Non-Term Life insurance, Seeking your guidance

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Topic Author
ALostCause2
Posts: 8
Joined: Sat Jan 06, 2018 12:45 pm

Non-Term Life insurance, Seeking your guidance

Post by ALostCause2 » Thu Mar 14, 2019 7:31 am

Looking for help for a friend who was recently handed a non-term Life Insurance policy by his parents. It's quite a small policy with a small death benefit. He's in his late 20's and right now is single with no dependents, but eventually plans to have a family. He requested the inforce illustration which I've asked his permission to post to seek your help.

I ran his information through term4sale and it looks like for a $25K benefit:
  • 10 year - $75 / year
  • 15 year - $75 - $77 / year
  • 20 year - $77 - $80 / year
  • 25 year - $108 - $120 / year (yes this is not an error, prices are higher!)
  • 30 year - $83 - $87 / year

PRO's to this variable life policy:
  • 4% guaranteed
  • Possibly lower premiums (following the nonguaranteed cost of insurance)
CON's to this variable life policy:
  • Tiny capacity for overfunding to get the 4% (looks like only around $925 capacity)
  • Possibly higher premiums if held long term (following the guaranteed cost of insurance)

Questions
  • What is IRC Guideline Level Prem (GLP)?
  • What is Annually IRC Guidelines Single Prem (GSP)?
  • Am I understanding it correctly? The cost of insurance for this Variable policy is cheaper compared to Term for the next 10 years? Should he just keep it and treat it like a 10 year Term policy?
  • Should he overfund the insurance to collect the 4% guaranteed interest?
  • How do I convince him to switch to Term? What calculations should I be showing him?


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DarkHelmetII
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Re: Non-Term Life insurance, Seeking your guidance

Post by DarkHelmetII » Thu Mar 14, 2019 7:51 am

1) For such a complex policy and low death benefit, before even getting into the details I would suggest this is not much warranting the brain power ... just get out of the policy. Put extra $$ into a lazy boglehead 3-fund portfolio. Buy term if / when your friend gets married.

2) I have a VUL (sacrilegious for a boglehead) with TIAA-CREF and pay $350 / year for 10-years for a $900,000+ death benefit. I am not suggesting this guy run out and buy a VUL ... but simply suggesting he consider TIAA-CREF for his term policy if / when he needs one. This is for the top medical underwriting tier.

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David Jay
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Re: Non-Term Life insurance, Seeking your guidance

Post by David Jay » Thu Mar 14, 2019 7:58 am

I agree, surrender it.

My folks did that for me (to me?). I really dislike the imposition of starting something without your permission and expecting you to make payments on it the rest of your life. Or else having to dishonor their “gift”. It is truly a no-win for a loyal child.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Jack FFR1846
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Re: Non-Term Life insurance, Seeking your guidance

Post by Jack FFR1846 » Thu Mar 14, 2019 8:04 am

The first question when trying to decide whether to buy or keep a life insurance policy is: Is there someone who depends on your income who would need this money if you die?

His answer is no. Full stop. He doesn't need life insurance. Cash it in.
Bogle: Smart Beta is stupid

mxs
Posts: 476
Joined: Tue Mar 24, 2015 1:54 pm

Re: Non-Term Life insurance, Seeking your guidance

Post by mxs » Thu Mar 14, 2019 8:23 am

Jack FFR1846 wrote:
Thu Mar 14, 2019 8:04 am
The first question when trying to decide whether to buy or keep a life insurance policy is: Is there someone who depends on your income who would need this money if you die?

His answer is no. Full stop. He doesn't need life insurance. Cash it in.
The one possible expense is burial, which is likely between $15k-$25k depending on area and details. If that is covered, you do not need the policy. If that is not covered, you should cover that with either this policy or a new term policy. Upon marriage and/or children, a policy in the 8-12 times income is then needed, and I would suggest as long of a term policy as makes sense and can be afforded.

Topic Author
ALostCause2
Posts: 8
Joined: Sat Jan 06, 2018 12:45 pm

Re: Non-Term Life insurance, Seeking your guidance

Post by ALostCause2 » Thu Mar 14, 2019 8:25 am

My inclination was to recommend surrendering it, but the price of a new term policy made me pause. He’s planning on starting a family in the upcoming years so not having to go through underwriting/medical is appealing to him. I’m having trouble wrapping my head around figuring out how to show, with numbers/calculations, whether it’s better to start a new term policy.

likegarden
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Re: Non-Term Life insurance, Seeking your guidance

