Whole Life Insurance 'Gift' from Parents

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logandouglasbr
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Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Wed Mar 25, 2015 12:15 pm

Hello Bogleheads,
I was informed by my parents that I have a whole life insurance policy in my name that they have been paying since my birth. I am now 26 and Married so they have decided to pass it on to me. My dad has stated that I am free to do whatever I wish with it, including cash it out. I admit that I don't know anything when it comes to insurance policies. :confused

I will include details below but my question is: should I keep it?

My wife and I are currently contributing about 35% of our gross income ($90k) towards debt reduction (primarily student loans ~$35k @ 7%), no credit card debt or car payments.

My wife does not have any 401k option available to her and we are only matching 6% on my 401k while we pay off the debts.

The Insurance is provided by Mass Mutual in my name.
It is listed as a Limited Payment Whole Life Policy (Paid Up at 95)
It has an "Automatic Premium Loan Provision."
Face Amount: $50,000
Annual Premium: $310

Dividend Option: Paid-Up Additions
Dividend Available: $7,088

Loan Available: $10,551 @ 4.27%

Net Cash Value: $10,777
Death Benefit: $113,569

BackOfTheNet
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Re: Whole Life Insurance 'Gift' from Parents

Post by BackOfTheNet » Wed Mar 25, 2015 12:20 pm

I would cash it out and pay off debt. Take out a term policy instead, my roughly 26 year old wife has a $500,000 term policy for $12 per month.

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powermega
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Re: Whole Life Insurance 'Gift' from Parents

Post by powermega » Wed Mar 25, 2015 12:41 pm

Does the policy have a "guaranteed insurability" rider? That could make the policy more valuable. You could also ask for an "inforce re-projection" and see if the policy could get by going forward without paying any premiums. I suspect that it would, and if that's the case I think you could keep it since the costs to you would be zero.
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Re: Whole Life Insurance 'Gift' from Parents

Post by AngelD » Wed Mar 25, 2015 12:43 pm

I would find out what the guaranteed rate of return is on the cash value. I got a whole life policy gift from my parents. I was going to dump it because all we ever hear is 'whole life is bad'. But the policy was so old that it no longer required payments & the cash value increases by a minimum of 5% per year. I figure other than the market, which has risk, nothing right now will come close to that return. So I've held on to it & it is my emergency fund.

So I would run a similar analysis on your & find out the returns on the cash value. A policy that old might be worth keeping.

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logandouglasbr
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Re: Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Wed Mar 25, 2015 12:50 pm

powermega wrote:Does the policy have a "guaranteed insurability" rider? That could make the policy more valuable. You could also ask for an "inforce re-projection" and see if the policy could get by going forward without paying any premiums. I suspect that it would, and if that's the case I think you could keep it since the costs to you would be zero.
I suppose this is the crux of the issue for me, the cash would be convenient but it isn't really necessary at this point and if we can get the coverage for free then that beats paying $12 or $20 or $50 a month for the rest of my life.

Is the in force re-projection something I can calculate myself or do I need to request it from the provider. Also, how can I determine if there is a guaranteed insurability rider, I haven't been able to find any verbage to this end in my policy information?

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Re: Whole Life Insurance 'Gift' from Parents

Post by jdb » Wed Mar 25, 2015 12:53 pm

BackOfTheNet wrote:I would cash it out and pay off debt. Take out a term policy instead, my roughly 26 year old wife has a $500,000 term policy for $12 per month.
+1. This question has come up before on this site. I was in similar situation many years ago but 22 and unmarried when father proudly presented me with whole life policy. Appreciated the cash value, never knew whether he was aware it had been cancelled. Sad commentary on insurance industry that they are still suckering parents into buying whole life policies for minor children with obviously no dependants.

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Re: Whole Life Insurance 'Gift' from Parents

Post by Jack FFR1846 » Wed Mar 25, 2015 12:58 pm

Ask the company if the cash value can be used to cover insurance premiums and how much that would be. I have a similar policy with similar numbers but am twice your age. The premiums for me are now paid from cash value and are significantly less than term would cost me. But you are far younger, so would likely find lower premiums for term
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Re: Whole Life Insurance 'Gift' from Parents

Post by powermega » Wed Mar 25, 2015 1:51 pm

logandouglasbr wrote:
powermega wrote:Does the policy have a "guaranteed insurability" rider? That could make the policy more valuable. You could also ask for an "inforce re-projection" and see if the policy could get by going forward without paying any premiums. I suspect that it would, and if that's the case I think you could keep it since the costs to you would be zero.
I suppose this is the crux of the issue for me, the cash would be convenient but it isn't really necessary at this point and if we can get the coverage for free then that beats paying $12 or $20 or $50 a month for the rest of my life.

Is the in force re-projection something I can calculate myself or do I need to request it from the provider. Also, how can I determine if there is a guaranteed insurability rider, I haven't been able to find any verbage to this end in my policy information?
The carrier (one of their agents) should be able to provide the re-projection for you. It is not something you can calculate on your own. Most of the costs of a WL policy are front-loaded, so from your standpoint, it "costs" nothing and might actually have a decent interest rate going forward. If you have the policy documents that were originally delivered to your parents, those documents would specify all of the riders on the policy, including the Guaranteed Insurability rider. If you don't have those documents, the carrier (or one of their agents) should be able to tell you that based on your policy number.

That rider can be valuable to keep since you're still pretty young. That rider would allow you to buy more insurance without underwriting if you became very expensive to insure or even un-insurable. That happened to a good friend of mine. He is the breadwinner for his family, but he is massively under-insured and unable to buy any other insurance other than the group policies that are sold through employers (1-2 times salary, etc). When he was your age, everything was "fine", but that all very quickly changed within 10 years.

If you were to purchase a new 20-30 year term policy, I don't think this kind of rider has as much value since you would likely have all of your insurance need met with the new term policy. In other words, don't bother with this rider with a new term policy that has a long duration (20-30 years).
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Re: Whole Life Insurance 'Gift' from Parents

Post by MrBachelor » Wed Mar 25, 2015 6:14 pm

IF you are in good health you can get 10x the face value of that policy in 20-30 year level term for the same annual premium. By that time you should not need insurance as you will have followed the BH lifestyle and be financial independent.
Cancel it immediately, buy term and pay down debt.

The only reason not to is if you are otherwise uninsurable.

EDIT: $100k won't buy much after 50 years of inflation (assuming you keep it until you die at average life expectancy).
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dratkinson
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Re: Whole Life Insurance 'Gift' from Parents

Post by dratkinson » Wed Mar 25, 2015 7:33 pm

Short story. I kept the policy my parents bought for me. Believe I've probably broken even and beneficiary will gain.


Long story.

My parent did the same thing when I was in my mid-20s. Not knowing any better I kept the MetLife policy and reimbursed them for it. Assumed I was getting a good deal... because it was (1) real life insurance!, and the (2) annual premium was cheaper than anything I could buy then. At the time I didn't know about dependents and term life.

Still have the policy:
--Annual premium is now less than annual dividend, which is used to buy additional paid up insurance.
--Additional paid up insurance earns additional annual dividend.
--Quarterly dividends on MetLife shares (from demutualization) cover policy premium.
So policy is now essentially free and continues to grow.

A few years back, a MetLife rep called me to his office on the pretext of an insurance review. He wanted me to convert to "policy premiums paid from policy annual dividends, instead of buying additional paid up insurance". He also pitched an annuity (for him) to better take advantage of my other investments. By then I knew better. Thanks, BHs.

Assumed if for-profit insurance company wanted me to do something (switch payment methods, buy an annuity), then it's in their best interest and not mine. So I didn't.

