What to do with Whole Life Policy

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alex11
Posts: 90
Joined: Wed Jul 28, 2010 5:25 pm

What to do with Whole Life Policy

Post by alex11 » Thu Aug 09, 2018 4:32 am

In-Laws have a whole life policy and we were discussing whether it would make sense to cash it or keep it. They have been paying $140 a month since 1991.
Surrender amount - 77k
Death Benefit - 168k
Looks like the yearly dividend was $1,150 this year.
His Age 61
Annual cost $1,680

The last two years, the surrender amount(and I believe also the death benefit)has increased by around $4,500.

Two questions:
1. What exactly causes the additional increase in the surrender amount? I see $2,830 in dividends and annual payments going in. Is it investment returns? If so, I assume this surrender amount could actually go down in a down market?
2. If it were to be cashed out, the money would be put into a CD. Thoughts on whether it makes sense to keep the policy or cash out?

Thanks

Cigarman
Posts: 290
Joined: Fri Jul 12, 2013 5:12 am

Re: What to do with Whole Life Policy

Post by Cigarman » Thu Aug 09, 2018 6:09 am

I know there are firms that can analyze whole life policies...someone else can chime in on what those are....

Back of the envelope math says that in 27 years they have paid in $45,000 and it is worth $77,000 today, a gain of $32,000 or 71% overall....

I think this is the primary reason why Boglehead's don't recommend whole life polciies. Certainly, even with market ups and downs in the past 27 years, that much per month put in a Roth would be much further ahead and tax free at withdrawal. Plus, for that amount of cash they probably could have bought a term policy with a much higher death benefit.

hafjell
Posts: 149
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Re: What to do with Whole Life Policy

Post by hafjell » Thu Aug 09, 2018 7:18 am

Cigarman wrote:
Thu Aug 09, 2018 6:09 am
Plus, for that amount of cash they probably could have bought a term policy with a much higher death benefit.
This is often lost in the discussion of the confusing math on whole life policies. Assuming decent health, $1,000 per year buys you a lot more term. Yes, different products. But if you're buying life insurance strategically, as income replacement or protection, level term will deliver way more.

gmaynardkrebs
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Re: What to do with Whole Life Policy

Post by gmaynardkrebs » Thu Aug 09, 2018 8:07 am

Are you using the annual dividends to reduce premium? If not, I would do that and keep the policy as a sort of a compromise. That will reduce the $140/mo to about $44. Most whole life policies pay about the same as a CD, so you won't gain much there after tax. Before surrendering, and assuming they still need some insurance (they may, to protect the survivor spouse), make sure their health is good. However, this is a small amount of money, so unless they really need the cash value, I would just keep it in force, using dividends to reduce premium.

Dandy
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Re: What to do with Whole Life Policy

Post by Dandy » Thu Aug 09, 2018 9:17 am

Most insurance companies will allow you to make the policy paid up (i.e. no future premiums but reduced dividends and face amount). If insurance is needed that might be a way to go. Or they may agree to reduce the face value of the insurance so that dividends will usually pay the premium. (whole life dividends usually go up but that isn't guaranteed)

Whole life policies that have been in force for decades usually generate nice dividends that can be tax free. While not a good product usually once you have them for decades they can have some advantages. Look at what options there are for no future premiums. Also compare the current divided to the cash value - how does that compare to "safe" returns outside the policy? The see what that return might look at under the option to have the policy paid up or the face reduced so that the premium pays the premium.

Use dividends to pay premiums or take them in cash. As you age usually the options to buy additional insurance or letting them accumulate are not a great deal or are not needed.

mdavis6890
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Joined: Wed Jan 27, 2016 12:19 pm

Re: What to do with Whole Life Policy

Post by mdavis6890 » Thu Aug 09, 2018 9:30 am

The dividend can confuse you, because it looks like you're getting 1150/77,000 = 1.5% return on your money. Then you compare that to a CD and it looks okay and you say 'well, I guess we'll leave it alone.'
But that's wrong, because you continue to pay in 1680/yr. They're paying you the dividend out of your own money!
To really figure it out, get a quote on a 30 year term policy (long, because to be fair, a WL policy has infinite term) and $168k death benefit. Subtract that from the 1680 and what's left is your money going to pay that dividend.

