Overfunded Life Insurance Policies

These policies are designed to maximize cash value and minimize death benefit. The idea is that they build cash value quickly that you can access for any reason. In addition, this cash value grows predictably and safely.

Overfunded policies are most noteworthy in press from Nelson Nash’s – Infinite Banking  and  Pamela Yellen  – Bank On Yourself .  

Both authors offer great information about whole life insurance and how it can be used. 

But is overfunded life insurance the correct purchase for you?

Here is a great video from Bank On Yourself that explains their concept … 

Video Reference: https://www.bankonyourself.com/ 

Why Are You Looking Into An Overfunded Whole Life Policy? 

There are many things to consider before you purchase an overfunded policy. However, the most important aspect is WHY?

In order to make sure a policy makes sense you should ask yourself these questions:

  1. Why have you decided on whole life?

  2. What do you plan to use the policy for?

  3. How do you plan do fund your policy?

  4. When do plan to access the cash value?

  5. Can you fund your policy even if you were to have a bad income year?

  6. Why do you believe that an overfunded policy is the best plan?

  7. Do you have a need for life insurance?

Any competent agent should ask you all of these questions to design your policy correctly. The answers are critical to make sure you are not buying something that doesn’t make sense for you. 

WHEN Do You Plan To Use Your Cash Value? 

WHEN you plan to access your cash value can greatly dictate if an overfunded policy is the best fit.

All buyers of life insurance will fall into four categories:

  1. Do not plan to access cash value.

  2. Want to access cash value for retirement.

  3. Would like to access cash value in the next 10 years.

  4. Are looking to access cash values ASAP.

Now we will use these to determine what you should be considering. 

1. Do Not Plan To Access Cash Value  

If you do not plan on accessing your cash value, then we would not recommend an overfunded life insurance.

Overfunded life insurance offers many benefits such as guaranteed death and level premiums.

Otherwise you will be “overpaying” for the living benefit (Cash Value), and your death benefit would be smaller than it should.

So if you will not access cash value, then we would suggest looking into a Universal Life Policy. Universal Life policies come into many shapes and sizes, but in particular you should look into Guaranteed Universal Life Polices. This policy is like a permanent term insurance

Universal Life Policy

Male Age 40, Good Health

Death Benefit: $1,000 per month

Universal Life Policy Male

Female Age 40, Good Health

Death Benefit: $1,000,000

Universal Life Policy Female

Recap

You can see in the above two illustration examples cash value is not focus.

For the male’s policy:

  • In year 1 the surrender value is $0.
  • By year 5 the surrender value is $880.
  • At age 65 surrender value is $29,640. 
  • At age 65 death the benefit is $1,00,000

For the female’s policy:

  • In year 1 the surrender value is $0.
  • By year 5 the surrender value is $5,461.
  • At age 65 surrender value is $67,352. 
  • At age 65 death the benefit is $1,00,000

The surrender value’s do accumulate and Universal Life Policies do have cash value however the primary reason for this cash value is to help keep premiums level into the later years. As the cost of insurance ” mortality cost” rises over time the price will also increase. This all happens in the background and you will not see an actual change in premium as the policy owner. 

2. I Would Like To Access My Cash Value For Retirement 

If this is you we might recommend considering the purchase of overfunded life insurance.

However, if you do not need the cash value in the early years of your policy a traditional whole life policy could be fine.

If you are between the ages of 50 – 60 you would be better off with a limited pay style policy. 

Traditional Design 

The example below illustrates a design that offers a substantial cash value and death benefit by age 65. 

Traditional Whole Life Policy  

Male Age 40, Good Health

Premium: $1,000 per month

Regular Whole Life Insurance Illustration

Female Age 40, Good Health

Premium: $1,000 per month

Regular Whole Life Insurance Illustration Female

Recap

You can see in the above two illustration examples do accumulate cash value in the later years.

For the male’s policy:

  • In year 1 the cash value is $0.
  • By year 5 the cash value is $35,594.
  • At age 65 he will have $468,202. 
  • At age 65 death the benefit is $1,084,236

For the female’s policy:

  • In year 1 the cash value is $0
  • By year by the cash value is $38,061
  • At age 65 she will have $495,208 in cash value.
  • At age 65 death the benefit is $1,3304,943

The cash values accumulate much more efficiently than a Universal Life Policies. You will also note the premiums are a bit higher for these policies.

The cash value growth for these policies are much stronger in the later years. In the early years the cash value is lower as much of your premium is going to pay for the mortality expenses that the policy caries.

3. I Would Like To Access My Cash Value In The Next 10 Years 

If this is you I would recommend overfunded life insurance.

This police design will have a lower death benefit and substantially more cash value in year one.

You can see this by comparing the traditional and overfunded example.

Always confirm the policy is not a Modified Endowment Contract (MEC). 