But the insurance policy cash surrender value, and stock shares, do seem to have some value, so I keep both as part of my emergency fund. And the death benefit will help settle the estate.
Last edited by dratkinson on Thu Mar 26, 2015 4:49 pm, edited 1 time in total.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Wed Mar 25, 2015 7:49 pm

While these are horrible purchases, the decision on whether or not to keep an old policy is different then the decision to purchase one or to buy more term. This is bc costs are sunk. The real question is do you want a permanent death benefit. You or someone else has already pretty much paid for it. Have appropriate term regardless of this decision.

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logandouglasbr
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Re: Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Thu Mar 26, 2015 9:58 am

Warning, this reply is as clear as mud. Sorry in advance. :confused

Okay, lots of good information and my inclination is to just cash out; however, I got the in force illustration and I'm not exactly sure what I'm looking for to determine if the policy is self sustaining or not. I would take it to my financial adviser, but I don't have one at this point. I don't feel like I really have the assets to need one.

I believe according to the document at age 95 it "may" have a Total Death Benefit of $679,586?

Again, I'm not sure, but it looks like the value of the annual dividend is enough to cover the contract premium so is that what I would want to do?
It seems like they calculated the growth based on about 3% a year, I could probably get a better rate of return by paying off the debt, but only on essentially 1/10th of the value?

I can't get any of the document to format properly to copy it over here but it has the columns: Year, Contract Premium, Guaranteed CSV, Guaranteed Death Benefit, Total Annual Dividend, CSV of Paid-Up Additions, Total CSV, Amount of Paid-Up Additions, Total Death Benefit

26 $310 $3,490 $50,000 $425 $7,536 $11,259 $63,352 $113,570
27 $310 $3,731 $50,000 $444 $8,288 $12,268 $67,136 $117,369
28 $310 $3,987 $50,000 $473 $9,107 $13,360 $70,932 $121,181
29 $310 $4,258 $50,000 $496 $9,990 $14,531 $74,816 $125,082
30 $310 $4,543 $50,000 $522 $10,941 $15,787 $78,728 $129,012

@95 $310 $45,345 $50,000 $11,449 $581,514 $627,859 $628,586 $679,586

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deanbrew
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Re: Whole Life Insurance 'Gift' from Parents

Post by deanbrew » Thu Mar 26, 2015 10:52 am

dhodson wrote:While these are horrible purchases, the decision on whether or not to keep an old policy is different then the decision to purchase one or to buy more term. This is bc costs are sunk. The real question is do you want a permanent death benefit. You or someone else has already pretty much paid for it. Have appropriate term regardless of this decision.
I agree with this sentiment. You have cash value that will continue to grow. You also have the death benefit that will continue to grow. The cash value is growing by quite a bit more than the annual premium, so I would look at this insurance policy as a safe investment providing diversification and tax benefits. When you eventually die - hopefully many decades from now - your heirs will get the insurance money tax-free. Or you could cash it out when you are old and your kids are grown and buy something big with it.

There are lots of people here in Bogleland who reflexively pooh-pooh whole life insurance. While the first several years are arguably a lousy investment, once the policy gets to a certain point, it makes sense to keep paying it. I think you'd be crazy to cash this one out. The "bad" dollars are already washed downstream. Keep paying the modest premium, and let the cash value and death benefit grow.

Full disclosure - my wife has a Mass Mutual whole life policy that was purchased for her years ago. We are paying the premium because the cash value is going up each year by more than the premium. So, we are earning money on our contributions, and the (growing) death benefit is part of our estate planning/inheritance puzzle. I gladly pay the premium and view the policy as part of our portfolio, adding diversification from both stocks and bonds.
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Re: Whole Life Insurance 'Gift' from Parents

Post by itstoomuch » Thu Mar 26, 2015 11:04 am

By Holding this CV insurance, you are NOT helping the insurance company's balance sheet. :?
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Re: Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Thu Mar 26, 2015 11:06 am

itstoomuch wrote:By Holding this CV insurance, you are NOT helping the insurance company's balance sheet. :?
Can you please explain this a little more, I don't understand?

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Re: Whole Life Insurance 'Gift' from Parents

Post by powermega » Thu Mar 26, 2015 11:18 am

logandouglasbr,

Based on the fact that the annual dividends are greater than the premium (about 33% higher), I think it would be best to just keep the policy and stop paying premiums on it so it doesn't cost you anything out of pocket. The cash value and death benefit would grow slower than the re-projection showed since part of the dividend would pay the premium instead of buying paid-up additional insurance. If you want to see how this would look, you could ask for a re-projection that shows what happens if you stop paying premiums. There might be a time in the future where this policy might come in handy for borrowing or withdrawing money from it. From an asset allocation perspective, I would look at it as part of the overall bond allocation.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Thu Mar 26, 2015 11:46 am

powermega wrote:logandouglasbr,

Based on the fact that the annual dividends are greater than the premium (about 33% higher), I think it would be best to just keep the policy and stop paying premiums on it so it doesn't cost you anything out of pocket. The cash value and death benefit would grow slower than the re-projection showed since part of the dividend would pay the premium instead of buying paid-up additional insurance. If you want to see how this would look, you could ask for a re-projection that shows what happens if you stop paying premiums. There might be a time in the future where this policy might come in handy for borrowing or withdrawing money from it. From an asset allocation perspective, I would look at it as part of the overall bond allocation.
That's a bad way to calculate it. One should use the current CSV and premiums and the then guaranteed and illustrated CSV. Just bc dividends are greater than premiums doesn't mean much. Also dividends aren't guaranteed to continue. For all companies, the dividends (as a %) have been going down for a long time.

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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Thu Mar 26, 2015 11:48 am

logandouglasbr wrote:
itstoomuch wrote:By Holding this CV insurance, you are NOT helping the insurance company's balance sheet. :?
Can you please explain this a little more, I don't understand?
Once a policy has been in force a long time, the insurance company has taken most of its profits for the most part and thus would prefer you to surrender it. The death benefit is always more expensive for them.

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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Thu Mar 26, 2015 11:54 am

deanbrew wrote:
dhodson wrote:While these are horrible purchases, the decision on whether or not to keep an old policy is different then the decision to purchase one or to buy more term. This is bc costs are sunk. The real question is do you want a permanent death benefit. You or someone else has already pretty much paid for it. Have appropriate term regardless of this decision.
I agree with this sentiment. You have cash value that will continue to grow. You also have the death benefit that will continue to grow. The cash value is growing by quite a bit more than the annual premium, so I would look at this insurance policy as a safe investment providing diversification and tax benefits. When you eventually die - hopefully many decades from now - your heirs will get the insurance money tax-free. Or you could cash it out when you are old and your kids are grown and buy something big with it.

There are lots of people here in Bogleland who reflexively pooh-pooh whole life insurance. While the first several years are arguably a lousy investment, once the policy gets to a certain point, it makes sense to keep paying it. I think you'd be crazy to cash this one out. The "bad" dollars are already washed downstream. Keep paying the modest premium, and let the cash value and death benefit grow.

Full disclosure - my wife has a Mass Mutual whole life policy that was purchased for her years ago. We are paying the premium because the cash value is going up each year by more than the premium. So, we are earning money on our contributions, and the (growing) death benefit is part of our estate planning/inheritance puzzle. I gladly pay the premium and view the policy as part of our portfolio, adding diversification from both stocks and bonds.
Cashing it out when old is a bad idea. If you don't want the death benefit then don't invest in something with a very likely lower return (which is going down as a % since WL dividends continue to drop). If you aren't going to keep until death then might as well surrender sooner instead of later or at the very least 1035 exchange so that you aren't stilt paying for insurance. When one surrenders, all gains are taxed as income.

There is no diversification with whole life. They just invest the money in bonds for you. That would be like me saying I bought total bonds at vanguard and total bonds at Schwab and now I'm diversified.