Post by likegarden » Thu Mar 14, 2019 8:29 am

50 % of people nowadays get cremated after they die. With that burial is inexpensive, there is probably a thread here about costs, around $1000. So there is no life insurance required to cover those costs.

mxs
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Re: Non-Term Life insurance, Seeking your guidance

Post by mxs » Thu Mar 14, 2019 8:35 am

ALostCause2 wrote:
Thu Mar 14, 2019 8:25 am
My inclination was to recommend surrendering it, but the price of a new term policy made me pause. He’s planning on starting a family in the upcoming years so not having to go through underwriting/medical is appealing to him. I’m having trouble wrapping my head around figuring out how to show, with numbers/calculations, whether it’s better to start a new term policy.
This policy is insufficient for what would be needed should he have a family. I would guess that increasing the amount on this policy is either not possible, or would require underwriting/medical anyway. He will need a new policy no matter what. Starting a family is not a guarantee, and the difference in price between now and then could be small. Get the policy when it actually is needed.

They are currently paying $6.44 x 12 = $77.28 a year for a $20k policy. You gave numbers for $25k term policies that are slightly cheaper. If they want to have something they can hang on to this if they really want, but I wouldn't. I would get rid of this policy, and get a term policy when a spouse/significant other and/or child is dependent on their income.

Based on my recent experience with these matters, the best thing they can do is get a will written up so that their wishes are known and the legal process of handling their affairs is easier and cheaper (less estate legal work, no surety bond expenses or other hassles, etc.).

mxs
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Re: Non-Term Life insurance, Seeking your guidance

Post by mxs » Thu Mar 14, 2019 8:43 am

likegarden wrote:
Thu Mar 14, 2019 8:29 am
50 % of people nowadays get cremated after they die. With that burial is inexpensive, there is probably a thread here about costs, around $1000. So there is no life insurance required to cover those costs.
Good point, if that is their wishes. If not, the expense will have to be paid from somewhere.

Topic Author
ALostCause2
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Re: Non-Term Life insurance, Seeking your guidance

Post by ALostCause2 » Thu Mar 14, 2019 9:08 am

mxs wrote:
Thu Mar 14, 2019 8:35 am
They are currently paying $6.44 x 12 = $77.28 a year for a $20k policy. You gave numbers for $25k term policies that are slightly cheaper. If they want to have something they can hang on to this if they really want, but I wouldn't. I would get rid of this policy, and get a term policy when a spouse/significant other and/or child is dependent on their income.
The Premium is indeed $77/year, but the cost of the insurance is listed under the column "COI and Contract Charges." The difference between the Premium and "COI and Contract Charges" gets added to the Cash Value which gets a 4% return.

So the true cost is what is listed under "COI and Contract Charges" and that's what I'm using to compare to the Term pricing. Certainly did take me some time to figure that part out! Unless I am mistaken, the price of a new Term policy (at least in the short term) thus comes out higher than this current insurance product.

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Stinky
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Re: Non-Term Life insurance, Seeking your guidance

Post by Stinky » Thu Mar 14, 2019 9:24 am

DarkHelmetII wrote:
Thu Mar 14, 2019 7:51 am
For such a complex policy and low death benefit, before even getting into the details I would suggest this is not much warranting the brain power ... just get out of the policy. Put extra $$ into a lazy boglehead 3-fund portfolio. Buy term if / when your friend gets married.
+1

Drop the policy. Very complex product for such a small amount of cash/insurance..

$20k death benefit is entirely insufficient for any insurance needs that your friend will have when he starts a family. Buy lots of level premium term insurance at that time.
It's a GREAT day to be alive - Travis Tritt

mxs
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Re: Non-Term Life insurance, Seeking your guidance

Post by mxs » Thu Mar 14, 2019 10:19 am

ALostCause2 wrote:
Thu Mar 14, 2019 9:08 am
mxs wrote:
Thu Mar 14, 2019 8:35 am
They are currently paying $6.44 x 12 = $77.28 a year for a $20k policy. You gave numbers for $25k term policies that are slightly cheaper. If they want to have something they can hang on to this if they really want, but I wouldn't. I would get rid of this policy, and get a term policy when a spouse/significant other and/or child is dependent on their income.
The Premium is indeed $77/year, but the cost of the insurance is listed under the column "COI and Contract Charges." The difference between the Premium and "COI and Contract Charges" gets added to the Cash Value which gets a 4% return.

So the true cost is what is listed under "COI and Contract Charges" and that's what I'm using to compare to the Term pricing. Certainly did take me some time to figure that part out! Unless I am mistaken, the price of a new Term policy (at least in the short term) thus comes out higher than this current insurance product.
Even with the COI and Contract Charges, you are comparing apples and oranges slightly. This policy is for 20k, the term you listed is 25k. You are getting 80% of the benefit of the term policies. If you took 80% of the $75 or so a year for the term policy, which is $60, the cost and benefit of both polices would be about the same today. I don't think it works exactly that way, but that is a better comparison.

