Life Insurance - it's changing role in the seasons of life

Question: I read in a magazine about life insurance having a living value. How can it have a living value if you have to die to collect it?

Answer: Your question reminds me of the lumberjack who heard about a newfangled contraption called a "chainsaw" that a man could use to cut twice as much wood in half as much time.

This sounded mighty good to the old woodcutter, so he went to town and bought a chainsaw. Just three days later, he returned to the store with a dejected look on his face. The chainsaw was dirty and battered looking.

"This thing don't work too good!" he said. "It takes me ten times longer to cut wood with this thing as it did with my ax. I want my money back!"

Confused, the salesman said, "Let me see if I can figure out what the problem is. May I?" And with that, he took the chainsaw, pulled the starter cord and the chainsaw roared to life.

Startled, the lumberjack jumped back and yelled, "What's that noise?"

Both chainsaws and life insurance can be very helpful tools. But you have to know how to turn the power on.

Permanent life insurance is designed to pay a claim whether the insured dies next week or lives to be 100. Therefore permanent life insurance builds a cash value, growing until it is equal to the death benefit amount by age 100.

This cash value portion is sometimes cited as a "living value" to the insured, since it can be accessed for any reason by the owner of the policy prior to death. I have seen some insurance companies and their agents compare this cash value growth to some other form of investment, such as a mutual fund, and declare one better than another.

This makes about as much sense as using a chainsaw as an ax. You can do it, but it is not the way the chainsaw was designed to be used. The cash value of an insurance policy is hardly a stand-alone investment and should not be compared to one.

Much better to focus on the death benefit as a living value. That's how the tool was designed to be used.

Most retirees are forced to make their retirement dollars perform two duties - their retirement dollars must (1) produce an income and (2) preserve themselves (most retirees are very concerned about running out of money).

Consider how life would be different for a retiree if he had a more balanced approach: what if every dollar of retirement-income-producing capital was matched by a dollar of permanent life insurance death benefit?

For a retiree, a permanent life policy means freedom. Each year, he can spend his retirement income, plus some of his retirement capital. Every year the retirement account is reduced due to his spending, the endowment (cash) portion of the policy increases proportionally. In fact, using a variety of interest rates, tax rates and inflation rates, a strong case can be made that most retirees could have double the after tax income with their same assets, if they just had a same-size policy to go with it.

In one's later years, life insurance can be a permission slip to spend your own money in retirement, with no fear of ever running out.

The secret of using life insurance in this way is integration and coordination with your other assets. You have to know what you're doing and have a plan - don't just buy a product and expect it to work out.

Life insurance can indeed have a living value to you. Just make sure you know how to turn the power on.