Whole life question about additional paid up insurance

[letsgobobby]

I have seen several of our knowledgable insurance folks state that after holding a whole life policy for a certain number of years, the wisest move is to use dividends to buy additional paid up insurance. Why is that? I understand not letting a policy lapse after 20+ years and we have kept my wife's policy for that reason. But why more insurance, as opposed to letting the dividend reduce the premium?

[dhodson]

paid up additions have a lower load and thus you get more bang for the buck both in cash value and death benefits.

in my view (and im of course not an agent), people are usually older then as well so you probably are increasing your "bond like" investments. A policy that has been held a very long time eventually starts to get "bond like" results. I wouldnt purchase a policy for this reason but once owned you have to decide what to do going forward. Now if you are struggling for cash then sure change it or keep it to reducing dividends. Polices that have always had PUAs as dividends, overfunded as much as possible, and had no loans seem to perform best.

before there were MEC limits, the idea was to buy like 1 dollar of insurance and overfund to infinity. this way you reduce the really horrible part of whole life (the whole life itself) to a minimum. i exagerate a little but just a little.

[letsgobobby]

Hi dhodson,

You were one of those whom I recalled making the statement, so thank you for taking the time to respond.

I don't understand what you say by "having a lower load." Does the entire argument rely on low prevailing interest rates? What 'return' am I getting internally from this policy?

Here is our situation:

MetLife policy purchased 4/1/93 (by my in-laws, affinity sale through their church ) on my wife (now 38 years old)
face value death benefit $100k
premium $539
current death benefit $108,388
current cash value $12,960
2012 dividend $151

Obviously the alternative to buying additional paid up insurance is to redirect the 2012 dividend to reduce the premium, but you, mephistopheles, MetLife, and other insurance folks have recommended buying more insurance instead.

[dhodson]

when i say load i mean things like comission that drag on the immediate cash value and death benefit value. paid up additions pay a lot less comission which is a reason why you see so few polices overfunded. They are in essence small completely paid for additional insurance. They will also produce dividends which can further "improve" the situation down the line.

keep in mind im not an agent. Im a guy who has experience with whole life (all negative mind you) and this experience made me research and understand the product so i wouldnt be fooled again or allow those i care about to be fooled. I hope to provide you and others useful information but im not in the finance or insurance industry.

To help you see what you can or should do, you must request from the insurance company an illustration with dividends set to PUAs and an illustration with dividends set to reduce premium. They are required to provide this to you. Look at both the guaranteed and non guaranteed collums for death benefit and CSV and see if it appeals to you. In the current low interest rate environment, id suspect that dividends will continue to go down so the policy probably will perform less than the current non guaranted collumn at least for several years. Historically it seems that once interest rates rise, about 5-6 years later dividends start to rise with them. You may also be able to overfund your policy at least by adding an additional PUA rider. Depends on the policy and the company. For instance lets say the normal premium is 1k per year. If your dividend at this point is 500 dollars then you can either pay 500 dollars out of pocket or pay 1k still and let that 500k of dividend go towards PUAs. If you can overfund then you can dump even more money into the policy then just 1k total or the 500 extra depending on how you like to look at it.

A lot depends on do you need insurance, how is your current health, and do you need or plan to leave money behind at your death. If you dont need insurance or plan to leave money behind then its good to come up with an exit plan since the only way any permanent policy really works out at all is if you keep in until death and thus leave some money behind.

For those who want to leave money behind, dont want any money for themselves, are ok with the lower return from insurance, and know for sure they will always be able to pay the policy then no lapse gUL works better than whole life bc it is cheaper for the same death benefit. Problem is if you dont pay the premium it crashes bc it doesnt really build up cash value. Whole life is more expensive for the same death benefit but it will build more cash value that you could access via loans. Loans arent taxed since technically it is a loan from the insurance company but they drag on your performance and can cause the policy to crash. What i think makes most sense is to take loans out late in life (so less interest paid and less chance of collapse) and allow your heirs to get the difference between your death benefit and the amount you took out in loans which is usually at max 90% of csv.