You also have underestimated how many years it is a poor investment. This isn't a reflexive pooh-pooh of whole life. Its the reality of investing in primarily bonds via an insurance company. Its like a highly managed, front loaded bond fund, that just isn't going to work as a good investment.

Again the decision to keep is different then the decision to purchase but lets not pretend that people here just don't understand and reflexively pooh-pooh whole life. It has the reputation around here that it deserves.

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Re: Whole Life Insurance 'Gift' from Parents

Post by powermega » Thu Mar 26, 2015 12:17 pm

dhodson wrote:
powermega wrote:logandouglasbr,

Based on the fact that the annual dividends are greater than the premium (about 33% higher), I think it would be best to just keep the policy and stop paying premiums on it so it doesn't cost you anything out of pocket. The cash value and death benefit would grow slower than the re-projection showed since part of the dividend would pay the premium instead of buying paid-up additional insurance. If you want to see how this would look, you could ask for a re-projection that shows what happens if you stop paying premiums. There might be a time in the future where this policy might come in handy for borrowing or withdrawing money from it. From an asset allocation perspective, I would look at it as part of the overall bond allocation.
That's a bad way to calculate it. One should use the current CSV and premiums and the then guaranteed and illustrated CSV. Just bc dividends are greater than premiums doesn't mean much. Also dividends aren't guaranteed to continue. For all companies, the dividends (as a %) have been going down for a long time.
True, but current dividends are 33% higher than the premium, so there is some room for a decline in dividends. If you're one to believe that bond interest rates will be higher in the future than they are today, then you can expect dividend rates to eventually rise as well. Plus, there is already $7.5k of PUA cash value, which can pay for 24 years of premiums by itself, and that would assume that dividends are $0 during that time, and that the value of the PUA cash value doesn't increase at all as it would from the increase in net single premium rates as the insured gets older. I feel pretty confident that the policy could pay for its own premium indefinitely.

[EDIT: include mentioning the increase in NSP rates that are used for PUA CV calculations]
Last edited by powermega on Thu Mar 26, 2015 12:24 pm, edited 1 time in total.
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Re: Whole Life Insurance 'Gift' from Parents

Post by deanbrew » Thu Mar 26, 2015 12:23 pm

dhodson wrote:There is no diversification with whole life. They just invest the money in bonds for you. That would be like me saying I bought total bonds at vanguard and total bonds at Schwab and now I'm diversified.

You also have underestimated how many years it is a poor investment. This isn't a reflexive pooh-pooh of whole life. Its the reality of investing in primarily bonds via an insurance company. Its like a highly managed, front loaded bond fund, that just isn't going to work as a good investment.

Again the decision to keep is different then the decision to purchase but lets not pretend that people here just don't understand and reflexively pooh-pooh whole life. It has the reputation around here that it deserves.
Life insurance companies invest in more than just bonds. They also invest in stocks, real estate, mortgages and other vehicles. You are oversimplifying by comparing a life insurance policy with a bond fund.

I also disagree with the assertion "Its like a highly managed, front loaded bond fund, that just isn't going to work as a good investment." A main reason most front-loaded funds are lousy investments has more to do with the load than the ongoing expenses. With an insurance policy like the OP's, the heavy up-front "load" has already been paid, and it's a far different investment now.

If the word "reflexively" offended you, I will take it back, as I agree that it is an unfair caricaturization. But I stand by my stance that many here fail to properly differentiate between buying a new whole life policy and analyzing one that has been paid on for many years and is providing both a positive return and growing death benefits.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Thu Mar 26, 2015 12:26 pm

powermega wrote:
dhodson wrote:
powermega wrote:logandouglasbr,

Based on the fact that the annual dividends are greater than the premium (about 33% higher), I think it would be best to just keep the policy and stop paying premiums on it so it doesn't cost you anything out of pocket. The cash value and death benefit would grow slower than the re-projection showed since part of the dividend would pay the premium instead of buying paid-up additional insurance. If you want to see how this would look, you could ask for a re-projection that shows what happens if you stop paying premiums. There might be a time in the future where this policy might come in handy for borrowing or withdrawing money from it. From an asset allocation perspective, I would look at it as part of the overall bond allocation.
That's a bad way to calculate it. One should use the current CSV and premiums and the then guaranteed and illustrated CSV. Just bc dividends are greater than premiums doesn't mean much. Also dividends aren't guaranteed to continue. For all companies, the dividends (as a %) have been going down for a long time.
True, but current dividends are 33% higher than the premium, so there is some room for a decline in dividends. If you're one to believe that bond interest rates will be higher in the future than they are today, then you can expect dividend rates to eventually rise as well. Plus, there is already $7.5k of PUA cash value, which can pay for 24 years of premiums by itself, and that would assume that dividends are $0 during that time. I feel pretty confident that the policy could pay for its own premium indefinitely.
While that may be true, the OP never said that he/she wants a permanent death benefit. Additionally the debt this person has is considerably higher than even the return on the death benefit unless the person dies prematurely.

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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Thu Mar 26, 2015 12:31 pm

deanbrew wrote:
dhodson wrote:There is no diversification with whole life. They just invest the money in bonds for you. That would be like me saying I bought total bonds at vanguard and total bonds at Schwab and now I'm diversified.

You also have underestimated how many years it is a poor investment. This isn't a reflexive pooh-pooh of whole life. Its the reality of investing in primarily bonds via an insurance company. Its like a highly managed, front loaded bond fund, that just isn't going to work as a good investment.

Again the decision to keep is different then the decision to purchase but lets not pretend that people here just don't understand and reflexively pooh-pooh whole life. It has the reputation around here that it deserves.
Life insurance companies invest in more than just bonds. They also invest in stocks, real estate, mortgages and other vehicles. You are oversimplifying by comparing a life insurance policy with a bond fund.

I also disagree with the assertion "Its like a highly managed, front loaded bond fund, that just isn't going to work as a good investment." A main reason most front-loaded funds are lousy investments has more to do with the load than the ongoing expenses. With an insurance policy like the OP's, the heavy up-front "load" has already been paid, and it's a far different investment now.

If the word "reflexively" offended you, I will take it back, as I agree that it is an unfair caricaturization. But I stand by my stance that many here fail to properly differentiate between buying a new whole life policy and analyzing one that has been paid on for many years and is providing both a positive return and growing death benefits.
The general accounts are typically around 85% bonds/treasuries.

This will be the 3rd time in this thread where I have said the decision to buy is different then the decision to surrender. You actually just proved my point about it being like a highly managed front loaded bond (mostly) fund. I have clearly written several times that those costs are sunk. The OP still needs to value a permanent death benefit. If he/she doesn't then its going to be very hard to come up with a good argument to keep this especially given the 7% debt.

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Re: Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Thu Mar 26, 2015 12:48 pm

dhodson wrote: While that may be true, the OP never said that he/she wants a permanent death benefit. Additionally the debt this person has is considerably higher than even the return on the death benefit unless the person dies prematurely.
The permanent death benefit is not/should not be necessary. Like was mentioned earlier, we intend to live the BH lifestyle and so should be adequately covered at the time of death. We are saving about 30% of our current income and my wife is still in school getting her PhD [the loans are not actually due yet but still accruing interest]. We have no intention of changing our lifestyle to incorporate her income post graduation, so our savings rate should jump to about 80%.
We will be well situated to self insure at that point.

This is the primary reason I was considering cashing in the policy to start with; It seems like an unnecessary expense while we are trying to pay off debt, to gain a not that great of a benefit once we're financially independent.

If I were to pursue a 1035 exchange what would be the value that carried across? The guaranteed CSV of $3,490, the total CSV of $11,259, or the amount of Paid-Up additions of $60,352, or something else entirely?