Nate79
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Location: Portland, OR

Re: What to do with Whole Life Policy

Post by Nate79 » Thu Aug 09, 2018 10:01 am

The real question to ask is do they need life insurance. If they do not then I would cash it out and use the cash value in their portfolio. Realize the cash value is an imaginary number that has no value until they cash it out. If you don't cash it out you never get this money, the insurance company keeps it when you die. They pay the death benefit.

gmaynardkrebs
Posts: 887
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Re: What to do with Whole Life Policy

Post by gmaynardkrebs » Thu Aug 09, 2018 10:07 am

Nate79 wrote:
Thu Aug 09, 2018 10:01 am
The real question to ask is do they need life insurance. If they do not then I would cash it out and use the cash value in their portfolio. Realize the cash value is an imaginary number that has no value until they cash it out. If you don't cash it out you never get this money, the insurance company keeps it when you die. They pay the death benefit.
They might need the cash value at a later date for LTC or medical expenses. Good to have in reserve.

Nate79
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Location: Portland, OR

Re: What to do with Whole Life Policy

Post by Nate79 » Thu Aug 09, 2018 10:11 am

gmaynardkrebs wrote:
Thu Aug 09, 2018 10:07 am
Nate79 wrote:
Thu Aug 09, 2018 10:01 am
The real question to ask is do they need life insurance. If they do not then I would cash it out and use the cash value in their portfolio. Realize the cash value is an imaginary number that has no value until they cash it out. If you don't cash it out you never get this money, the insurance company keeps it when you die. They pay the death benefit.
They might need the cash value at a later date for LTC or medical expenses. Good to have in reserve.
So take it now and put it in a savings account or into your portfolio where you have the immediate liquidity to pay for needed events vs paying for insurance you don't need. Eventually you need to decide how to get the money out. At death you lose the cash value.

megabad
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Re: What to do with Whole Life Policy

Post by megabad » Thu Aug 09, 2018 10:20 am

Personally, I would keep to death at this point given the comparison of the current payout going into a CD. Would inquire about adding long term care rider. Typically Level Premium Whole Life results in you taking a massive hit early on financially. Though the past has no bearing on this decision, it effectively means the premiums vs benefit now are more attractive than they were say 20 years ago.

P&C actuary
Posts: 114
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Re: What to do with Whole Life Policy

Post by P&C actuary » Thu Aug 09, 2018 11:03 am

If you cash out, I think the difference between premiums paid and surrender value is taxable income.

FunnelCakeBob
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Re: What to do with Whole Life Policy

Post by FunnelCakeBob » Thu Aug 09, 2018 11:28 am

P&C actuary wrote:
Thu Aug 09, 2018 11:03 am
If you cash out, I think the difference between premiums paid and surrender value is taxable income.
Don't the dividends also affect taxable amount by reducing the cost basis? Im reading the dividends are considered as a return of premiums paid. If so, the cost basis would be the total premiums paid minus total dividends.

123
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Re: What to do with Whole Life Policy

Post by 123 » Thu Aug 09, 2018 6:01 pm

Some people elect to exchange a whole life policy for an annuity (like with Vanguard) to defer taxes on any gain in the value of a policy. The annuity can generally be invested in one of many Vanguard mutual funds such as a fixed income fund, stock fund, or a mix. The advantage of an annuity is that the "basis" of the annuity is the sum of all the payments made on the life insurance policy previously. Conversion to an annuity avoids the sudden large tax bite that can result when a policy is surrendered, in its place there is some portion of taxable income as annuity distributons are received.

Due to the increasing surrender value of the whole life policy you actually have less "insurance" as time goes on (the "insurance" is actually the difference between the surrender value and the current insurance amount).
The closest helping hand is at the end of your own arm.

BarnacleBill
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Joined: Wed Aug 08, 2018 10:11 am

Re: What to do with Whole Life Policy

Post by BarnacleBill » Fri Aug 10, 2018 4:53 pm

alex11 wrote:
Thu Aug 09, 2018 4:32 am
Two questions:
1. What exactly causes the additional increase in the surrender amount? I see $2,830 in dividends and annual payments going in. Is it investment returns? If so, I assume this surrender amount could actually go down in a down market?
The additional increase in cash surrender value is because the insurance company has money left over each year after paying for overhead, paying claims, and putting money away in reserves. That leftover money is then divided up amongst the policyowners. In insurance parlance, it is called a "dividend," but it is not the same as a stock dividend. IRS treats insurance policy dividends as a return of premium, not as a distribution of profits, thus life insurance policy dividends are not taxable. <br/>
<br/>
This cash surrender amount, also called "accumulated/accrued cash value," does not go down in a down market. Cash value in a whole life policy does not fluctuate with the market.</r>

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