How Best to Utilize Permanent Life Insurance Upon Retirement

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delrinson
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How Best to Utilize Permanent Life Insurance Upon Retirement

Post by delrinson » Thu Aug 16, 2018 7:03 am

In my mid 50's, hoping to be able to retire at 65. Part of my portfolio consists of two permanent life insurance policies. For the purposes of asset allocation, I regard them as fixed income (as that's how the underlying assets are invested). As a round number, their combined cash value will be about $300,000 upon retirement, or about 15% of my total portfolio (based, obviously, upon my assumptions and projections, which I believe to be fairly conservative).

For those of you who own permanent insurance, I wonder if I can pick your brains as to the advantages and disadvantages of various options as to how to utilize permanent insurance during retirement. Since I would definitely not sell them, I believe my options are as follows:

1. Leave them alone. Death benefit and cash value continue to grow, dividend pays premium.

2. Take out policy loans for income. Allow cash value to erode over the years as I take out policy loans as income with no intention to repay. Obviously I'd need to make sure that cash value remained high enough so as not to trigger a surrender of the policies.

3. Convert policies to paid up status and take dividends as income. In this scenario, there would no additional premiums due so the dividends produced could be taken as income.

4. Annuitize the policies. Convert the policies to annuities (either immediate or deferred) as a source of income.

I should say that, in all likelihood, I don't believe my wife and I will be under any absolute necessity for the policies to supplement our income; I'm reasonably confident that other sources will be adequate to meet our needs. However, as they are financial assets capable of producing income, it may be wise to take advantage of their income-producing ability.

While I know that Bogleheads in general are no great fans of permanent insurance, I suspect that a goodly number of us own such policies and would welcome other owners' thoughts as how best to make use of such policies.

Thank you in advance for your input.

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David Jay
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by David Jay » Thu Aug 16, 2018 8:26 am

Hard to give useful advice because "permanent" covers a lot of ground these days. What specifically do you hold? Are both policies traditional whole life? Or are they some other variant?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Nate79
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by Nate79 » Thu Aug 16, 2018 9:34 am

Not sure why this discussion should be about keeping these horrible products for another 15 years + retirement years. Better would be should I cancel this cr*p or not (yes) and what to do with the cash value.

delrinson
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by delrinson » Thu Aug 16, 2018 10:04 am

David Jay wrote:
Thu Aug 16, 2018 8:26 am
Hard to give useful advice because "permanent" covers a lot of ground these days. What specifically do you hold? Are both policies traditional whole life? Or are they some other variant?
One is whole life, a Northwestern Select 100 policy; the other is Northwestern variable policy.

inbox788
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by inbox788 » Thu Aug 16, 2018 11:00 am

delrinson wrote:
Thu Aug 16, 2018 7:03 am
1. Leave them alone. Death benefit and cash value continue to grow, dividend pays premium.

2. Take out policy loans for income. Allow cash value to erode over the years as I take out policy loans as income with no intention to repay. Obviously I'd need to make sure that cash value remained high enough so as not to trigger a surrender of the policies.

3. Convert policies to paid up status and take dividends as income. In this scenario, there would no additional premiums due so the dividends produced could be taken as income.

4. Annuitize the policies. Convert the policies to annuities (either immediate or deferred) as a source of income.
Well, a lot depends on specifics. What kind of returns are guaranteed with these policies?

Are the policies performing at the projected values or exceeding it? Unlikely, but if they are, then keeping it until the end seems like the obvious choice. Are the outperforming the minimum guaranteed values? Many policies will rail against this low boundary and not have much of a chance to much better, but in long held policies, it may be good enough.

What are the loan interest rates and terms? Unless they're unusually low, taking out loans isn't really a good choice.

IMO, converting to paid up is a poor compromise. Either the policy is good enough to keep adding to it, or it's not and cash it out. There's no such thing as hold when you have other uses for your money, it's either buy or sell. You might hold for a year for tax considerations, but that's about it.

If you have substantial taxable gains on the policy AND you need an annuity AND you can find a fairly priced annuity, then it' something to consider, but otherwise, it's simpler to keep these decisions independent.

DetroitRick
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by DetroitRick » Thu Aug 16, 2018 11:20 am

I can relate to your thought process. I've got three very old policies and have done the same exercise yearly since my mid 50's (62 now). Based on my policies (2 small whole life, 1 mid-sized universal life) and my needs, I've been doing your Option 1. Option 2 will be very valuable for me over the next few years as well. I may eventually choose Option 4 on the larger policy (and consider liquidating the smaller two), but don't feel very compelled to act yet.