In the case of a 1035 exchange would I be looking to convert it to a similar policy with a decreased premium paid by the previous policy, or would it be more beneficial to convert it into a deferred annuity?

My understanding is that a cash surrender would net $11,259 - taxes so if I could convert it into a more useful retirement vessel with a greater value that seems like a better option.

Sorry to lump this on you guys so dense. I feel [understandably] pretty confused by the whole situation. Do they make it this convoluted on purpose to swindle as much money as they can from people?

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Re: Whole Life Insurance 'Gift' from Parents

Post by deanbrew » Thu Mar 26, 2015 12:49 pm

dhodson wrote: The general accounts are typically around 85% bonds/treasuries.

This will be the 3rd time in this thread where I have said the decision to buy is different then the decision to surrender. You actually just proved my point about it being like a highly managed front loaded bond (mostly) fund. I have clearly written several times that those costs are sunk. The OP still needs to value a permanent death benefit. If he/she doesn't then its going to be very hard to come up with a good argument to keep this especially given the 7% debt.
Mass Mutual's 2013 financial statement shows that about 60 percent of invested assets are in cash and bonds, and 40 percent are invested in equities, real estate and other vehicles. So, holding a life insurance policy isn't like holding a bond fund, load or no-load, or managed or indexed.

I'm not sure why you think I'm arguing with you about what you have stated - once, twice or thrice. We agree that looking at the OP's decision is different than weighing a new policy. And, FWIW, I agree that he needs to consider whether the death benefit is important or worthwhile to him. One consideration, however, is that he is only 26 and doesn't mention children. One's desire for insurance and/or estate planning changes over the years. If he quits paying on the premium now, he can't start up later. It's a permanent decision to stop paying the premium. I'm suggesting that $391 a year is pretty modest compared to the growing cash value and death benefit. It sounds as if the OP is pretty diligently paying down his debt and has a handle on his finances, and I believe this policy can play a part in his financial well-being in the coming decades. Just my opinion, of course.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Fri Mar 27, 2015 7:27 am

deanbrew wrote:
dhodson wrote: The general accounts are typically around 85% bonds/treasuries.

This will be the 3rd time in this thread where I have said the decision to buy is different then the decision to surrender. You actually just proved my point about it being like a highly managed front loaded bond (mostly) fund. I have clearly written several times that those costs are sunk. The OP still needs to value a permanent death benefit. If he/she doesn't then its going to be very hard to come up with a good argument to keep this especially given the 7% debt.
Mass Mutual's 2013 financial statement shows that about 60 percent of invested assets are in cash and bonds, and 40 percent are invested in equities, real estate and other vehicles. So, holding a life insurance policy isn't like holding a bond fund, load or no-load, or managed or indexed.

I'm not sure why you think I'm arguing with you about what you have stated - once, twice or thrice. We agree that looking at the OP's decision is different than weighing a new policy. And, FWIW, I agree that he needs to consider whether the death benefit is important or worthwhile to him. One consideration, however, is that he is only 26 and doesn't mention children. One's desire for insurance and/or estate planning changes over the years. If he quits paying on the premium now, he can't start up later. It's a permanent decision to stop paying the premium. I'm suggesting that $391 a year is pretty modest compared to the growing cash value and death benefit. It sounds as if the OP is pretty diligently paying down his debt and has a handle on his finances, and I believe this policy can play a part in his financial well-being in the coming decades. Just my opinion, of course.
I havent looked at theirs per say but thats low for most companies ive seen. Still its mostly bonds/treasuries. But more to the point, the stock market has done well the last few years. Has dividends gone back up? Nope. Why? Well bc its mostly a bond investment. It also behaves like a managed bond fund over a long period of time as well. Over a short period of time, its a lot worse. Still also no diversification bc there are no magical investments for just insurance companies.

The OP also doesnt need WL to give money at or before his/her death. It is actually better to give money away while living bc people are more likely to need it then and you can enjoy watching them with it. Accessing money from WL before death can be expensive and risky for the policy especially when the owner is young/far from death and dividends are going down which they are still currently. I find it funny that the OP says he/she is investing in a boglehead manner, doesnt want a permanent death benefit, has 7% debt and you claim most bogleheads sort of reflexively pooh-pooh evaluating whether or not to keep an old WL policy. While i dont doubt that an old WL policy is different then the purchase of one, im not so sure you arent guilty of the same thing of not really trying to evaluate the situation but instead having a reflexive response. Additionally given the OP is young, if he/she wanted to then they actually could purchase a new policy at a later date. There would be the risk of health changes of course and that is a real risk but assuming he/she truely invests in a boglehead manner then unless they die prematurely they will have more money to give away then if investing via WL. There just isnt magical investments for insurance companies.

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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Fri Mar 27, 2015 7:37 am

logandouglasbr wrote:
dhodson wrote: While that may be true, the OP never said that he/she wants a permanent death benefit. Additionally the debt this person has is considerably higher than even the return on the death benefit unless the person dies prematurely.
The permanent death benefit is not/should not be necessary. Like was mentioned earlier, we intend to live the BH lifestyle and so should be adequately covered at the time of death. We are saving about 30% of our current income and my wife is still in school getting her PhD [the loans are not actually due yet but still accruing interest]. We have no intention of changing our lifestyle to incorporate her income post graduation, so our savings rate should jump to about 80%.
We will be well situated to self insure at that point.

This is the primary reason I was considering cashing in the policy to start with; It seems like an unnecessary expense while we are trying to pay off debt, to gain a not that great of a benefit once we're financially independent.

If I were to pursue a 1035 exchange what would be the value that carried across? The guaranteed CSV of $3,490, the total CSV of $11,259, or the amount of Paid-Up additions of $60,352, or something else entirely?

In the case of a 1035 exchange would I be looking to convert it to a similar policy with a decreased premium paid by the previous policy, or would it be more beneficial to convert it into a deferred annuity?

My understanding is that a cash surrender would net $11,259 - taxes so if I could convert it into a more useful retirement vessel with a greater value that seems like a better option.

Sorry to lump this on you guys so dense. I feel [understandably] pretty confused by the whole situation. Do they make it this convoluted on purpose to swindle as much money as they can from people?
If you dont care about the death benefit then be sure you have adequate term in place before surrendering the WL. It certainly is more straight forward to do just that and pay off the debt. If one wanted to 1035 exchange instead then the basic idea is as follows. You 1035 into a relatively low cost variable annuity such as one sold via vanguard. The cost basis is maintained and they transfer over the current CSV. The benefit is that you arent hit immediately with a tax bill for the gains which are always taxed as income. You try to place your least tax efficient asset in such a policy such as REITs if you are inclined to purchase them. You hold it until retirement (a few decades) and then the tax deferral helps overcome the costs of the annuity and the fact that gains are taxed as income instead of capital gains rates. You could even annuitize this money (for the insurance of annuitization) and this helps reduce immediate tax burden since some of the money returned to you is gains and some return of principal with each payment to you. This could be spread out over a lifetime to get the most mortality credits or a limited pay period such as 10 years to again just reduce the immediate tax hit. For the amount of money we are talking about, this might be a lot of work for the benefit.

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Re: Whole Life Insurance 'Gift' from Parents

Post by itstoomuch » Fri Mar 27, 2015 10:53 am

logandouglasbr wrote:
itstoomuch wrote:By Holding this CV insurance, you are NOT helping the insurance company's balance sheet. :?
Can you please explain this a little more, I don't understand?
I kinda look at money as risk buckets.
Whole life promises Life Insurance (LI) and a Cash Value (CV)account for life. This means that the insurance co. (IC) takes on the Mortality Risk and Investment Risk. The Investments that the company makes must make more $$ than the guaranteed returns to you plus fixed overheads. The longer you hold the LI, the LI risk for the IC. is reduced because it is covered in the CV. However in the interim the Dividends is a burden in a low bond return era.

