Traditional cash value life insurance, whether fixed or variable, may provide an answer to many of our current problems, writes financial-services attorney Judith Hasenauer.
We have previously written about the continuing reduction in the average amount of life insurance in force in this country and the distribution problems that seem to be driving this phenomenon. Term insurance rates are at or near all-time lows. On every side, we are bombarded with radio and television advertisements for cheap term insurance. The Internet is replete with offers of low-cost term insurance. Yet, little is said about the many uses that are available for traditional cash-value life insurance.
Many large insurers have severely cut back on the amount of annuities--both fixed and variable--that they wish to sell. A number of insurers have curtailed their sales of long-term care insurance. Yet at the same time, the government issues statements about its concern over low savings rates and the lack of retirement funds available for the baby boomers and those already retired. We believe that traditional cash-value life insurance, whether fixed or variable, may provide an answer to many of these problems.
The life insurance business started in this country with the industrial insurance offered by many of the now-household-name insurers that were established in the 19th century to provide some form of death protection for workers during the Industrial Revolution. Insurance agents ran "debit routes" around the country, collecting small premiums on a weekly basis, using coupon books to record that the premiums had been paid. The amount of life insurance purchased on these debit routes was usually quite small and did little more than get a breadwinner buried and provide a small safety net for the widow and family. Amazingly, there is quite a bit of debit insurance still in force in this country, although there have been few sales of this type of insurance in decades.
Debit life insurance was not usually concerned with the tax advantages of life insurance or with the ability to borrow cash values. After all, most of the debit life insurance sold in this country predated the federal income tax, and the cash values were so small as to be insignificant for someone who was desperate to access emergency funds.
By the time of World War II, the life insurance business began to morph into sales of large-face-amount cash-value policies that were often used more for estate planning or business succession planning than for the pure insurance elements of the products. With marginal federal income taxes that could go into the 90th percentage rate, the tax elements of the cash-value life insurance policy became paramount. Federal and state estate and inheritance taxes were also at confiscatory rates, and cash-value life insurance provided tax-free liquidity that was essential for maintaining family wealth. Today, cash-value life insurance still is used for the same purposes, despite the confusion of the past few years regarding estate taxes, capital gains taxes, and regular income taxes.
Throughout all of this, the middle class wage-earner has been largely forgotten in the life insurance process. The middle class wage earner relies almost exclusively on the group insurance provided at the place of employment or on small amounts of term insurance purchased, more likely than not, on a whim.
Yet, as the savings rate among the members of the middle class continues to drop, the value of a savings program using the tax advantages of cash-value life insurance increases. Most members of the middle classes are usually unaware of their actual rate of federal and state income taxes. With interest rates in this country at an all-time low, conventional savings methods result in what is probably a negative return on the money saved when inflation and taxes are factored into the equation. As is the case with most fixed-return investments, cash-value life insurance returns are lower than they have been in decades. Nevertheless, they are generally somewhat higher than on other forms of saving, particularly when the tax-deferred or tax-free nature of the interest credited to such policies is considered.
The ability to borrow on a tax-free basis from properly designed cash-value life insurance policies is critical to their use for purposes other than protection against premature death of the insurer. Tax-free policy loans can be used to cover long-term care expenses, for college expenses, and for emergency needs of all kinds. There is no other financial product that provides this type of flexibility.
Despite this, the sales of cash-value life insurance policies are quite low, particularly among the members of the middle class. Even those members of the middle class who try to save for future needs seldom think of cash-value life insurance as a means to achieve their objectives. This is because the delivery system for such products to the large numbers of middle class Americans who need them does not really exist and has not existed since the effective end of the debit life insurance industry.
We have heard on numerous occasions that "the average life insurance agent cannot afford to sell the average life insurance policy to the average American." Despite this current failure in the delivery system, we believe that an effective delivery system, utilizing modern technology, can be developed to solve this problem. We will have more to say on this in further columns.