Be very careful of uninformed advice to immediately liquidate older policies. Sunk costs are sunk costs and are no longer relevant to you. And you would also need to consider your own tax situation. But only look forward from here. Nobody can correctly advise liquidation without knowing both your needs and the exact characteristics of your particular policies. Policies are not all the same - some are better than others. First, give great consideration to how important the insurance component of your existing contracts are. And for how many more years that insurance will continue to be important for you and your family. Some people need no life insurance after a certain age, others do. Only you know. Plus you can always do a comparative shop for term insurance and see what that reveals. Cost of insurance can vary considerable within the non-term universe of policies.

With a higher quality older policy, it is unlikely that you need to feel rushed to make a decision today. Take a close look at your policies to see how they are changing from year to year first (cash value and insurance value and premiums and policy dividends). Dismissing the primary reason for having these policies - insurance - you can do some simple rate of return calculations to form a basis in choosing alternatives you might pick. In my case, for the past 5 years or so especially, I could see that my return exceeds that of intermediate-term bond instruments right now. Plus, of course, I have the insurance which I need at the moment.

In addition to my own policies, I looked at a few whole life policies for another family member this spring. And drew a totally different conclusion. She was considering liquidation. In those cases, the only reason to bother keeping them in force was the life insurance aspect (she is elderly). Just weighing premiums vs. cash value, there would have otherwise been no reasons to keep them. But we did, frankly because death is imminent near-term and that changes everything.

Loan value can be another interesting factor in retirement. If you intend to use ACA for insurance, and if current program parameters don't change (yes, I'm laughing at my "ifs"), policy loans can be very useful in avoiding subsidy cliffs. For example, next year for me, I will likely take a policy loan to reduce a taxable IRA distribution in order to avoid a cliff. My policy loan is at a below-market interest rate. As a result, I will incur significant savings for a small outlay of interest. That savings will dwarf YEARS of premiums. Black and white - win win.

I've also looked at your option 4. As a result, I'm leaning towards eventually doing that with my larger universal life policy (via 1035 exchange). Specifically as policy insurance costs grow and my need for insurance declines. But after looking at specifics (via the website immediateannuities.com, thanks Bogleheads!) I don't feel compelled to do so yet. For multiple reasons - I still have to attach some value to the insurance aspect of my policies, and I don't need the income stream at this particular time. But it's definitely going to stay on my radar for the future. In my case, I will probably hit the switch at age 70.

Just a few other random comments. While I don't share the enthusiasm of a typical insurance agent for these products, I would also add that I took special comfort in their existence at the depth of the last financial crisis. That was predicated on the amounts involved (state insurance pool limits), and on the long-term viability of the issuing insurers. I was also, after starting this analysis process, able to make one adjustment to a policy that significantly increased its viability - dropping an moderately expensive disability waiver. My stage in life no longer required this and I had kind of forgotten about it. Dropping it eliminated a significant premium expense for me.

So, best of luck with your decision. Dig those policies out and give them a close look. It may be one of the most tedious and boring things you ever do, but for me it was worth it. Disregard agent projections, or at least focus more on worst-case (highest insurance costs, lowest returns). Move slowly is my best advice.

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David Jay
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by David Jay » Thu Aug 16, 2018 11:47 am

delrinson wrote:
Thu Aug 16, 2018 10:04 am
David Jay wrote:
Thu Aug 16, 2018 8:26 am
Hard to give useful advice because "permanent" covers a lot of ground these days. What specifically do you hold? Are both policies traditional whole life? Or are they some other variant?
One is whole life, a Northwestern Select 100 policy; the other is Northwestern variable policy.
Almost without exception, one should cash out the variable life policy. Variable life policies are intended (beyond generating commissions for the salesman) as investment vehicles. And they perform that function poorly.

Depending on taxation implications, sooner is better than later.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Nate79
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by Nate79 » Thu Aug 16, 2018 11:53 am

Please read White Coat Investor's extensive articles on Permanent Life Insurance.
https://www.whitecoatinvestor.com/what- ... insurance/

There are tons of "myths" about these products. The people saying to cash them in, even old policies are not "uniformed." There are a lot of people on here with extensive experience with these type of policies and realize how bad they are.