Whole life is bad news for most of us. Agents dont want to admit it. Most polices fail. Most people lose tons of money. With that said, once owned for a long time, typically keeping it in force is the best thing to do if you can and you are willing to leave some money behind at your death. If you arent then discussing exit strategies is best.

[Calm Man]

bobby, as I understand it from prior posts, you are a doctor . If your wife dies, do you need any of this 100K to continue on? I assume not. It sounds to me like future purchases of more life insurance won't help you and I have to assume that the investment returns on the cash value would be less than that of an index fund. I would get rid of the whole thing although I assume an insurance person would disagree with me. But maybe I don't understand all of this.

[dhodson]

you almost understand in my view. over the long run i think we would all agree that index funds are likely to do better yet all of us carry some bonds especially as we get older (for a bunch of reasons not likely all relevant to this thread). Even though a bunch of money has been sunk, going forward it is likely his returns on this will be similar to other bonds he will carry. This is why it was once (and maybe still is in some circles) desireable to purchase a whole life policy from someone who was going to surrender it. Let say the cash surrender value on a policy 20 years into the policy is 100k. Somebody offers you 101k and you think hey its 1k more than what i would have gotten otherwise but the person buying the policy is looking at the bond type performance going forward and is happy you paid all the initial fees. None of this should be construed to think its a good idea to purchase whole life to begin with.

[bluemarlin08]

If you don't need/want the death benefit, then the other reason to consider keeping the policy is for the potential investment return. You MIGHT get bond like returns, but you might not. Dividends are being reduced industry wide and might continue to be reduced in the future, diminishing future returns. Various in force illustrations can help determine what might happen, but these illustrations can be flawed. Try to find an independent agent/broker that will help you.

[letsgobobby]

I'll have to read through the responses to understand better.

We do still count on this death benefit, though it's not a critical amount. My wife has a work policy and also term.

I would be willing to accept 'bond like returns', I think of the cash value as part of our emergency fund.

The figures above are as of April 1, 2012.

On April 1, 2011:

death benefit $107,620
cash value $11,823
2011 dividend $157

So it seems like my $539 premium + $157 dividend + investment gains on $11,823 bought me $768 more in death benefit but $1137 more in cash value. Not to mention the value of the life insurance. From a very simplistic standpoint, that seems perfectly acceptable, no?

[dhodson]

Order the in force illustrations

You will see it more clearly then

They cost you nothing but a phone call to order

[letsgobobby]

I have ordered the up to date illustrations. I have them from 2008 and they show that by now, she should have $12,626 and $106,960 in guaranteed cash value and death benefit. The non-guaranteed columns show $13,112 and $108,176. So it seems we are somewhere in between.

How do I determine what the potential 'bond-like returns' would be from this policy?

FYI MetLife was once a mutual company but went public a few years ago. As a policyholder she received a few shares which we liquidated. My understanding is that as a non-mutual company going forward her dividends will be lower than a mutual company. Out of curiosity, is there any way to convert this to a mutual company policy?

[Steelersfan]

FYI MetLife was once a mutual company but went public a few years ago. As a policyholder she received a few shares which we liquidated. My understanding is that as a non-mutual company going forward her dividends will be lower than a mutual company. Out of curiosity, is there any way to convert this to a mutual company policy?

Since Met life went non-mutual I don't see any way to get to a mutual policy unless you cancel this policy and purchase from a (different) mutual company.

Very unlikely to be financially viable.

[mephistophles]

I have seen several of our knowledgable insurance folks state that after holding a whole life policy for a certain number of years, the wisest move is to use dividends to buy additional paid up insurance. Why is that? I understand not letting a policy lapse after 20+ years and we have kept my wife's policy for that reason. But why more insurance, as opposed to letting the dividend reduce the premium?

First, life insurance policies with mutual companies that become stock companies continue to pay dividends, generally at the same rate as if the demutualization never occurred. I own several policies with former mutual companies and I am happy with the dividend performance since demutualization.

