Should I dump (W)Hole Life Insurance and Variable Insurance

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Brainvest
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Joined: Fri Sep 15, 2017 2:15 pm

Should I dump (W)Hole Life Insurance and Variable Insurance

Post by Brainvest » Fri Sep 15, 2017 2:52 pm

Should I dump WLI and assumes losses of approx 45K or give it a chance?

WLI since 2013 - 24K year premium - Total value 109K - Cash value 70K

Once I got some extra income I was sold into:

Variable LI (April 2017) - 30K year premium - Total Value 12K - Cash surrender value after charges 5,5K

Income is about 750-800K before taxes; already maxing 401 and 457, and planning on opening 529 (x2) and Vanguard taxable account with 120K salary bonus I will get in weeks

Embarrassed by my complete ignorance, I finally embarked into understanding a bit more finances thanks to White Coat Investor and Bogleheads

I am thinking best plan is to do a 1035 transfer to a Vanguard VA - total value 121K - cash value 75K - and let it grow tax free and/or declare losses in 2-3 years - then invest in taxable account
Additionally, invest the 54K in premiums in taxable accounts

Would anyone think that there is value on keeping the WLI and/or VLI - these are the reasons to stay based on the sucker from NorthwesternMutual (of course):

1- the worse part is almost over and will start growing positive in 2-3 years
2- gains will be tax-free (and taxes might be higher in the future)
3- gains are less influenced by the market changes (when the stocks collapse, the insurance keeps growing)
4- It is a good product to have in your portfolio when you have other areas covered (401, 457, 529, taxable accounts)

Your advice is sincerely appreciated
Thanks!

djscal
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by djscal » Fri Sep 15, 2017 4:34 pm

There are several different schools of thought on the ways of terminating an expensive life insurance policy.

One is to stop the bleeding and cut and run away from these very expensive "investments" now and pay the early termination fees. Chalk it up to an expensive lesson.

Another is your approach to exchange it - but then you exchange one expensive investment with high fees for another investment with (less) high fees.

A 3rd is to wait it out and then terminate when you won't incur so many early termination fees.

What my wife and I did was to wait out her Northwestern Mutual VUL policy and cash it out after 10 yrs when the early termination fees were fairly minimal. After 10 yrs she made practically nothing after the monstrous fees by the insurance company. Horrendous investment - if you can even call it that.

She cashed out her other two NML whole life policies and paid the early termination fees before we were together.

Damn - that was an expensive lesson and unconscionable that a so called fiduciary advisor (and a supposed "friend") would sell a single woman with no children 3 non term life insurance policies.

Another thing you might consider doing is to hire James Hunt who is a former life insurance commissioner to run an analysis for you on your existing policies and he can also advise you as to what your best option(s) may be. His fees are very reasonable. Ask me how I know... :-)

itstoomuch
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by itstoomuch » Fri Sep 15, 2017 5:42 pm

Dump.
Your primary purpose for LI is life insurance. Buy it cheaper and Invest the Difference. You and heirs will ALWAYS come out ahead in the short term and probably in the Longterm (need your parameters to make better prediction).
Its easy to prove by just looking at today's numbers.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ThePrince
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by ThePrince » Fri Sep 15, 2017 9:03 pm

itstoomuch wrote:
Fri Sep 15, 2017 5:42 pm
Dump.
Your primary purpose for LI is life insurance. Buy it cheaper and Invest the Difference. You and heirs will ALWAYS come out ahead in the short term and probably in the Longterm (need your parameters to make better prediction).
Its easy to prove by just looking at today's numbers.
+1

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TomatoTomahto
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by TomatoTomahto » Fri Sep 15, 2017 9:15 pm

Brainvest, welcome to the forum! I wish I could welcome you with a more optimistic view. Pull the bandaid off. Now. Don't throw good money after bad.

It won't hurt forever.

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Watty
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by Watty » Fri Sep 15, 2017 9:43 pm

I don't know enough to evaluate your options with those policies but before you cancel them you should make sure that you have any needed term life insurance in place. There could be some medical issue that comes up which could make getting term insurance expensive or impossible which would make keeping the old policies your only option for having life insurance.

bogglizer
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by bogglizer » Fri Sep 15, 2017 9:58 pm

WLI is an investment like any other, and its current return can be computed. If

( [cost of term insurance for 1 year] + [annual cash value increase] - premium ) / [cash value] > 3%

then it might be worth keeping. The 3% is a judgment call. You could pick a higher or lower number, depending on your take on what makes a worthwhile investment. Just dumping it because people here think it smells seems foolish.

glensos
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by glensos » Fri Sep 15, 2017 10:42 pm

Whole life insurance is not only not an investment, it is the most expensive life insurance choice. Stop the bleeding, and move on before you end up with even more regrets. It's an expensive lesson, but it's time to learn from this horrific error.