I generally find people who say to hold on to them (even old policies) to not understand much about the policies and not able to really understand how the complicated nature of the policy makes them very difficult to evaluate. Instead they just look at the mythical "cash value" and even worse future growth projections and think that they have a savings account with the insurance company. Then they need to figure out what to do with the policies (the point of this thread) and realize they have a pile of complicated junk policies that they can't figure out how to utilize (and where all of the actual options are so subpar that any mythical return they thought they had will be eaten away by the bad options).

Rwsawbones
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by Rwsawbones » Thu Aug 16, 2018 2:02 pm

Can one do a 1035 exchange into an immediate annuity? If so can one do a 1035 exchange into an immediate annuity with one’s spouse as co-annuitant with 100% to survivor?

If one has a crystal ball that predicts one’s very early demise then if the policies stay in place the beneficiary would receive the proceeds free of income tax. If the policies are cashed out income taxes would be due on the difference between the total amount cashed out and the total premiums paid. Taking the cas value as a loan would avoid the income taxes but one has to be sure to keep enough in the policy to avoid its lapsing. Another issue if one is really long lived Ma any Universal Life Policies end at age 95 at which time one would owe income taxes on the entire gain. ? Can an unusually long lived person do a 1035 exchange a few years prior to maturity say into an annuity paying out say in 5 years to spread out the gain and therefore the taxes?

1CEBITN
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by 1CEBITN » Thu Aug 16, 2018 2:43 pm

I would listen to DetroitRick's advice if I were you, OP. There are so many different companies offering life insurance which give it a bad name and so many different variations on permanent life insurance it is very uninformed to say blindly to get rid of them or cash them out unless you know precisely how the policy works in terms of fees and dividends, how long the owner has had the policy, and how much dividend income is in there at a minimum. It's important to remember that some people don't use permanent insurance as an investment, it just makes them sleep better at night. I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate. The average 6% dividend NWM whole life provides is just gravy to me. Based on how long the OP has held these policies he is long past paying the bulk of the fees, that is sunk money he isn't getting back so might as well treat this as it is currently with its go-forward benefits vs the other things he could do with it. He is to the point where he is largely just taking dividends which will likely perform better going forward than any bond fund available. There is no reason at this point in time to switch out unless you actually need the cash imho.

Loans can be a useful tool because you don't have to pay them back they just lower the death benefit and they are tax free. You might have to pay a premium that year to keep it paid up though. When the market is down and you need cash it can be an interesting way to avoid selling equities low. I'd have to understand more about the annuity you would flip it to before I comment on that but it may be worthwhile to just wait until you know you will start pulling cash out. Estate taxes on the annuity may be different than on your life insurance so if you plan to keep that for the next-generation that would be something to understand.

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HomerJ
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by HomerJ » Thu Aug 16, 2018 3:44 pm

1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate.
You would have passed on far more if you had bought term life for 30 years, and invested the difference in Total Stock Market Index Fund (which is also passed on tax-free).
Based on how long the OP has held these policies he is long past paying the bulk of the fees, that is sunk money he isn't getting back so might as well treat this as it is currently with its go-forward benefits
This part is true. The OP has already lost money on the investment, but that is water under the bridge, and going forward he MIGHT make decent enough returns to keep the policy.
The J stands for Jay

1CEBITN
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by 1CEBITN » Thu Aug 16, 2018 4:21 pm

HomerJ wrote:
Thu Aug 16, 2018 3:44 pm
1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate.
You would have passed on far more if you had bought term life for 30 years, and invested the difference in Total Stock Market Index Fund (which is also passed on tax-free).
That totally depends on the investment vehicle chosen. To compare directly with whole life you would have to be comparing it to an after-tax brokerage account - which would also require you to pay taxes on the dividends the investment throws off over the entire term as well. Depending on how the estate is set up it may not necessarily be 100% tax free across fed and state.

Also, If you were going to choose life insurance as an investment and work it into your overall AA it would be closer to the bond/cash portion of your portfolio, not the equities. That 2-3% average growth over time from a bond fund after taxes doesn't necessarily outpace life insurance. Life insurance may actually do better over a 30 year horizon than DCA over 30 years with a bond fund in a taxable account. IMHO, the "passing on far more" is debatable.