Second, the best dividend option depends on each individual's situation. Paid up additions makes sense if you want to increase the death benefit and total cash value annually, without having to qualify for the new insurance. PUA's are often recommended for the above reason, plus the annual increases are income tax free from both a death and a cash accumulation standpoint. Years ago, when interest rates were very high, many agents recommended dividends to accumulate at interest as a better way to grow policy values. The interest on past accums was taxable annually though the dividend itself was usually not taxable. With lower interest rates, the rate of growth has been better with PUAs for quite a few years now.

Using dividends to pay policy premiums also makes sense, depending on your situation. If you don't want or need more life insurance then dividends to reduce may be a good option. Also, if you need more life insurance, you might want to explore the option of allowing dividends to reduce or pay for existing permanent insurance to free up money to buy new term insurance. Alot also depends on age. On several policies I allow the dividends to complety pay all premiums just based of personal preference,

Other dividend options may include buying one year term insurance equal to the guaranteed cash value or to cover loans with the balance going to PUA's or whatever.

I guess the bottom line is that you need to choose the dividend option that best suits your needs.
Best regards,
ole meph

[Frugal Al]

Paid up additions are a little like getting more whole life insurance at a wholesale price, purchased with dividends, which are just a refunds of excess premiums charged--how nice of the insurance company to do that. Assuming one needs insurance, it is a way a making a poor or marginally competitive product more palatable, financially. If one has ALL other tax advantaged accounts maxed out, it can be a marginally acceptable financial instrument, assuming the original policy was also bought smartly. PUAs do not make a silk purse out of a sow's ear, but they make it easier to live with and tolerate the sow.

Using dividends to pay premiums doesn't provide the same financial leverage that buying paid-up-additions does, and does nothing to improve the financial performance of the underlying policy.

[dhodson]

I have ordered the up to date illustrations. I have them from 2008 and they show that by now, she should have $12,626 and $106,960 in guaranteed cash value and death benefit. The non-guaranteed columns show $13,112 and $108,176. So it seems we are somewhere in between.

How do I determine what the potential 'bond-like returns' would be from this policy?

FYI MetLife was once a mutual company but went public a few years ago. As a policyholder she received a few shares which we liquidated. My understanding is that as a non-mutual company going forward her dividends will be lower than a mutual company. Out of curiosity, is there any way to convert this to a mutual company policy?

you cant "switch" nor would you want to. In essence any 1035 exchange would be like purchasing a new policy with all those front end loads again. Im sure some agent would love it if you did.

what you do is take a look at a current illustration both with dividends going to PUAs and to reduce premiums. Look at how much you would pay and how much your CSV and death benefits go up the following year. It is likely to be pretty close to reality for the 1st year (although maybe a little less). Over time the actual performance likely will be further from the illustration which is why you ask for them yearly. Illustrations are typically given under current assumptions/dividends.

[letsgobobby]

Finally got the illustrations and this is what it says. We are in year 20 now.

Year - cash value - death benefit

Scenario 1 assumes no future dividends:

20 - $13,926 - $108,387
21 - $14,993 - $108,387
22 - $15,962 - $108,387
23 - $17,032 - $108,387

Scenario 2 assumes future dividends at current dividend scale, with premiums to additional paid up insurance:

20 - $14,096 - $109,093 - dividend $143
21 - $15,365 - $109,876 - $165
22 - $16,566 - $110,731 - $186
23 - $17,905 - $111,665 - $210

So in a very simplistic way, if in the first scenario my cash value is $13,926, and I make a $539 premium payment, and a year later my cash value is $14,993, I have earned $532/($13,926+$539) = 3.726% on my money. Is that a fair estimation? In addition, I've had the benefit of life insurance coverage for the year. So that seems pretty reasonable considering the interest rate environment we're in. Is this a reasonable way to look at the policy?

If dividends continue at the current scale then in the first year I have earned $587/(14,096+539+143) = 3.972%.

Am I in the ballpark?

[calqueuelater]

I think you are in the ballpark.

Long-time lurker here, who also bought a whole life policy many (25) years ago.