ThisTimeItsDifferent
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by ThisTimeItsDifferent » Fri Sep 15, 2017 11:10 pm

1035 exchange to a variable annuity and the deduct the loss?

droliver
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by droliver » Fri Sep 15, 2017 11:52 pm

If you can afford to have the cash tied up for awhile (2 decades) and are otherwise maxing out your other tax advantaged investments, whole life insurance is actually a very interesting approach over a long term. It offers some unique tax advantages returns within the policy that can be hard to reach on an after tax basis with equities. while past may not be prologue, there is a reasonable argument for this approach to complement other savings. A lot of sophisticated investors prepay the premiums of the policies to accelerate the break even point of the commission and use them for tax free cash flow out of the plan in retirement. A lot of institutions and banks also use these as investments taking polices out on employees.

fundseeker
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by fundseeker » Sat Sep 16, 2017 5:27 am

droliver wrote:
Fri Sep 15, 2017 11:52 pm
If you can afford to have the cash tied up for awhile (2 decades) and are otherwise maxing out your other tax advantaged investments, whole life insurance is actually a very interesting approach over a long term. It offers some unique tax advantages returns within the policy that can be hard to reach on an after tax basis with equities. while past may not be prologue, there is a reasonable argument for this approach to complement other savings. A lot of sophisticated investors prepay the premiums of the policies to accelerate the break even point of the commission and use them for tax free cash flow out of the plan in retirement. A lot of institutions and banks also use these as investments taking polices out on employees.
Any chance that you are in the life insurance business? Just wondering...

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oldcomputerguy
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by oldcomputerguy » Sat Sep 16, 2017 5:36 am

droliver wrote:
Fri Sep 15, 2017 11:52 pm
If you can afford to have the cash tied up for awhile (2 decades) and are otherwise maxing out your other tax advantaged investments, whole life insurance is actually a very interesting approach over a long term. It offers some unique tax advantages returns within the policy that can be hard to reach on an after tax basis with equities.
Not to sound cynical, and I'm certainly no expert on life insurance, but so does a capital loss.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

Brainvest
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Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by Brainvest » Sat Sep 16, 2017 7:25 am

I am trying to make predictions and comparisons - I am assuming a 5% return with 3% standard deviation
Please help me out and correct my mistaken assumptions

These are the policies parameters:

1- WLI - $2000/ month for 25 years (total 600K)
Guaranteed Cash Value 680K
Net Cash (estimated dividends) – 1,160K
No Taxes?
Death benefit 1,2K

2- 2- Variable Adjusted LI - $2500/ months for 25 years (total 750K)
Max sales load – 5.2%
Deferred acquisition cost – 1.3% of premium
Premium Tax charge – 2% of premium
Total: 8.5% ($213 / $2500) – $2287
$2287/ months for 25 years at 5% (SD 3%)- $1,325 (879k – 2050 K)
Sales Charge – 1.2%
Other costs: $67/month (?)
Death benefit 1,8K

These are the predictions for investment in taxable accounts:

1- WLI comparison
$2000/ month for 25 years at 5% (SD 3%)- $1,150k (750k – 1750K)
Reduce taxes – 15% - 1068K (727k-1,577K)
Add Term Insurance – 2K/year – 50K

2- VALI comparison
$2500/ months for 25 years at 5% (SD 3%)- $1,450 (1000k – 2250 K)
Reduce taxes – 15% - $1,345K (962K-2,025K)
Term Insurance – 2.5K/year – 62.5K

Conclusion: looking at the numbers, keeping the VLI option will be nearly equal to investing it assuming the market growth is below 6%; but investing will be better with higher growth (??)
For the VALI option, the numbers are also quite similar
What am I estimating wrong? These estimations do not strongly support dumping the insurance policies
Please help from the experts, I am just an initiate

FamousWalrus
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Joined: Wed Oct 05, 2016 6:56 pm

Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by FamousWalrus » Sat Sep 16, 2017 8:10 am

Return on death benefit at life expectancy is usually a 6-8% tax-free IRR, so not terrible. If your estate is subject to federal tax (10.98MM+ for a married couple) it could be worthwhile to keep the policies and move them to an Irrevocable Life Insurance Trust. However, WL and variable life are typically not the preferred vehicles for such a strategy, universal life provides a much higher death benefit relative to your cash value.

Just another idea, but I would echo previous posters than I am definitely not a fan of using these policies as retirement vehicles. If there's no permanent NEED for life insurance (e.g. estate taxes, planning for special needs relative, target inheritance, etc.) you are almost always better off buying term and investing the difference in a taxable account.

ThePrince
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Joined: Sun Aug 20, 2017 9:15 pm

Re: Should I dump (W)Hole Life Insurance and Variable Insurance

Post by ThePrince » Sat Sep 16, 2017 8:30 am

droliver wrote:
Fri Sep 15, 2017 11:52 pm
If you can afford to have the cash tied up for awhile (2 decades) and are otherwise maxing out your other tax advantaged investments, whole life insurance is actually a very interesting approach over a long term. It offers some unique tax advantages returns within the policy that can be hard to reach on an after tax basis with equities. while past may not be prologue, there is a reasonable argument for this approach to complement other savings. A lot of sophisticated investors prepay the premiums of the policies to accelerate the break even point of the commission and use them for tax free cash flow out of the plan in retirement. A lot of institutions and banks also use these as investments taking polices out on employees.
See what Dave Ramsey says about the subject matter. He is right. https://youtu.be/9W68uqkEBiU

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