So if they want the policy today, keep it until you have a need for a much larger policy. Then get a new large term policy and drop this one.

Otherwise, drop the policy today, and wait for a need for a large term one to get then.

investorag83
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Re: Non-Term Life insurance, Seeking your guidance

Post by investorag83 » Thu Mar 14, 2019 10:20 am

Couple things:

1) This is not a variable policy. This is a universal life policy. It receives a credited interest rate that can change but it is not market based (variable policies are market based). At one point this was probably earning 8% with a guaranteed 4 but as rates have fallen, so has the crediting rate.
2) The current interest rate is 4.5%. It will never be less than 4% (the guaranteed column). You can see the difference the .5% makes when comparing the 2 columns.
3) If he keeps making the premiums as they are, it will collapse at age 90 requiring a larger premium. Technically, if he wants to keep this policy healthy now, he needs to fund it better. The interest rates dropping have decimated the long term cash value expectation for this policy.

Quick math by comparison, the value is very good for a 20k death benefit...10 bucks a month should help this a lot and a 4% guaranteed rate is hard to find on policies written today. The question is if he really wants a 20k death benefit 60 years from now (this is like the 70 year olds that have 5k policies they owned for 50 years...it doesn't do much 50 years down the road). I'm a fan of using policies to go alongside a Bogle designed portfolio for risk management purposes (unlike most on here...to each their own) but even I don't see a whole lot of value in this structure. Either fund something like this well (i.e. the earlier poster putting 300 into a VUL) or don't. But half-assing a contribution plan to something with a negligible death benefit when you're 29 is not appealing.

This is also why I don't like using UL's for anyone under 50.

Dottie57
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Re: Non-Term Life insurance, Seeking your guidance

Post by Dottie57 » Thu Mar 14, 2019 10:35 am

ALostCause2 wrote:
Thu Mar 14, 2019 8:25 am
My inclination was to recommend surrendering it, but the price of a new term policy made me pause. He’s planning on starting a family in the upcoming years so not having to go through underwriting/medical is appealing to him. I’m having trouble wrapping my head around figuring out how to show, with numbers/calculations, whether it’s better to start a new term policy.
The price for term above was cheap.

chw
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Re: Non-Term Life insurance, Seeking your guidance

Post by chw » Thu Mar 14, 2019 10:41 am

I would get rid of it. If your friend has debt (that can't be paid off by his estate) that is co-signed by others- think parents on student loans, perhaps he should get a simple term insurance policy for the amount of the loan(s), but otherwise, I would ditch the policy.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Non-Term Life insurance, Seeking your guidance

Post by Valuethinker » Thu Mar 14, 2019 12:00 pm

ALostCause2 wrote:
Thu Mar 14, 2019 7:31 am
Looking for help for a friend who was recently handed a non-term Life Insurance policy by his parents. It's quite a small policy with a small death benefit. He's in his late 20's and right now is single with no dependents, but eventually plans to have a family. He requested the inforce illustration which I've asked his permission to post to seek your help.

I ran his information through term4sale and it looks like for a $25K benefit:
  • 10 year - $75 / year
  • 15 year - $75 - $77 / year
  • 20 year - $77 - $80 / year
  • 25 year - $108 - $120 / year (yes this is not an error, prices are higher!)
  • 30 year - $83 - $87 / year

PRO's to this variable life policy:
  • 4% guaranteed
  • Possibly lower premiums (following the nonguaranteed cost of insurance)
CON's to this variable life policy:
  • Tiny capacity for overfunding to get the 4% (looks like only around $925 capacity)
  • Possibly higher premiums if held long term (following the guaranteed cost of insurance)

Questions
  • What is IRC Guideline Level Prem (GLP)?
  • What is Annually IRC Guidelines Single Prem (GSP)?
  • Am I understanding it correctly? The cost of insurance for this Variable policy is cheaper compared to Term for the next 10 years? Should he just keep it and treat it like a 10 year Term policy?
  • Should he overfund the insurance to collect the 4% guaranteed interest?
  • How do I convince him to switch to Term? What calculations should I be showing him?


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He should get out of this policy.

If he needs life insurance because he has dependents who would have an issue if he were not alive, then he should buy term life - level term, 25 year period (usually), to the level of the financial need.

Otherwise he has no need for life insurance, and he certainly has no need for such a complex policy.

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