Contrasting is Term LI and Invest the Difference.
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Re: Whole Life Insurance 'Gift' from Parents

Post by logandouglasbr » Fri Mar 27, 2015 1:27 pm

itstoomuch wrote:
logandouglasbr wrote:
itstoomuch wrote:By Holding this CV insurance, you are NOT helping the insurance company's balance sheet. :?
Can you please explain this a little more, I don't understand?
I kinda look at money as risk buckets.
Whole life promises Life Insurance (LI) and a Cash Value (CV)account for life. This means that the insurance co. (IC) takes on the Mortality Risk and Investment Risk. The Investments that the company makes must make more $$ than the guaranteed returns to you plus fixed overheads. The longer you hold the LI, the LI risk for the IC. is reduced because it is covered in the CV. However in the interim the Dividends is a burden in a low bond return era.

Contrasting is Term LI and Invest the Difference.
:greedy
So not helping the IC balance sheet but not really helping mine at all either. Not significantly at least.

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Re: Whole Life Insurance 'Gift' from Parents

Post by itstoomuch » Fri Mar 27, 2015 3:53 pm

^ Then you have answered your question.
As most of us have already said, "Buy term insurance. Kill the WL. Payoff debt. "
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Re: Whole Life Insurance 'Gift' from Parents

Post by DrDubious » Fri Mar 27, 2015 9:28 pm

OP,

I think there are a few issues that haven't yet been mentioned that might be worth bringing up.

The most basic way to judge the life insurance policy as an asset is to look at the return as an investment moving forward. Looking at the first year of your data, it looks like your cash value will have a return [i.e. (gain in total cash value - contribution)/(starting cash value)] of around 6.2%. This is certainly better than most low-risk, fixed-income type investments available right now. So if you are planning on holding any fixed-income at all, in should probably be in the form of this policy. Projecting the returns out into future years is a little more complicated but can be done using IRR and/or XIRR functions in excel. You can do this both with the "guaranteed" column as well as the column accounting for dividends. Obviously the nonguaranteed values can be higher or lower than projected, and it may well be the case that dividends go down as long as interest rates stay low, but they are probably a reasonable first estimate and closer to what you can expect than the guaranteed values, at least for the first few years, before deviations from the projections have a chance to compound significantly.

If you don't plan on holding any fixed income/bond/CD type investments, it may be worth considering deploying your cash value elsewhere. The obvious safe choice is paying off the debt, which at 7% looks like it represents a better guaranteed return than accumulating within the policy at 6.2%. However we don't know the extent to which your loan interest is deductible, and what tax bracket you are in; if it's entirely deductible, you don't have to be in a very high tax bracket for the effective rate of the loan to become less than the expected return on the cash value, which would make using cash value to pay it off relatively less desirable.

It is interesting that you list the interest rate on the loan as 4.27%... this is obviously less than 7% and probably less the tax-adjusted rate on your student loan interest, which suggests that there may be a play in borrowing some money from the policy to use to pay off part of the student loans. It is difficult to know whether this is a good idea without knowing the specific rules on governing the interest rate and fees on policy loans for your policy. The only way to know this is to get projections from your insurer assuming you do take a loan. I will echo however the cautions mentioned above in not letting the loan force the policy to lapse, which would cause all the gain in the policy to become taxable all at once, which can make for a nasty surprise. Another caution is that having a loan out may or may not influence the dividends generated by your policy; your insurer or agent should be able to answer that one as well. Depending on the answers to the questions in this paragraph, it may make sense to transfer debt to the insurer; if your income in the future does go up as planned, once you've paid off the higher-interest rate student loans, you can always go back and pay off your policy loans as well. But you will have to run the actual numbers to know for sure it this is a good idea.

I am not sure whether anyone else has mentioned this, but if for some reason you decide you don't want to put any more money into the policy but would like to keep it in place, you can look into having it be "reduced paid-up" -- in other words, the death benefit is reduced to a level such that the cash value is guaranteed to keep it in force without new premium being paid regardless of dividend performance. It doesn't sound like this is an obvious choice for your situation, but it is a possibility.

Yet another consideration mentioned above but worth reiterating is whether there are any options to raise the level of coverage. If so, and you choose to exercise the option, your premiums would go up, but if you have any health problems that could make it expensive or impossible to get more term coverage (which you might decide you need regardless of what you do with the current policy), such an option may be the best one available. Before choosing to execute such an option you would of course want to see projections for that situation as well to see if the numbers make sense in terms of total overall return over time.

Once you have all the variables pinned down, if you find yourself choosing between two ways to play things where one favors keeping the policy and one favors dumping it, and the numbers are fairly close to even, you may want to consider erring on the side of keeping the policy. This may not be a popular opinion around here, but I would argue that the life insurance policy does in fact have some benefits that may prove valuable down the road. These benefits may not be reason enough to GET into a policy, but might factor into a decision to KEEP a policy. Some examples may include protection from creditors (depending on what state you live in), and not being counted for your future kids' financial aid calculations (depending on the school and which version of the financial aid calculations they use). Moreover, I would argue that the life insurance policy could add diversity to an otherwise Bogleheadish portfolio of stocks and bonds. While it's true that the insurer's general fund invests predominantly in bonds with some portion of other stuff that you may or may not be able to invest in directly on your own, the structure of the policy and the legal/tax treatment make it behave differently than if you just owned a proportionate slice of the holdings in the general fund. Although you can probably expect the returns of the cash value and death benefit at life expectancy to be similar to bonds/fixed income, they can't go down like bonds (or stocks, real estate, mortgage-backed securities, or whatever) can. The only way your money is at risk is if the company goes down, and your cash value or death benefit exceed the limitations of your state's guarantee. This might be an issue for some insurers, but is very unlikely for the company which provided your policy... to the extent that if it did, it would probably only be in a legitimate, Zombie Apocalypse, SHTF-type scenario where the viability of the entire nation were at risk, at which point you probably would be preoccupied with other things than the performance of your portfolio. But back to the point, if you fast forward to a scenario where stocks and bonds both tank, but you need liquidity, having the ability to get it cheaply without having to sell something at a depressed price could make a big difference in your overall wealth long-term.

Anyway, hopefully that gives you some food for thought. I don't think your decision is as easy as "whole life sux" or "everybody should own some whole life" which depending on the venue may be the predominant noise. Chances are good that to make the optimal decision, you will have to go through all the options with the agent assigned to your policy. Go into that conversation with your guard up, and leave your checkbook at home. That agent's agenda may be very different than yours, and the best way to know the difference is to know what you're talking about, and know it well enough so that the agent can tell, forcing him to shift his risk/benefit analysis re: dealing with you honestly and trying to preserve the relationship for any potential future business vs. trying to put one over on you for a quick buck. I will echo dhodson's disclaimer that I am not in any way connected to the insurance industry.

Good luck.

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Re: Whole Life Insurance 'Gift' from Parents

Post by White Coat Investor » Fri Mar 27, 2015 11:39 pm

logandouglasbr wrote:Hello Bogleheads,
I was informed by my parents that I have a whole life insurance policy in my name that they have been paying since my birth. I am now 26 and Married so they have decided to pass it on to me. My dad has stated that I am free to do whatever I wish with it, including cash it out. I admit that I don't know anything when it comes to insurance policies. :confused

I will include details below but my question is: should I keep it?

My wife and I are currently contributing about 35% of our gross income ($90k) towards debt reduction (primarily student loans ~$35k @ 7%), no credit card debt or car payments.

