Ditch whole life insurance?

[neophyte]

As we are paying off all debt, I have been toiling with the idea of cashing out my whole life policy AFTER securing a term life policy and using whatever "cash" I get toward the debt.

Just for information, I chose to select this vehicle. I was not pushed, coerced, or made to select it. I personally selected it (at the time) as a tool to provide my partner with money that I may not otherwise been able to pass to her. It is not that expensive, but I realize I do not need it (for many reasons) and won't let the fear of not being able to transfer money to her upon my death keep me stuck in this.

I am open to suggestions/input--pros/cons, things to look out for? Specifically, has anyone ever "cashed out" this type of policy before? As I understand it, there could be a fee to cash it out, based on how long I have been on the policy. I am also under the impression that I could ask my insurer if I can switch to a term level without having to go through all the underwriting, new medical, etc. Any feedback on my thought process?

Thank you in advance.

[Outer Marker]

It may or may not be a good idea depending on how long you've had it, the dividends paid, and whether or not they are guaranteed. I wish I had not gotten into the whole life racquet to begin with. But, 9+ years into the policy, the up-front commissions have been sunk, and the tax-deffered return on my NW Mutual whole life is favorable compared to other safe investments. These policies are the devil to figure out. I paid $79 for an impartial evaluation by this guy before deciding to keep mine. http://www.evaluatelifeinsurance.org If you have pressing need for the cash to pay down high interest debt, that would certainly factor into the decision.

[jeffyscott]

In addition to taking the cash value or converting to a term policy, you may be able to convert it to a paid-up policy.

[sdrone]

It's really too bad there aren't good investment vehicles in this space. I max my tax-avoidance accounts (401k, Roth IRA) and I've got term insurance. I wish there were SOMETHING good in this space to stash more savings in a tax-friendly manner.

[dhodson]

you need to ask for an in force illustration from the company. this will give you an idea how the policy might perform in the future.

Many times after you have had a policy a long time, the returns going forward are bond like. You cant get back the comission and fees already lost.

You have to decide if you want to leave some money behind at your eventual death. If you dont want to leave any, then permanent insurance typically isnt for you.

If you are okay leaving some money behind then what i would do (and im not an agent) with a policy held for a long time is change dividends to paid up additions. I would overfund if possible up to the MEC limit. Late in retirement, id take a loan out for about 90% of the csv not intending to pay it back. My heirs would get the difference between the death benefit and the loan.

The longer one has had a policy, the more likely it is best to just keep the darn thing. While it is frequently a mistake to purchase, it can also be a mistake to surrender.

If you have no desire to keep permanent insurance at all then if it were me id surrender if premiums paid are close to current surrender value. If there was a large difference, id consider 1035 exchange the surrender value into an annuity. This keeps the cost basis so if i was at a large loss, my gains in the annuity would be tax free until exceeding my previous premiums paid. If there were gains then this defers taxes further. Gains are taxed as income.

[dhodson]

It's really too bad there aren't good investment vehicles in this space. I max my tax-avoidance accounts (401k, Roth IRA) and I've got term insurance. I wish there were SOMETHING good in this space to stash more savings in a tax-friendly manner.

excessive fear of taxes leads to many bad decisions at times. Just use tax efficient in a taxable account once you have done the usual.

[neophyte]

Thank you everyone. I will consider everything offered here. A followup question-is ditching the policy an option, whether or not I get anything back from it? Or will that really have to do with whatever the insurance company says?

[Higman]

About 25 years ago I took out a term life policy and stopped paying premiums on my whole life but let the cash value pay the annual whole life premiums. The insurance company was treating it as a loan and was charging 5%. After a few years the cash value was not enough to pay the premium and the policy was cancelled. To my surprise I got hit with an unexpected tax bill. All that cash value I depleted was treated as ordinary income – all at once! Hopefully I’m remembering this correctly but the point is – understand the tax implications before cancelling.

[dhodson]

your in force illustration will tell you what you could get back. Also if you just call and ask what the cash surrender value is they will tell you that value.

Yes all gains are taxed as income even if you crash the policy. Your example shows one of the many problems of taking out too much in loans too early in life from a policy.

[neophyte]

In addition to taking the cash value or converting to a term policy, you may be able to convert it to a paid-up policy.

Would this be a paid-up term life policy?

[HomerJ]

It's really too bad there aren't good investment vehicles in this space. I max my tax-avoidance accounts (401k, Roth IRA) and I've got term insurance. I wish there were SOMETHING good in this space to stash more savings in a tax-friendly manner.

A plain old stock index fund in a taxable account is very tax-friendly.

People worry way too much about taxes, and not enough about fees...

$100,000 in the Vanguard Total Stock Market Index Fund costs like $60 a year in fees, and generates about $2000 in dividends, which costs you $300 in taxes... (15%)... That's $360 you lose from that account each year (0.36%).

Life insurance salesman promises you no taxes, but you pay 2%-3% in fees each year.... Many people, scared of taxes, end up paying $2000-$3000 each year to avoid $300 in taxes.

[neophyte]

It may or may not be a good idea depending on how long you've had it, the dividends paid, and whether or not they are guaranteed. I wish I had not gotten into the whole life racquet to begin with. But, 9+ years into the policy, the up-front commissions have been sunk, and the tax-deffered return on my NW Mutual whole life is favorable compared to other safe investments. These policies are the devil to figure out. I paid $79 for an impartial evaluation by this guy before deciding to keep mine. http://www.evaluatelifeinsurance.org If you have pressing need for the cash to pay down high interest debt, that would certainly factor into the decision.

