Feb 24, 2020

When Cash Now Means More

A lifetime of hard work, careful saving, and smart investing can build a retirement fund. Just one serious illness can all but wipe one out. The unfortunate reality is that even the wisest retirement planners can end up in real trouble if they fall ill. If and when that happens, these careful savers may be horrified to learn that their remaining wealth is tied up in assets — rather than in cash, which could be used to pay their bills.

That’s a real problem, because not all wealth is the same. Some assets are more liquid than others, meaning they can be more quickly converted into cash or other stores of value. And when you’re facing certain circumstances, liquid assets can be worth much more.

Debt and the cycle of debt

Why is cash in hand sometimes more valuable than assets or cash later on? To understand why, we need to look at the time value of money and how debt works.

The time value of money is a concept that holds that, all else held equal, a given amount of money right now is worth more than a given amount of money later. Why? Because you can do something with money now, including invest it to make more money by the time you would’ve gotten that starting sum in the future.

Debt works a bit like this. When you take out a loan, you agree to pay it back with interest. In a way, you’re an investment on the part of your lender. They’re using the time value of money by taking money they have now and making it earn interest — by lending it to you.

But interest doesn’t always accrue at a steady rate. If you have trouble paying off your debts, the interest could be added to the principal and could quickly spiral out of control. You may eventually hit a point at which you can only pay the interest (or not even that), trapping you in an endless cycle in which you can never reduce your debts. This is called the cycle of debt.

Assets and cash now

Let’s return to the first idea we talked about. Let’s say that you’re retired and have fallen seriously ill. You’re low on cash, and you’re in danger of seeing your debts pile up. But you don’t have much cash on hand. All you have are assets, such as your house and your insurance policies.

But these assets have real value. Your life insurance policy will someday pay out to your beneficiaries. Unless you’ve discovered the fountain of youth, that’s a guaranteed payday. Too bad that it will come too late to rescue you from your current situation.

But you can convert your eventual insurance payout into cash now. It’s called a viatical settlement, say the experts at American Life Fund, and it can be a huge financial relief to folks facing medical bills and other expenses.

The idea is pretty simple: Another party buys your life insurance policy. You get cash now, and the organization buying your policy gets the eventual insurance policy payout. You’ll get less in cash than the policy will someday be pay out, as you might expect — remember that, because of the time value of money, the cash now is worth more. The people on the other side of the transaction will get some interest on the money they spend now by cashing in your policy at some point down the line, and you’ll get the cash that you need right now. And, as we’ve just seen, that cash can be much more important to you in your current situation than any amount of insurance payout could be down the line. With cash now, you can pay down bills and reclaim your comfortable retirement. Avoiding the cycle of debt should be your top financial priority.

Is a viatical settlement right for you? That depends on your age, health, insurance policy, and financial situation. For advice, consider working with a financial adviser. You may find that a viatical settlement is a powerful option.

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