At the end of 2011 and 2012, here are my policy values:

Death Benefit - Cash Value - Annual Premium

$127,590 - $35,351 - $876
$129,643 - $37,863 - $876

Believe my annual rate of return should be calculated as ($37,863 - $35,351) - $876/$35,351 = 4.6%

Forgetting for a minute that I perhaps should never have bought the policy in the first place, I don't see any options that I like better than keeping it. I have no immediate need for the cash value, the policy's internal rate of return appears good, and there are tax consequences to liquidating it. If retirement savings grow as expected I may just keep the policy for my heirs, and if not I guess I will look more seriously into the ability to convert this into a SPIA via a 1035 exchange.

Hope this helps.

[letsgobobby]

Yes, thank you for your comments and thoughts.

[EmergDoc]

If retirement savings grow as expected I may just keep the policy for my heirs, and if not I guess I will look more seriously into the ability to convert this into a SPIA via a 1035 exchange.

You could also take out loans (later in retirement the better) for living expenses instead of buying a SPIA. Your returns over the last 25 years are pretty typical from what I have seen. Disappointing compared to bond returns over the same time period (TBM has 6.7% returns from 86 to present), but certainly far better than a kick in the teeth.

[calqueuelater]

Yes, if I am doing the math right it has been a 4.0% average annual return since the inception of the policy. I recently began to mentally think of this as part of the bond portion of my portfolio and adjusted the rest of my asset balances accordingly.

[dhodson]

While its good to know from inception, all we now care about is going forward.

[letsgobobby]

right, I don't think the return from inception has been as good as the return will be going forward. I could run it through Excel to see.

[dhodson]

you dont even need to do that to understand it. Just look at how your CSV barely rose for the first 10 years and wasnt even premiums paid. computing it helps primarily determine how it compares to other opportunities

[Dandy]

Pd up adds are usually a good deal. When you get older watch how much insurance your div buys. At some point it doesn't make sense to spend $100 div to get $125 in additional insurance. When you aren't buying enough pay the prem or take the div.

[likegarden]

As comparison, my wife has a very small whole life insurance from New York Life since 1968. Last year it increased the net cash value by 3.98%.

[letsgobobby]

I decided to try the exercise of plugging this through Excel:

cash value: $7,398.51 4/1/2006
premium paid $430.00 3/15/2007
premium paid $380.00 3/9/2008
premium paid $356.00 3/5/2009
premium paid $381.00 4/1/2010
premium paid $382.00 3/12/2011
premium paid $539.00 3/15/2012
premium paid $539.00 3/15/2013
cash value $(14,096.52) 4/1/2013

XIRR = 5.27%

Did I do this correctly? It seems too good to be true. The premium paid in 2007-2011 was reduced by dividends used to reduce out of pocket costs. So what I am showing is the amount of money I actually contributed to the policy.

[mephistophles]

I decided to try the exercise of plugging this through Excel:

cash value: $7,398.51 4/1/2006
premium paid $430.00 3/15/2007
premium paid $380.00 3/9/2008
premium paid $356.00 3/5/2009
premium paid $381.00 4/1/2010
premium paid $382.00 3/12/2011
premium paid $539.00 3/15/2012
premium paid $539.00 3/15/2013
cash value $(14,096.52) 4/1/2013

XIRR = 5.27%

Did I do this correctly? It seems too good to be true. The premium paid in 2007-2011 was reduced by dividends used to reduce out of pocket costs. So what I am showing is the amount of money I actually contributed to the policy.

Where did you come up with the number $7398 for the total cash value in your policy in 2006? I think you might have that number wrong.

[letsgobobby]

Meph, it is from my wife's April 1, 2006 annual statement.

[mephistophles]

Meph, it is from my wife's April 1, 2006 annual statement.

I think the bottom line is that this 20 year old Met policy is a good investment going forward for cash value buildup and a permanent death benefit. That would be true with probably all good dividend paying policies with good companies at that age.

I also think that dividends to Paid Up Additions makes sense as PUA increases are not subject to income tax and add to the guaranteed cash value which also grows tax deferred. Going forward, definitely keep the policy.

[letsgobobby]

Thank you!