Overfunded Whole Life Policy 

Male Age 40, Good Health

Premium: $1,000 per month

Overfunded Whole Life Insurance Sample Male

Female Age 40, Good Health

Premium: $1,000 per month

Overfunded Whole Life Insurance Sample Female

Recap 

You can see in the above two illustration examples accumulate strong early cash value.

For the male’s policy:

  • In year 1 the cash value is $5,592.
  • By year 5 the cash value is $48,706.
  • At age 65 he will have $502,756 in cash value. 
  • At age 65 death the benefit is $1,033,566

For the female’s policy:

  • In year 1 the cash value is $5,839
  • By year by the cash value is $50,998
  • At age 65 she will have $527,091 in cash value.
  • At age 65 death the benefit is $1,240,313

These two policies are very efficient and have great early cash values. The above policies are 50% blended. This means that half of the total $12,000 premium is going to pay for the base contract and the other half is going towards cash value.

Hence why you see so much more cash value in the first year. The difference you will note is that the death benefits of these policies are much lower than the “traditional whole life policies”. Depending on how much life insurance you need will impact what type of design would be better suited for you. 

4. I Would Like To Access My Cash Values ASAP 

When you are looking to access cash value very quickly, then  I would recommend an overfunded life insurance.

I believe that this policy by MassMutual provides the strongest year on cash value in the market.

This policy is called the Legacy High Early Cash Value or HECV.

See the review on MassMutual’s HECV

High Early Cash Value Whole Life Policy

Male Age 40, Good Health

Premium: $1,000 per month

High Early Cash Value Whole Life Insurance Sample Male

 

Female Age 40, Good Health

Premium: $1,000 per month

High Early Cash Value Whole Life Insurance Sample Male

You can see in the above two illustration examples accumulate strong early cash value.

For the male’s policy:

  • In year 1 the cash value is $10,299.
  • By year 5 the cash value is $57,431.
  • At age 65 he will have $439,891 in cash value. 
  • At age 65 death the benefit is $984,030

For the female’s policy:

  • In year 1 the cash value is $10,754
  • By year by the cash value is $59,969
  • At age 65 she will have $459,329 in cash value.
  • At age 65 death the benefit is $1,027,512

As you can see, these two policies are the most efficient for cash value in the first 5 years. The above policies both have significantly more cash value and also death benefit compared to the other two options.

However, these policies do not offer the strongest growth longterm. By age 65 these policies underperform the traditional and overfunded policy in cash value and death benefit. If you are looking to leverage cash value in the first five years of your policy this is the best choice.

The HECV policy is also a great option for business owners who need to own life insurance and hate “losing’ their premiums. If you set up a HECV policy you can essentially recoup your premium contributions in the form of cash value in 5 years. Thats not a bad deal! 

Overfunded Life Insurance TipsBenefits Beyond Cash Value

Death Benefit

Overfunded Live Insurance not only offers great cash value, but also it offers a tax free death benefit to the beneficiaries of your policy. 

Tax Benefit

Overfunded Life Insurance is a tax advantaged product. The cash value grows tax deferred and the cash value can be spent down tax free! 

Growth

Depending on what company you work with the tax deferred growth can be between (4-6%) annually. So over time your cash value will grow faster and faster.

What does your savings account pay? 

Exchange

As a policy owner you have the ability to move your cash from one life insurance policy to the next without income tax liability. As a matter of fact, you can even move your cash value into an annuity as well. 

Market Protection

Markets go up and down. When markets go DOWN overfunded life insurance provides protection. The policy is not correlated directly to the stock markets. If the market declines, the cash values are vested and will not go backwards. 

No Age Restrictions

Cash Value life insurance has no liquidity restrictions. Your cash can be taken out of the policy before age 59 ½ for any reason without government-imposed penalties, unlike IRAs and 401ks.

Well that pretty cool! 

Privacy

In reality, overfunded life insurances are a private. What this means is that there are no transaction histories any time you access cash in your policy it does not appear on a credit check.

Tip: Most schools do not look at cash values accounts during financial aid applications. Overfunded life insurance is a great place to save for kids college. 

No Limits

Overfunded life insurance has no contribution limits. There are NO caps on the amount you can contribute.

The only limitation is if you can qualify for enough death benefit to allow a large cash contribution into the policy without making the policy a Modified Endowment Contract .

The Bottom Line 

In conclusion, talk to an experienced agent!

You will want to consider very carefully who is the person helping you design an overfunded policy.

If the agent is not asking you questions like the ones listed at the beginning of the article. I can assure you they are not well versed in designing a policy to fit your needs. 

Final Thoughts 

Finally, overfunding a life insurance is not appropriate for every person.

It is a valuable option for investors in good health who are serious about long-term savings and want tax-efficient vehicle. If you plan to buy an overfunded life insurance policy it is important that the policy is carefully designed.

It is important to work with an independent and licensed life insurance professional. The agent must have experience with overfunded life insurance or you will get a policy that may not fit your objectives.

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