I don't think you will find anyone besides an advisor who thinks whole life is a great investment. I agree with you there. I personally don't look at it as an investment but it does have some nice options for tax-free flexibility later in life that you won't get with term and an after-tax brokerage account full of bonds. For those of us brave enough to admit we like the idea of having permanent life insurance those benefits are a nice bonus.

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HomerJ
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by HomerJ » Thu Aug 16, 2018 9:24 pm

1CEBITN wrote:
Thu Aug 16, 2018 4:21 pm
HomerJ wrote:
Thu Aug 16, 2018 3:44 pm
1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate.
You would have passed on far more if you had bought term life for 30 years, and invested the difference in Total Stock Market Index Fund (which is also passed on tax-free).
That totally depends on the investment vehicle chosen. To compare directly with whole life you would have to be comparing it to an after-tax brokerage account - which would also require you to pay taxes on the dividends the investment throws off over the entire term as well. Depending on how the estate is set up it may not necessarily be 100% tax free across fed and state.

Also, If you were going to choose life insurance as an investment and work it into your overall AA it would be closer to the bond/cash portion of your portfolio, not the equities. That 2-3% average growth over time from a bond fund after taxes doesn't necessarily outpace life insurance. Life insurance may actually do better over a 30 year horizon than DCA over 30 years with a bond fund in a taxable account. IMHO, the "passing on far more" is debatable.

I don't think you will find anyone besides an advisor who thinks whole life is a great investment. I agree with you there. I personally don't look at it as an investment but it does have some nice options for tax-free flexibility later in life that you won't get with term and an after-tax brokerage account full of bonds. For those of us brave enough to admit we like the idea of having permanent life insurance those benefits are a nice bonus.
You said you wanted something to leave behind no matter what. Therefore, it's not something you'd want to spend, i.e. not part of your AA.

Total Stock Market Index is very tax efficient, 2% dividends taxed at 15% is a 0.30% drag on your portfolio.

Fees on whole life are in the 2%-3% range.

Paying 2%-3% in fees to avoid 0.30% in taxes is a poor strategy.

Your kids would be far richer if you had gone the other way, but that's okay... they will still get plenty, I'm sure. And the insurance guy's kids will get some too... :)
The J stands for Jay

GrowthSeeker
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by GrowthSeeker » Thu Aug 16, 2018 9:39 pm

Knowing what I know now, I would say cash them out and put them in Total Stock Market (VTI / VTSAX).

Other than Warren Buffett, people at insurance companies who decide how to invest money must be the absolute dumbest investors on the planet. Either that, or they find a way to secretly take fees from your account.
Just because you're paranoid doesn't mean they're NOT out to get you.

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BL
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by BL » Fri Aug 17, 2018 12:51 am

I believe the company is required to give you an "in-force Illustration" with the guaranteed numbers if you ask for it. Google that to get more info. Then you would have more information to help in making a decision.

There has been a person mentioned that you can hire to analyse it for you for maybe $100. Search posts here and maybe you can find threads that mention that.

gotester2000
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by gotester2000 » Fri Aug 17, 2018 1:09 am

DetroitRick,

If you cash out and invest the proceeds then you start getting returns on the principal.
If you keep it invested in bad product you are losing the opportunity to make money on the principal.
Say, 100$ in a bad product is not making money and you cash out at a discount and get 90$ - that 90$ will start making you money instead of sinking 100$.

1CEBITN
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by 1CEBITN » Fri Aug 17, 2018 2:58 pm

HomerJ wrote:
Thu Aug 16, 2018 9:24 pm
1CEBITN wrote:
Thu Aug 16, 2018 4:21 pm
HomerJ wrote:
Thu Aug 16, 2018 3:44 pm
1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate.
You would have passed on far more if you had bought term life for 30 years, and invested the difference in Total Stock Market Index Fund (which is also passed on tax-free).
That totally depends on the investment vehicle chosen. To compare directly with whole life you would have to be comparing it to an after-tax brokerage account - which would also require you to pay taxes on the dividends the investment throws off over the entire term as well. Depending on how the estate is set up it may not necessarily be 100% tax free across fed and state.

Also, If you were going to choose life insurance as an investment and work it into your overall AA it would be closer to the bond/cash portion of your portfolio, not the equities. That 2-3% average growth over time from a bond fund after taxes doesn't necessarily outpace life insurance. Life insurance may actually do better over a 30 year horizon than DCA over 30 years with a bond fund in a taxable account. IMHO, the "passing on far more" is debatable.