My wife does not have any 401k option available to her and we are only matching 6% on my 401k while we pay off the debts.

The Insurance is provided by Mass Mutual in my name.
It is listed as a Limited Payment Whole Life Policy (Paid Up at 95)
It has an "Automatic Premium Loan Provision."
Face Amount: $50,000
Annual Premium: $310

Dividend Option: Paid-Up Additions
Dividend Available: $7,088

Loan Available: $10,551 @ 4.27%

Net Cash Value: $10,777
Death Benefit: $113,569
Well, let's see. $310 per year for 26 years grows to $10,777. =RATE(26,-310,,10777,1) = 2.06% per year. Quite an investment for your parents. Too bad they didn't put it in an S&P 500 fund, whose return over the last 26 years annualizes to 10.41% per year. So basically, you could have had something closer to $40K if they had chosen the Vanguard S&P 500 fund instead of a whole life policy for you. That life insurance basically cost $29K. It makes me so angry I almost can't watch March Madness because Northwestern Mutual is sponsoring it.

Your returns going forward will be better than 2%, of course, but with such a small policy, policy costs will continue to eat up much of the return. The usual rule of thumb is to keep it after 20+ years, but with this tiny policy, I'd be inclined to take the money and run. Be sure to thank your parents for their thoughtful gift.
Last edited by White Coat Investor on Sat Mar 28, 2015 8:02 am, edited 1 time in total.
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Re: Whole Life Insurance 'Gift' from Parents

Post by DrDubious » Sat Mar 28, 2015 7:47 am

EmergDoc,

As has been belabored repeatedly, you can't turn back the clock, so it is completely useless to OP to calculate the return on investment on the policy to this point. All that matters is what comes next, and 6.2% as a starting point for something with slightly more risk than a savings account generally isn't too bad. If you are pointing out the lousy return as a cautionary point to others who might be considering a similar policy for their kids right now, there is some utility to that calculation, but it is still disingenuous to compare it to an S & P 500 fund, which has a completely different risk profile and role in a portfolio. For all you know, the parents might have been using the policy as a fixed-income equivalent. There is an admittedly lower return and less liquidity at the outset, but if they knew they weren't going to have problems with cash flow, that's not too problematic. With regard to the current role in the OP's portfolio, having a fixed-income instrument pulling 6.2% tax-deferred (or potentially tax-free) with a few potentially advantageous bells and whistles doesn't sound so bad to me. I know if I had the opportunity to pull that kind of nearly risk-free return I would take it in a heartbeat.
Last edited by DrDubious on Sat Mar 28, 2015 9:53 am, edited 1 time in total.

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Re: Whole Life Insurance 'Gift' from Parents

Post by letsgobobby » Sat Mar 28, 2015 7:51 am

Wife received a similar gift from parents, at the 15 year mark we opted to keep it, now it returns around 4% yearly. Best fixed income returns of anything we own. I'd consider keeping your policy if you are in need of additional fixed income space.

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Re: Whole Life Insurance 'Gift' from Parents

Post by White Coat Investor » Sat Mar 28, 2015 8:01 am

DrDubious wrote:EmergDoc,

As has been belabored repeatedly, you can't turn back the clock, so it is completely useless to OP to calculate the return on investment on the policy to this point. All that matters is what comes next, and 6.2% as a starting point for something with slightly more risk than a savings account generally isn't too bad. If you are pointing out the lousy return as a cautionary point to others who might be considering a similar policy for their kids right now, there is some utility to that calculation, but it is still disingenuous to compare it to an S & P 500 fund, which has a completely different risk profile and role in a portfolio. For all you know, the parents might have been using the policy as a fixed-income equivalent. There is an admittedly lower return and less liquidity at the outset, but if they knew they weren't going to have problems with cash flow, that's not too problematic. With regard to the current role in the OP's portfolio, having a fixed-income instrument pulling 6.2% tax-deferred (or potentially tax-free) with a few potentially advantageous bells and whistles doesn't sound so bad to me. I know if I had the opportunity to pull that kind of nearly risk-free return I would take it in a heartbeat.
The return calculation is for others and the OP to realize what a crummy investment whole life can be. I mean, 26 years during the greatest bull market in bonds the world has ever known and they/he got returns less than inflation. That sucks. As I mentioned, it will be better going forward but it's still only $10K.

While obviously an S&P 500 index fund has a different risk profile, it seems to me to be a heck of a lot better gift/risk profile for someone if the plan is to invest money for 26 years prior to passing it to the heir. If the intent had been to provide burial funds in the event the OP died young, that "need" could have been much more efficiently covered with term life insurance. I see so many of these "gifts" that are well-intentioned but far less effective than they could have been. The OP's situation provides yet another example.
Last edited by White Coat Investor on Sun Mar 29, 2015 6:18 pm, edited 1 time in total.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sat Mar 28, 2015 8:06 am

Changing to paid up is a bad choice for someone who repeatedly said didn't need/want a death benefit and has debt at a higher rate.

The OP can not increase the death benefit at this point on even a kiddie WL policy except by PUAs and the OP doesn't want more permanent death benefit and this increase is small. Buying additional term if available as a rider is also a bad idea since it can be found cheaper elsewhere unless health has changed.

Buy umbrella insurance for real protection.

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Re: Whole Life Insurance 'Gift' from Parents

Post by White Coat Investor » Sat Mar 28, 2015 8:15 am

logandouglasbr wrote:
This is the primary reason I was considering cashing in the policy to start with; It seems like an unnecessary expense while we are trying to pay off debt, to gain a not that great of a benefit once we're financially independent.

If I were to pursue a 1035 exchange what would be the value that carried across? The guaranteed CSV of $3,490, the total CSV of $11,259, or the amount of Paid-Up additions of $60,352, or something else entirely?

In the case of a 1035 exchange would I be looking to convert it to a similar policy with a decreased premium paid by the previous policy, or would it be more beneficial to convert it into a deferred annuity?

My understanding is that a cash surrender would net $11,259 - taxes so if I could convert it into a more useful retirement vessel with a greater value that seems like a better option.

Sorry to lump this on you guys so dense. I feel [understandably] pretty confused by the whole situation. Do they make it this convoluted on purpose to swindle as much money as they can from people?
If you need the cash flow, that's a great reason to dump the policy, even if the other purposes are just to max out a retirement account or pay down debt, and even though returns going forward should be better than the returns in the past. Although just as it's hard to argue for an asset (even with an improved return) on just 10K with just $310 a year going into it, it's hard to argue $310 a year is going to kill your cash flow needed for other purposes,

I see little need for an exchange if you do wish to dump the policy though. <$3K is gain, so your taxes due should be less than $1000. Too bad you pay taxes on nominal gains, since on an after-inflation basis, you have a loss. An exchange into a VA or similar is only going to delay those taxes. Not a great option for you. Either surrender it now, move on, and don't worry about it or keep it for life. Two reasonable options, but neither of them "awesome."

And yes, they make it this convoluted on purpose. Much easier to sell.
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Re: Whole Life Insurance 'Gift' from Parents

Post by toto238 » Sat Mar 28, 2015 8:38 am

The key here is that you have 7% student loans. This would have to be a FANTASTIC policy to beat the return you'll get by throwing any money you can at those loans. Unless given substantial evidence otherwise, I think paying off the student loans is your best ROI.

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Re: Whole Life Insurance 'Gift' from Parents

Post by deanbrew » Sat Mar 28, 2015 8:59 am

I had decided to not chime in again, as it seems as all of the bases have been touched... but I just can't help myself. Given the miniscule annual premium, I think it would be foolish to do anything but keep paying the policy. People keep mentioning term insurance as the "right" life insurance to buy, and invest the difference. Go price term insurance for someone who is 26, 36, 46, etc. Yes, the OP could buy term insurance right now that is cheaper, but the death benefit doesn't increase. If you factor in the level premium and rising death benefit he already has with his WL policy, term insurance is not a clear winner - if you look at his policy now and don't dwell on the past 26 years.

