Group universal life insurance with cash accumulation fund

[dodojojo]

I'm not eligible for the company paid life insurance but qualify for its group universal life plan where I would pay the premiums.  I suppose since it's a company plan, the rates are rather competitive.

The plan also offers a cash accumulation fund feature.  Apparently I'd be able to contribute to this plan via payroll deduction. There's no investment option--I'm just guaranteed 4% annual return.  There is no management fee.  I can withdraw funds anytime without penalty.  I do not pay taxes on withdrawals if they are less than what I have contributed.  There is a annual cap but it's dependent on the amount of my life insurance (higher insurance, higher fund cap).  If I leave the company, I can continue with the insurance plan (higher premiums though) or I can stop the plan and withdraw my cash fund without penalty.  I do pay taxes on the interest earned on cash fund.

This all sounds too good to be true.  Is anyone dealing with this type of life insurance?  Or knowledgeable?  The cap probably won't be much, but I'm keen on using it to stash some emergency cash as 4% sure as hell beats whatever I'm getting in my bank savings accounts.

[dandarc]

You have to have the insurance to get the cash account, right?  The insurance premium matters here - sounds like company is subsidizing it as well which all goes into whether this is a good deal or not.

E.g. - say you wanted to put 10K in here - sounds like you're getting $400 / year in interest - great deal compared to current rates available at banks.  However if you have to buy an insurance policy that costs $1200 per year that you otherwise wouldn't buy, this isn't such a great deal then, is it?  If the policy requirement is only $10 a year, yeah go for it, but read the fine print to be sure the access to the money really is as easy as advertised.

Combining insurance and investing rarely works out - read up on these things at whitecoatinvestor.com - he debunks a lot of the marketing there better than I ever could.

[dodojojo]

dandarc, yes, upon further review, GUL in general may not be better for me.  My premium is $.037 for every $1,000 in insurance coverage for this year.  It is lower than buying 10 years term life.  But in 10 years time, the GUL premium is $.091 for every $1,000 of insurance.  A ten year term life overall would be cheaper over the 10 year period.  I'm looking at 10 years as I hope by that time, I will have enough of a stache and I will cancel life insurance.

In addition, I assume the rates are if I'm employed with the company.  Should I leave, my rates would likely go up exponentially.

[dodojojo]

dandarc, thanks for the whitecoatinvestor.com link.  I just read the life insurance post and it's simple and highly informative.

[dandarc]

Yeah - this might be an OK deal because it sounds like the employer is paying part of the premium too - if they're paying 80% of it, it can skew the numbers.  How much insurance would you have to buy to be able to put the amount that you want into the savings component?  And is this insurance that you would buy otherwise, or would just be buying it to get access to this account.

For the record - compared to investing in stocks that guarantee of 4% comes at a huge cost - historical returns for stocks are in the 7-10% range, but you have to embrace the volatility.  I wouldn't go beyond your emergency fund for this account - for long term investing its just not good enough, even if the insurance part were free.

[dodojojo]

No, I need life insurance so I'm not just buying it for the cash fund feature.  I'm not looking at the 4% as a long term investment tool.  Just as a way to park some cash for emergency purposes.

Doing the math, it would be slightly cheaper to buy term insurance over 10 years than it is to participate in my company's GUL plan.  I don't anticipate staying at my company for 10 years (I have a three year limit on my current position) so I expect my GUL monthly rate would increase significantly when I exit.   Due to this, I'm going to stick with term life insurance.

I'll have to find another way to get better interest rates for my emergency cash fund.

[Nords]

I'll have to find another way to get better interest rates for my emergency cash fund.

It's either a cash fund for emergencies, in which case liquidity is more important than yield, or else it's a cash fund for when you need to buy something with cash-- in which case you ask for a cash discount.

In other words you're not supposed to chase yield with that type of cash fund.  But if it makes you feel better then you could buy three-year CDs and hope that you don't have to redeem them early.  PenFed sells their CDs in $1000 increments so that you can break them in small chunks instead of one large amount.