I don't think you will find anyone besides an advisor who thinks whole life is a great investment. I agree with you there. I personally don't look at it as an investment but it does have some nice options for tax-free flexibility later in life that you won't get with term and an after-tax brokerage account full of bonds. For those of us brave enough to admit we like the idea of having permanent life insurance those benefits are a nice bonus.
You said you wanted something to leave behind no matter what. Therefore, it's not something you'd want to spend, i.e. not part of your AA.

Total Stock Market Index is very tax efficient, 2% dividends taxed at 15% is a 0.30% drag on your portfolio.

Fees on whole life are in the 2%-3% range.

Paying 2%-3% in fees to avoid 0.30% in taxes is a poor strategy.

Your kids would be far richer if you had gone the other way, but that's okay... they will still get plenty, I'm sure. And the insurance guy's kids will get some too... :)
You're still making an apples to bananas comparison and you totally missed my point. I said, for YOUR argument to make sense you would have to equate life insurance to the "safe" part of a portfolio which would NOT be invested in equities. Nobody in their right mind would equate life insurance to an equity fund when comparing them as investments to be part fo their AA. I've already proven you wrong, that is the point. End of story. Just because it doesn't help your argument doesn't make you right...

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HomerJ
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by HomerJ » Fri Aug 17, 2018 3:14 pm

1CEBITN wrote:
Fri Aug 17, 2018 2:58 pm
HomerJ wrote:
Thu Aug 16, 2018 9:24 pm
1CEBITN wrote:
Thu Aug 16, 2018 4:21 pm
HomerJ wrote:
Thu Aug 16, 2018 3:44 pm
1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate.
You would have passed on far more if you had bought term life for 30 years, and invested the difference in Total Stock Market Index Fund (which is also passed on tax-free).
That totally depends on the investment vehicle chosen. To compare directly with whole life you would have to be comparing it to an after-tax brokerage account - which would also require you to pay taxes on the dividends the investment throws off over the entire term as well. Depending on how the estate is set up it may not necessarily be 100% tax free across fed and state.

Also, If you were going to choose life insurance as an investment and work it into your overall AA it would be closer to the bond/cash portion of your portfolio, not the equities. That 2-3% average growth over time from a bond fund after taxes doesn't necessarily outpace life insurance. Life insurance may actually do better over a 30 year horizon than DCA over 30 years with a bond fund in a taxable account. IMHO, the "passing on far more" is debatable.

I don't think you will find anyone besides an advisor who thinks whole life is a great investment. I agree with you there. I personally don't look at it as an investment but it does have some nice options for tax-free flexibility later in life that you won't get with term and an after-tax brokerage account full of bonds. For those of us brave enough to admit we like the idea of having permanent life insurance those benefits are a nice bonus.
You said you wanted something to leave behind no matter what. Therefore, it's not something you'd want to spend, i.e. not part of your AA.

Total Stock Market Index is very tax efficient, 2% dividends taxed at 15% is a 0.30% drag on your portfolio.

Fees on whole life are in the 2%-3% range.

Paying 2%-3% in fees to avoid 0.30% in taxes is a poor strategy.

Your kids would be far richer if you had gone the other way, but that's okay... they will still get plenty, I'm sure. And the insurance guy's kids will get some too... :)
You're still making an apples to bananas comparison and you totally missed my point. I said, for YOUR argument to make sense you would have to equate life insurance to the "safe" part of a portfolio which would NOT be invested in equities. Nobody in their right mind would equate life insurance to an equity fund when comparing them as investments to be part fo their AA. I've already proven you wrong, that is the point. End of story. Just because it doesn't help your argument doesn't make you right...
We're talking about leaving your kids money. THAT was the reason YOU bought perm life. To make sure they got money. Not to use for yourself.

Term and Total Stock Market Index is what you should have done. Your kids will get less now.

Now, in a more general use, yes it's probably better to compare whole life to bonds. But whole life basically IS bonds minus 2% fees.

So you'd still have more with bonds.

Now, I agree with you that once you've already made the mistake of buying whole life (a long time ago), it may not be a bad idea to keep it.

Usually it takes 10-15 years to just break even. But after that, the 6% dividends may be worth keeping (not all whole life dividends pay that much)

What I mean is, if you are 20 years into a policy, you may have a 1% annual returns at that point on the cash-value part. Terrible.

But now you may be getting 5%-6% returns on that cash-value. It may indeed be a good idea to keep it in at that point, instead of cashing out and investing in bonds separately.