And, yes, I understand the OP says he shouldn't/doesn't want death benefits. But he's only 26 years old, and has provided no evidence he has children yet. At 26, I didn't care about life insurance, either, but that changed once I had kids. Anticipating the next objection... he may need/want to buy additional life insurance at some point, and term will probably be better for him. But why give up a policy that is already in effect that will provide growing death benefit year after year for a measly $310 annual premium. The cash value and death benefit are going up by respectable rates that far exceed what he could earn through other "safe" income-generating vehicles.

Again, it's a measly $310 per year, earning a 6.2 percent return and providing a growing death benefit that will likely total a significant sum of money decades from now. I would gladly pay the current cash value to take over the policy as it exists for the OP. As some of us have pointed out repeatedly, the "bad" years are far under the bridge. Thank your parents for the policy (in a genuine, non-sarcastic manner), keep paying the premium, and watch the cash value and death benefit grow year after year.
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sat Mar 28, 2015 9:45 am

Term will still likely be cheaper even when you consider the rising death benefit from PUAs especially at this age especially for the time period they would need term. Add on a few decades and that could change this is bc of reasons for death in the young.

Bottom line is that the death benefit return on investment is very unlikely to beat 7% unless the OP dies prematurely (actual value is impossible to calculate without knowing future dividends but they are going down and likely will for some time bc of the low interest rate environment. Also when bonds improve for the insurance company, it typically takes years like around 6 for dividends to improve so it isnt going way up tomorrow). So the OP is losing money period over time with this investment compared to debt. IF the OP had developed some health issue over the last few decades that had decreased his/her lifespan then that would make a big difference in the decision (also make it unlikely to get reasonable priced term).

You have to want the death benefit otherwise all tax advantages go away (meaning you want money to go to someone or something at the time of your death and not before and not after since accessing money from it has costs and risks although i feel the risks/costs are fine if doing it late in retirement personally). Also since the OP must keep it in force until death (which is likely a long time away unless the OP dies prematurely) you are investing excessively conservatively since death is much further away then retirement. Now if there wasnt the 7% debt, sure you could say make this part of your bond portfolio but it really must be kept until death and you have to monitor it since it certainly isnt guaranteed to have bond like growth. Guaranteed is below inflation. OP likely has plenty of "bond room" in their other tax advantaged accounts. The OP would have to be of the mindset that he/she currently wants to invest in taxable even with the debt that they have and do that conservatively. We all do that with home mortgages and some with car payments but those have tax advantages for mortgages and the rates are currently favorable or at least reasonable.

IF the OP wants to give money to future kids then he/she will be able to give more and not wait until death if they just continue to invest in a boglehead manner. The idea that having kids should make one want a permanent death benefit is false.

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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sat Mar 28, 2015 9:49 am

i went to term4sale to run the numbers and for 20 year term for excellent health for 150k of death benefit (giving some room for the death benefit growth) cost is $120.50 per year and 30 year term is $172.50. Both way less than $300.

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DG99999
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Re: Whole Life Insurance 'Gift' from Parents

Post by DG99999 » Sun Mar 29, 2015 12:15 am

deanbrew wrote:I had decided to not chime in again, as it seems as all of the bases have been touched... but I just can't help myself. Given the miniscule annual premium, I think it would be foolish to do anything but keep paying the policy. People keep mentioning term insurance as the "right" life insurance to buy, and invest the difference. Go price term insurance for someone who is 26, 36, 46, etc. Yes, the OP could buy term insurance right now that is cheaper, but the death benefit doesn't increase. If you factor in the level premium and rising death benefit he already has with his WL policy, term insurance is not a clear winner - if you look at his policy now and don't dwell on the past 26 years.

And, yes, I understand the OP says he shouldn't/doesn't want death benefits. But he's only 26 years old, and has provided no evidence he has children yet. At 26, I didn't care about life insurance, either, but that changed once I had kids. Anticipating the next objection... he may need/want to buy additional life insurance at some point, and term will probably be better for him. But why give up a policy that is already in effect that will provide growing death benefit year after year for a measly $310 annual premium. The cash value and death benefit are going up by respectable rates that far exceed what he could earn through other "safe" income-generating vehicles.

Again, it's a measly $310 per year, earning a 6.2 percent return and providing a growing death benefit that will likely total a significant sum of money decades from now. I would gladly pay the current cash value to take over the policy as it exists for the OP. As some of us have pointed out repeatedly, the "bad" years are far under the bridge. Thank your parents for the policy (in a genuine, non-sarcastic manner), keep paying the premium, and watch the cash value and death benefit grow year after year.
+1

My experience was that I bought a WL policy which required 10 years of payments. I paid out $12,000 and the cash value is now $30k - returned about 5% to date. As an investment this was, of course, inferior, but like your situation the payments were a fairly trivial amount (yours are quite trivial) and I actually am happy I have the policy as one part of an emergency fund and to putter along with its tax deferred return. Also, the death benefit does have some value and is fully paid for; I believe that late into retirement I could exchange the CV and purchase a small annuity if I wished to do so, or there will be a benefit to my spouse for maybe a year of expenses (plus or minus). This policy is also from MassMutual which is one of the better life insurance companies (along with Northwestern Mutual and NY Life, notwithstanding any comments to the contrary). I am CERTAINLY not recommending anyone BUY WL, but I am actually OK with having done it at this small level, and your decision is only about keeping what you have.

And yes, before the piling on starts, I have considerable term insurance and the CV represents a tiny percentage of my investment portfolio.

For $310/year I would hold onto it, you may look back, like I did, and say "guess I made a mistake, but I am actually glad that I did". Also, someday, you may get some emotional satisfaction looking at your little policy and reflecting on it as a gift from your parents - that can have some value for some people.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

roflwaffle
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Re: Whole Life Insurance 'Gift' from Parents

Post by roflwaffle » Sun Mar 29, 2015 8:41 am

dhodson wrote:Once a policy has been in force a long time, the insurance company has taken most of its profits for the most part and thus would prefer you to surrender it. The death benefit is always more expensive for them.
My insurance company periodically bugs me about cashing out a policy my grandfather gave me from the 70s (I think) that's for ~$55k. The cash value is I think something like $25k, and the death benefit increases based on the interest/dividends, which are ~$800/year at this point.

I've been thinking about selling it, but it seems beneficial because it...
  • Costs nothing
  • Lasts the life of the owner
  • Is transferred without restriction? (Not sure about this, might be family only)
  • Earns ~3+% on it's cash value
I imagine the cost of term life insurance would push it's comparative earnings up to ~4%, which seems good for a relatively safe investment. I could be missing something, but my view is that a company asking you to cash out generally isn't making money on a product any more.

dhodson
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sun Mar 29, 2015 9:51 am

roflwaffle wrote:
dhodson wrote:Once a policy has been in force a long time, the insurance company has taken most of its profits for the most part and thus would prefer you to surrender it. The death benefit is always more expensive for them.
My insurance company periodically bugs me about cashing out a policy my grandfather gave me from the 70s (I think) that's for ~$55k. The cash value is I think something like $25k, and the death benefit increases based on the interest/dividends, which are ~$800/year at this point.

