Keep Some Cash Outside the Policy in Year One

New policyholders who get excited make a mistake the cautious ones never make. They get so sold on the policy that they route every spare dollar into premiums. Including the dollars that were the emergency fund. Then the transmission fails in month eight, and the policy that will one day be their favorite source of liquidity isn't one yet.

The early years of a high cash value policy are its slowest. We've never pretended otherwise. The costs come out early. Cash value in year one is a fraction of what you paid in, for reasons the education site explains in Why the First Few Years of Cash Value Look So Slow. The policy's borrowing power grows into something remarkable, but it grows. In year one it's a sapling, and a sapling can't hold a swing.

So here's the rule. Your emergency fund stays in the bank, boring and instant, until the policy's cash value can take over the job. For most designs that's a few years in, when the cash value is substantial and a policy loan can be in your checking account within days. Until then, run both. Keep several months of expenses liquid outside the policy, and size the premium so it's paid from income, not from draining the cushion. Our sister site's guide on how big an emergency fund should be is the right companion read here.

I'll grant the pushback, because it's fair. Some designs move existing savings into a policy on purpose, over several years. Done that way, with a written schedule and a cushion left behind, it works. The difference is a plan versus a sprint. Moving savings on a schedule you built is not the same as shoveling in everything loose because the illustration looked good.

The most expensive policy in the world is the one that lapses in year two because life happened and there was no cash anywhere else. All the front-loaded costs get paid, none of the compounding gets collected. Starving your life to overfund a policy gets you exactly that. One dull decision at the start prevents it. Size it right on day one, the way we laid out in How Much Should You Actually Put Into a Policy?, and the sapling gets its years to become the thing you bought it to be. New here? The get started page maps the whole path.