But it's still true that if you had just invested in bonds to begin with, you would have had far more at the 20-year mark, and the 30-year mark, etc. Starting with 15 years of 0% returns it's hard for whole life to catch up and pass a Total Bond Index Fund return.
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David Jay
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by David Jay » Fri Aug 17, 2018 7:57 pm

There are lots of versions of variable policies. Does your variable policy have a fixed insurance premium? Most of the variable policies I have seen have escalating insurance premiums that “eat up” a policy if kept into your 70s or 80s. I strongly recommend that you carefully study the prospectus.

As I said above, the design intent of the variable policy is to put investment-type assets inside an insurance policy “wrapper”. They are typically intended to be an investment vehicle, not to be maintained for the ”death benefit”.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

delrinson
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by delrinson » Sat Aug 18, 2018 6:39 am

Yes, I was struck by the wisdom of DetroitRick's advice...and to his I would add yours and perhaps a couple of others. Thank you.

Our NML policies have been wonderfully flexible tools over the years and I have no doubt that they will continue to be such.
1CEBITN wrote:
Thu Aug 16, 2018 2:43 pm
I would listen to DetroitRick's advice if I were you, OP. There are so many different companies offering life insurance which give it a bad name and so many different variations on permanent life insurance it is very uninformed to say blindly to get rid of them or cash them out unless you know precisely how the policy works in terms of fees and dividends, how long the owner has had the policy, and how much dividend income is in there at a minimum. It's important to remember that some people don't use permanent insurance as an investment, it just makes them sleep better at night. I purchased permanent life insurance because it is permanent, not because it is a good investment. I want something to leave behind no matter when I pass on that is tax-free to my estate. The average 6% dividend NWM whole life provides is just gravy to me. Based on how long the OP has held these policies he is long past paying the bulk of the fees, that is sunk money he isn't getting back so might as well treat this as it is currently with its go-forward benefits vs the other things he could do with it. He is to the point where he is largely just taking dividends which will likely perform better going forward than any bond fund available. There is no reason at this point in time to switch out unless you actually need the cash imho.

Loans can be a useful tool because you don't have to pay them back they just lower the death benefit and they are tax free. You might have to pay a premium that year to keep it paid up though. When the market is down and you need cash it can be an interesting way to avoid selling equities low. I'd have to understand more about the annuity you would flip it to before I comment on that but it may be worthwhile to just wait until you know you will start pulling cash out. Estate taxes on the annuity may be different than on your life insurance so if you plan to keep that for the next-generation that would be something to understand.

delrinson
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Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by delrinson » Sat Aug 18, 2018 6:56 am

Extremely thoughtful and helpful response...thanks so much!
DetroitRick wrote:
Thu Aug 16, 2018 11:20 am
I can relate to your thought process. I've got three very old policies and have done the same exercise yearly since my mid 50's (62 now). Based on my policies (2 small whole life, 1 mid-sized universal life) and my needs, I've been doing your Option 1. Option 2 will be very valuable for me over the next few years as well. I may eventually choose Option 4 on the larger policy (and consider liquidating the smaller two), but don't feel very compelled to act yet.

Be very careful of uninformed advice to immediately liquidate older policies. Sunk costs are sunk costs and are no longer relevant to you. And you would also need to consider your own tax situation. But only look forward from here. Nobody can correctly advise liquidation without knowing both your needs and the exact characteristics of your particular policies. Policies are not all the same - some are better than others. First, give great consideration to how important the insurance component of your existing contracts are. And for how many more years that insurance will continue to be important for you and your family. Some people need no life insurance after a certain age, others do. Only you know. Plus you can always do a comparative shop for term insurance and see what that reveals. Cost of insurance can vary considerable within the non-term universe of policies.

With a higher quality older policy, it is unlikely that you need to feel rushed to make a decision today. Take a close look at your policies to see how they are changing from year to year first (cash value and insurance value and premiums and policy dividends). Dismissing the primary reason for having these policies - insurance - you can do some simple rate of return calculations to form a basis in choosing alternatives you might pick. In my case, for the past 5 years or so especially, I could see that my return exceeds that of intermediate-term bond instruments right now. Plus, of course, I have the insurance which I need at the moment.