I've been thinking about selling it, but it seems beneficial because it...
  • Costs nothing
  • Lasts the life of the owner
  • Is transferred without restriction? (Not sure about this, might be family only)
  • Earns ~3+% on it's cash value
I imagine the cost of term life insurance would push it's comparative earnings up to ~4%, which seems good for a relatively safe investment. I could be missing something, but my view is that a company asking you to cash out generally isn't making money on a product any more.
If you want the death benefit then you aren't really missing anything. It is typically a reasonable thing to keep at this point if you want that but it does cost you money. That 25k can earn money in other ways and that is an opportunity cost. Keep in mind that inflation erodes the value of things.

dhodson
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sun Mar 29, 2015 9:57 am

DG99999 wrote:
deanbrew wrote:I had decided to not chime in again, as it seems as all of the bases have been touched... but I just can't help myself. Given the miniscule annual premium, I think it would be foolish to do anything but keep paying the policy. People keep mentioning term insurance as the "right" life insurance to buy, and invest the difference. Go price term insurance for someone who is 26, 36, 46, etc. Yes, the OP could buy term insurance right now that is cheaper, but the death benefit doesn't increase. If you factor in the level premium and rising death benefit he already has with his WL policy, term insurance is not a clear winner - if you look at his policy now and don't dwell on the past 26 years.

And, yes, I understand the OP says he shouldn't/doesn't want death benefits. But he's only 26 years old, and has provided no evidence he has children yet. At 26, I didn't care about life insurance, either, but that changed once I had kids. Anticipating the next objection... he may need/want to buy additional life insurance at some point, and term will probably be better for him. But why give up a policy that is already in effect that will provide growing death benefit year after year for a measly $310 annual premium. The cash value and death benefit are going up by respectable rates that far exceed what he could earn through other "safe" income-generating vehicles.

Again, it's a measly $310 per year, earning a 6.2 percent return and providing a growing death benefit that will likely total a significant sum of money decades from now. I would gladly pay the current cash value to take over the policy as it exists for the OP. As some of us have pointed out repeatedly, the "bad" years are far under the bridge. Thank your parents for the policy (in a genuine, non-sarcastic manner), keep paying the premium, and watch the cash value and death benefit grow year after year.
+1

My experience was that I bought a WL policy which required 10 years of payments. I paid out $12,000 and the cash value is now $30k - returned about 5% to date. As an investment this was, of course, inferior, but like your situation the payments were a fairly trivial amount (yours are quite trivial) and I actually am happy I have the policy as one part of an emergency fund and to putter along with its tax deferred return. Also, the death benefit does have some value and is fully paid for; I believe that late into retirement I could exchange the CV and purchase a small annuity if I wished to do so, or there will be a benefit to my spouse for maybe a year of expenses (plus or minus). This policy is also from MassMutual which is one of the better life insurance companies (along with Northwestern Mutual and NY Life, notwithstanding any comments to the contrary). I am CERTAINLY not recommending anyone BUY WL, but I am actually OK with having done it at this small level, and your decision is only about keeping what you have.

And yes, before the piling on starts, I have considerable term insurance and the CV represents a tiny percentage of my investment portfolio.

For $310/year I would hold onto it, you may look back, like I did, and say "guess I made a mistake, but I am actually glad that I did". Also, someday, you may get some emotional satisfaction looking at your little policy and reflecting on it as a gift from your parents - that can have some value for some people.
More likely you would be better late in retirement taking a loan against the CSV then doing the 1035 exchange. Remember the death benefit is always larger and that way your heirs get the difference of the death benefit minus loans. Do it late so the loan cant collapse the policy. If you look at any of the threads of folks who used WL to pay for college, you will see the problem of taking out loans early especially in a situation of continuing decreasing dividends.

I am glad you are happy with the purchase but I will say that I think its a bad idea to recommend to others to buy or keep something for emotional reasons. That's how people make bad decisions with their money. Frankly that's how these things get sold in the first place. There is nothing wrong with taking this gift and doing whatever with it. That shouldn't reduce the OPs emotional satisfaction.

roflwaffle
Posts: 440
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Re: Whole Life Insurance 'Gift' from Parents

Post by roflwaffle » Sun Mar 29, 2015 1:23 pm

dhodson wrote:If you want the death benefit then you aren't really missing anything. It is typically a reasonable thing to keep at this point if you want that but it does cost you money. That 25k can earn money in other ways and that is an opportunity cost. Keep in mind that inflation erodes the value of things.
That's true. In my situation, the death benefit is possibly useful.

With that said, is there anything that consistently returns inflation plus 1-2% and has a guaranteed cash value? That to me is the other advantage of this versus some other investment. Stocks return more in the long run (2+ decades), and bonds sometimes return more, but both of them have a cash value that can fluctuate more.

dhodson
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Re: Whole Life Insurance 'Gift' from Parents

Post by dhodson » Sun Mar 29, 2015 1:51 pm

roflwaffle wrote:
dhodson wrote:If you want the death benefit then you aren't really missing anything. It is typically a reasonable thing to keep at this point if you want that but it does cost you money. That 25k can earn money in other ways and that is an opportunity cost. Keep in mind that inflation erodes the value of things.
That's true. In my situation, the death benefit is possibly useful.

With that said, is there anything that consistently returns inflation plus 1-2% and has a guaranteed cash value? That to me is the other advantage of this versus some other investment. Stocks return more in the long run (2+ decades), and bonds sometimes return more, but both of them have a cash value that can fluctuate more.
I think you are forgetting that a current standard whole life policy will have a NEGATIVE real return for the first two decades. With dividends it will take about 15 years to break even and thats from a good company (level death benefit using dividends to decrease costs) and that doesnt even take into account inflation. The cash value for whole life doesnt fluctuate bc they give you zero for a year or two and then slowly go up. Any fluctuation in the stock market is better than that. There is no magic in this world. They invest in the same stuff (mostly bonds) but take out fees/cost of insurance/commissions. If you look at the OPs policy it has NOT returned above inflation and thats after 26 years.

roflwaffle
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Re: Whole Life Insurance 'Gift' from Parents

Post by roflwaffle » Sun Mar 29, 2015 4:14 pm

That's accurate, no argument from my end. With that said, I'm not deciding to get whole term life insurance, I'm deciding whether I should keep it. In that context, the better question when it comes down to whether or not to sell is are there any other assets that returns ~1-3% above inflation with minimal fluctuations in value?

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HomerJ
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Re: Whole Life Insurance 'Gift' from Parents

Post by HomerJ » Sun Mar 29, 2015 4:54 pm

logandouglasbr wrote:
powermega wrote:Does the policy have a "guaranteed insurability" rider? That could make the policy more valuable. You could also ask for an "inforce re-projection" and see if the policy could get by going forward without paying any premiums. I suspect that it would, and if that's the case I think you could keep it since the costs to you would be zero.
I suppose this is the crux of the issue for me, the cash would be convenient but it isn't really necessary at this point and if we can get the coverage for free then that beats paying $12 or $20 or $50 a month for the rest of my life.
$50,000 is very little insurance to protect your wife (and possibly someday kids)... That $12 a month could get you $500,000 in coverage.

And that $500,000 insurance policy could be considered "free" too - $10,000 cash-out pays out $200 a year in a 2% CD, which covers that $12 a month, with enough left over for a dinner out each year.

Invest it in stocks, and you could easily pay that monthly premium, AND watch the $10,000 grow to $100,000 over the next 30 years.

Which is better, $50,000 "free" insurance, or $500,000 "free" insurance?
Last edited by HomerJ on Sun Mar 29, 2015 4:57 pm, edited 1 time in total.

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HomerJ
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Re: Whole Life Insurance 'Gift' from Parents

Post by HomerJ » Sun Mar 29, 2015 4:56 pm

dratkinson wrote:Short story. I kept the policy my parents bought for me. Believe I've probably broken even and beneficiary will gain.
You'd have far more and your heirs would have far more if you had cashed it in, bought term, and invested the difference.

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