Thank you Outer Marker. I've only had it maybe 4 years. I am not sure about up-front commissions, I went through USAA. I am going to look at that link and determine if I want to just ditch it. It's a very low policy value ($50k) and I'm having many second thoughts about keeping it at this point.

[neophyte]

your in force illustration will tell you what you could get back. Also if you just call and ask what the cash surrender value is they will tell you that value.

Yes all gains are taxed as income even if you crash the policy. Your example shows one of the many problems of taking out too much in loans too early in life from a policy.

Thank you dhodson. I've requested the in force illustration and cash surrender value from USAA. I am hoping I can make sense of it when I receive it. Thank you for keeping with me on this, I am trying to understand, this is just something I know very little about. Thanks again.

[neophyte]

It's really too bad there aren't good investment vehicles in this space. I max my tax-avoidance accounts (401k, Roth IRA) and I've got term insurance. I wish there were SOMETHING good in this space to stash more savings in a tax-friendly manner.

A plain old stock index fund in a taxable account is very tax-friendly.

People worry way too much about taxes, and not enough about fees...

$100,000 in the Vanguard Total Stock Market Index Fund costs like $60 a year in fees, and generates about $2000 in dividends, which costs you $300 in taxes... (15%)... That's $360 you lose from that account each year (0.36%).

Life insurance salesman promises you no taxes, but you pay 2%-3% in fees each year.... Many people, scared of taxes, end up paying $2000-$3000 each year to avoid $300 in taxes.

I am not sure I cared too much what the fees were in a year when I purchased this initially. I was more concerned with long term taxes transferring money to my partner (although our marriage is recognized in some states, federally it is not yet; estate planning has proved challenging for me in this vein).

[jeffyscott]

In addition to taking the cash value or converting to a term policy, you may be able to convert it to a paid-up policy.

Would this be a paid-up term life policy?

No, paid up "permanent" policy, with a reduced benefit. My mom did this on a couple over-priced policies that she had been sold long ago, each originally had a face value of $10K. She had paid premiums for a long time and then did this conversion and pays nothing. One policy has a death benefit and cash value pretty close to the original $10K. The other has a cash value of $3,xxx and death benefit of $7,xxx. Both get dividends added each year.

[sdrone]

A plain old stock index fund in a taxable account is very tax-friendly.

People worry way too much about taxes, and not enough about fees...

I'm simply saying that it would be great if I could stash more savings in a cash sheltered investment. Given the choice, I'd love to have the ability to stash more retirement savings in something like a Roth IRA . Variable universal life policies, for instance, seem awesome - except for the massive fees and the inability to completely control your investment, of course.

[mephistophles]

I've only had it maybe 4 years. I am not sure about up-front commissions, I went through USAA. I am going to look at that link and determine if I want to just ditch it. It's a very low policy value ($50k) and I'm having many second thoughts about keeping it at this point.

Just my opinion as a 40 plus year life insurance agent. Recommend you just ditch the four year old policy. Call the company for a cash surrender form. No taxes will be due as you will surrender value will be small compared to premiums paid. Of course, make sure your life insurance needs are filled with term insurance before you do this.
ole meph

[neophyte]

I've only had it maybe 4 years. I am not sure about up-front commissions, I went through USAA. I am going to look at that link and determine if I want to just ditch it. It's a very low policy value ($50k) and I'm having many second thoughts about keeping it at this point.

Just my opinion as a 40 plus year life insurance agent. Recommend you just ditch the four year old policy. Call the company for a cash surrender form. No taxes will be due as you will surrender value will be small compared to premiums paid. Of course, make sure your life insurance needs are filled with term insurance before you do this.
ole meph

Thank you mephistophles. I've requested an in force illustration at the suggestion of another boglehead which is in the mail. I did ask the cash value of the policy and they did not respond--I'm assuming I should either know that value already or they have sent something in the mail. We'll see.

[Dandy]

In most cases whole life is too expensive to maintain if you have other life insurance options. I have a small whole life insurance that is paid up (after 40 yrs). The current dividend divided by the cash value returns 5.85%. So while it probably wasn't worth having this policy vs term for 40 years it does not seem to be worth giving up - especially now that there is no premium.

For those who have had whole life for a long term do the math before you act. For those of you who don't have whole life seriously consider term before you act.

[EmergDoc]

In most cases whole life is too expensive to maintain if you have other life insurance options. I have a small whole life insurance that is paid up (after 40 yrs). The current dividend divided by the cash value returns 5.85%. So while it probably wasn't worth having this policy vs term for 40 years it does not seem to be worth giving up - especially now that there is no premium.

For those who have had whole life for a long term do the math before you act. For those of you who don't have whole life seriously consider term before you act.

Well-stated.

[neophyte]

In most cases whole life is too expensive to maintain if you have other life insurance options. I have a small whole life insurance that is paid up (after 40 yrs). The current dividend divided by the cash value returns 5.85%. So while it probably wasn't worth having this policy vs term for 40 years it does not seem to be worth giving up - especially now that there is no premium.

For those who have had whole life for a long term do the math before you act. For those of you who don't have whole life seriously consider term before you act.

Well-stated.

+1. Thank you.