In addition to my own policies, I looked at a few whole life policies for another family member this spring. And drew a totally different conclusion. She was considering liquidation. In those cases, the only reason to bother keeping them in force was the life insurance aspect (she is elderly). Just weighing premiums vs. cash value, there would have otherwise been no reasons to keep them. But we did, frankly because death is imminent near-term and that changes everything.

Loan value can be another interesting factor in retirement. If you intend to use ACA for insurance, and if current program parameters don't change (yes, I'm laughing at my "ifs"), policy loans can be very useful in avoiding subsidy cliffs. For example, next year for me, I will likely take a policy loan to reduce a taxable IRA distribution in order to avoid a cliff. My policy loan is at a below-market interest rate. As a result, I will incur significant savings for a small outlay of interest. That savings will dwarf YEARS of premiums. Black and white - win win.

I've also looked at your option 4. As a result, I'm leaning towards eventually doing that with my larger universal life policy (via 1035 exchange). Specifically as policy insurance costs grow and my need for insurance declines. But after looking at specifics (via the website immediateannuities.com, thanks Bogleheads!) I don't feel compelled to do so yet. For multiple reasons - I still have to attach some value to the insurance aspect of my policies, and I don't need the income stream at this particular time. But it's definitely going to stay on my radar for the future. In my case, I will probably hit the switch at age 70.

Just a few other random comments. While I don't share the enthusiasm of a typical insurance agent for these products, I would also add that I took special comfort in their existence at the depth of the last financial crisis. That was predicated on the amounts involved (state insurance pool limits), and on the long-term viability of the issuing insurers. I was also, after starting this analysis process, able to make one adjustment to a policy that significantly increased its viability - dropping an moderately expensive disability waiver. My stage in life no longer required this and I had kind of forgotten about it. Dropping it eliminated a significant premium expense for me.

So, best of luck with your decision. Dig those policies out and give them a close look. It may be one of the most tedious and boring things you ever do, but for me it was worth it. Disregard agent projections, or at least focus more on worst-case (highest insurance costs, lowest returns). Move slowly is my best advice.

Miriam2
Posts: 2329
Joined: Fri Nov 14, 2014 11:51 am

Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by Miriam2 » Sat Aug 18, 2018 3:49 pm

delrinson - do you have the policies to leave a death benefit for someone?
Nate79 wrote: Not sure why this discussion should be about keeping these horrible products for another 15 years + retirement years. Better would be should I cancel this cr*p or not (yes) and what to do with the cash value.
For very old insurance policies, this is often not the case.

We have an old variable universal life policy (VUL) that we had evaluated by James Hunt at http://www.evaluatelifeinsurance.org and he said our policy was "golden" and "very valuable" for the permanent insurance we wanted it for (a special needs child). He explained that some of these old policies - most of which are no longer sold - can be useful now that the commission costs are long past.

Here is some information from Ole Meph :happy :(

viewtopic.php?f=2&t=176550#p2723153
viewtopic.php?f=2&t=176550#p2723652
viewtopic.php?f=2&t=100932&p=1463766#p1463766

Nate79
Posts: 3604
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: How Best to Utilize Permanent Life Insurance Upon Retirement

Post by Nate79 » Sat Aug 18, 2018 4:26 pm

Miriam2 wrote:
Sat Aug 18, 2018 3:49 pm
delrinson - do you have the policies to leave a death benefit for someone?
Nate79 wrote: Not sure why this discussion should be about keeping these horrible products for another 15 years + retirement years. Better would be should I cancel this cr*p or not (yes) and what to do with the cash value.
For very old insurance policies, this is often not the case.

We have an old variable universal life policy (VUL) that we had evaluated by James Hunt at http://www.evaluatelifeinsurance.org and he said our policy was "golden" and "very valuable" for the permanent insurance we wanted it for (a special needs child). He explained that some of these old policies - most of which are no longer sold - can be useful now that the commission costs are long past.

Here is some information from Ole Meph :happy :(

viewtopic.php?f=2&t=176550#p2723153
viewtopic.php?f=2&t=176550#p2723652
viewtopic.php?f=2&t=100932&p=1463766#p1463766
Sorry, I disagree. I just reread the first thread you posted and again there was some good advice in that thread (including by educated posters who already posted here) as opposed to the insurance salesman opinion.

Even old permanent life insurance is a horrible product as the insurance company has duped the consumer into believing they have an asset in the imaginary cash value. Yet it is only your estate who gets some payout in the end while you spent your life over paying for life insurance you either didn't need or could have paid much much less.

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