Using guaranteed yield in life insurance policy

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Topic Author
bogleyourmind
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Joined: Sun May 21, 2017 9:00 am

Using guaranteed yield in life insurance policy

Post by bogleyourmind »

I am a young man (age 23) and I recently found out that my parents started a whole-life insurance policy for me when I was born; it is about $100K of insurance, and has a cash value of $1800. I currently have no need for insurance (no dependents), and I know that term life insurance generally makes more financial sense, so I originally planned to cancel the policy and buy term insurance later. When I read the fine print of the policy, however, I saw that it has a guaranteed yield on the cash value of 6%; the cost of insurance and fees total about $100 per year, so the interest on the current cash value more than covers it. I have already maxed out my Roth-IRA contributions, and don't have access to other tax-deferred options, so given the current low interest rate environment and high equity valuations, I am tempted to contribute as much as possible to the policy and then cash out when interest rates rise or I need the money.

What are the risks if the insurance company fails? Are there tax considerations I should be aware of? Any other potential problems with this strategy?
mhalley
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Re: Using guaranteed yield in life insurance policy

Post by mhalley »

The money contributed to this up to now is a sunk cost, but please do not throw any more money at it. You already said you don't even need insurance at this stage of your life. Keep Maxing out your Roth and start taxable investing if you have no 401k.It might be worth having the policy evaluated to see if it is worth keeping for 100 bucks at http://evaluatelifeinsurance.org/
A search will reveal how whole life ic VERY SELDOME a good idea. Term life plus investing beats it in98% of cases.
Very unlikely you would owe taxes if you cashed out the policy. You can evaluate the likliehood of the insurance co failing by looking at its moody or other rating.
http://www.iii.org/article/how-to-asses ... ce-company
The fact that valuations are high now plays no role in your decision for life insurance. Check out wci post iron how to evaluate the policy
https://whitecoatinvestor.com/how-to-ev ... fe-policy/
Back to the market being high, check out what happens when you ONLY invest at peak market valuations:
http://awealthofcommonsense.com/2014/02 ... ket-timer/
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Nate79
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Re: Using guaranteed yield in life insurance policy

Post by Nate79 »

This is one area that I agree with Dave Ramsey. Whole life is one of, if not the worst financial product. It borders on being a scam considering the hidden fees and costs and misleading "guaranteed" rates. There are so many threads on how horrible these products are, just do a search.
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David Jay
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Re: Using guaranteed yield in life insurance policy

Post by David Jay »

I really dislike it when parents who do this to their kids...
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
bogleyourmind
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Joined: Sun May 21, 2017 9:00 am

Re: Using guaranteed yield in life insurance policy

Post by bogleyourmind »

Nate79 wrote:This is one area that I agree with Dave Ramsey. Whole life is one of, if not the worst financial product. It borders on being a scam considering the hidden fees and costs and misleading "guaranteed" rates. There are so many threads on how horrible these products are, just do a search.
I understand why whole life is usually quite bad. However, I think it could make a decent medium term investment in my situation. I have checked past statements and everything adds up, they really are only charging $100 per year, and I have been earning 6% on the cash balance. Why doesn't it make sense to contribute as much as I can for a few years, earn good interest, and then cash out when convenient? Even if I only contribute a few thousand, and taking the $100 per year into account, this returns much better than bonds are likely to.
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ThePrune
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Re: Using guaranteed yield in life insurance policy

Post by ThePrune »

People on the forum are sometimes a little to quick to dismiss permanent life insurance. Because your policy was purchased so long ago you appear to have a very high legacy cash balance interest rate - which could be quite valuable.

I suggest you ask your insurance agent for an in force illustration that shows the guaranteed minimum cash value growth for the case covering the minimum allowed premium payment. Ask for it to run out to at least age 65, and older is better. As you get older the Cost of Insurance (COI) portion of the annual fees should increase, causing cash value to lag behind its current trajectory of growth. But by looking at the complete financial picture you'll be able to decide if the policy is really worth maintaining just for its cash value.
Investment skill is often just luck in sheep's clothing.
Katietsu
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Re: Using guaranteed yield in life insurance policy

Post by Katietsu »

I agree that the reasoning of the OP makes a great deal of sense. Do get an in force illustration based only on the minimum guarantees. The decision as to whether or not to keep a whole life policy is very different than whether or not a WL policy should be purchased.
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David Jay
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Re: Using guaranteed yield in life insurance policy

Post by David Jay »

ThePrune wrote:People on the forum are sometimes a little to quick to dismiss permanent life insurance. Because your policy was purchased so long ago you appear to have a very high legacy cash balance interest rate - which could be quite valuable.

I suggest you ask your insurance agent for an in force illustration that shows the guaranteed minimum cash value growth for the case covering the minimum allowed premium payment. Ask for it to run out to at least age 65, and older is better. As you get older the Cost of Insurance (COI) portion of the annual fees should increase, causing cash value to lag behind its current trajectory of growth. But by looking at the complete financial picture you'll be able to decide if the policy is really worth maintaining just for its cash value.
^^^ This
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
inbox788
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Re: Using guaranteed yield in life insurance policy

Post by inbox788 »

bogleyourmind wrote:Why doesn't it make sense to contribute as much as I can for a few years, earn good interest, and then cash out when convenient? Even if I only contribute a few thousand, and taking the $100 per year into account, this returns much better than bonds are likely to.
I agree with those that say cash out. You're only 23, invest in stocks! You will definitely come out ahead.
Malinois000
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Re: Using guaranteed yield in life insurance policy

Post by Malinois000 »

As a couple of others mentioned, there is no hurry for you to make a decision. Ask your agent to provide an in-force policy illustration before making any decision about canceling this policy. Your parents have likely done a lot of the "heavy lifting" with this policy.
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