Variable Life Insurance Policy...what should I do with this?

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AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Variable Life Insurance Policy...what should I do with this?

Post by AZK »

Hello all,

My parents recently informed me that they purchased a variable life insurance policy in my name in 1990. It was a 75k policy. We pay $320 a year for it. It's current value if I were to close is a little under $5k. I'm told by the operator it has grown to $76k total. $1k growth in 21 years. awesome.

What do I do with this?

Do I close it take the cash and forget it?

Do I keep it, continue to pay it, but re-allocate the investments?

I'm sort of at a loss. They are sending me a bunch of info. to read about since I really have no clue what this policy is exactly and my parents can't really tell me either. My inclination is to close it, cause it just seems complicated and unnecessary, pocket the $5k and cut my loss there. ($320*21 years should be 6k+.) I asked if there was any penalty, which there isn't for closing this account. The only question I really have was if this would be advantageous to hold on to for perhaps borrowing against in the even I buy a house in the next 3-5 years (which is likely).

I don't know what background info you would need. But for now assume, no debt, gainfully employed, emergency fund intact, maxed retirement accounts, also contributing to taxable investments, 28% tax bracket. No kids currently but most likely in the next 1-2 years.

Before my parents told me about this, my plan was to buy term life once we had kids.
dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Post by dhodson »

My short answer would be dump this and take the small loss once term insurance was obtained. You are unlikely to ever get much of a return on this product as an investment.
Oneanddone
Posts: 1549
Joined: Sun Dec 12, 2010 9:39 am

Post by Oneanddone »

Keep in mind that you are insurable until the day that you are not. This means that a bad insurance policy shouldn't automatically be dropped.

It's not just a 1K gain in insurance coverage in 21 years. It was also insurance coverage for the past 21 years. It was also a guarantee that you could have insurance for the rest of your life. You are also getting back most of your premiums if you cancel.

I'm not saying that it is a good policy. It probably is not. I just want to make the point that this is an insurance product and it has done what it has promised to do.

Assuming that you are healthy and can replace it, I would certainly recommend doing it with a substantial term policy.

Even after getting a new term policy, I would not suggest cancelling it and having them send the cash. Instead, do a 1035 exchange into an annuity. I recommend this for almost all insurance policies that have a loss. This gives you the ability to get tax free growth and not just tax deferred growth.

Ex. Jim has an insurance policy with a $10,000 cost basis and $8,000 cash surrender value. Judy has the same thing. They both cancel their policy. Jim puts the money into a 5 year fixed annuity paying 4%. Judy puts the money into a 5 year CD paying 4%. At the end of 5 years, Jim will have about $500 more dollars.

The reason is that his first $2,000 of growth is tax free. Taxes and pre 59 1/2 penalties only apply to gains. He gets $2,000 without tax consequences because even though he is only putting in $8,000, his cost basis is $10,000.
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Thanks for the info. I'll look into the 1035 stuff.
dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Post by dhodson »

While a 1035 exchange is a possibility if I were you, I wouldn't. I'd just cash out. My reasoning for this is that you are young and the 1k difference of tax basis wouldn't be worth the low return and hassle factor of another insurance product. I feel a 1035 exchange is more useful if there is a greater loss or gain especially if you are older. Most of the reasons why this product is sold to parents of newborns are not worth it. Don't make the same mistake when you have kids.
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