Should I Keep My Cash Value Plan?

Dave Ramsey never recommends keeping a cash value policy (including whole, universal and variable life), regardless of how long or short you have had it, unless you are unable to qualify for a new, competitively priced term life policy. Keeping such a policy just compounds the mistake further, as the idea behind cash value plans is to overcharge you by manipulating you into thinking you will need life insurance your entire life – and that’s just not true! Within 15-20 years, you should be at a point in life where your family has built enough savings to sustain themselves without a life insurance policy. This is especially true when you consider all the money you can save by switching to a cheaper term life policy. These are the only plans we offer at Zander, because they’re the only ones that make sense.

Once you are out of debt and have built wealth, the need for life insurance is eliminated – and there are so many smarter things to do with your money! If you do still need life insurance after 20 or 30 years (unlikely), you will still be able to get more coverage at a lower rate than a cash value type plan. You would be subject to re-qualifying based on your health, but that risk is better than purchasing a poorly designed cash value policy today and suffering from its effect on your other financial strategies throughout the same time period.

Dave has long recommended using the cash value in the plan to intensify your debt reduction efforts, help establish your emergency fund and then take advantage of better investment options.  The savings you have in the cash value is typically earning a poor rate of return and it makes no sense to save money or leave it sitting while paying a much higher rate for credit card or other debt. The use of term life insurance is just one step in the overall process to get yourself out of debt and grow your savings.

Don’t let the fear of being charged a tax prevent you from cancelling your cash value plan. It is rare for a tax to be due, and when it is, it is only based on the amount in excess of the premium you have paid. Even if you do owe in taxes, the long-term benefits of switching to a term life policy far outweigh the risk. Learn more about the differences between term and whole life insurance.