Insurance Advice needed

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Paul69
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Joined: Mon Mar 27, 2017 8:09 am

Insurance Advice needed

Post by Paul69 » Mon Mar 27, 2017 8:32 am

My father was an insurance agent, so I'm guessing he bought my policy to help with his numbers one month. Anyway, here it is 27 years later and he passed on the policy information (and the yearly payments) to me. I don't need the policy as I have several term policies in place. I can't currently contact the agent as he is from my home town and friends with my father, so any questions like this will get back to him. I'm transferring the policy to my agent where I currently live, but the transfer will take up to two weeks. My goal is to understand my options so I can make a decision with the new agent.

The policy is a $100,000 whole life policy (State Farm executive protector). The premiums are $680/year. My parents have been paying for the policy since 1991. They've passed on the 1099 since days one for my taxes, so I've vaguely been aware of it but never payed attention until this year when I start making the payments!

So far, all I know is:
Total cash value: $19,326.00
Cash value change last year: $1,097
Total accumulated dividend: $5,296

Some of my questions are if I cancel the policy, do I get the accumulated cash and dividends? Since I have already been paying tax (via the reported 1099s) on the accumulated dividends, I assume that portion is tax free. Would I have to pay tax on the cash value portion?

If my math is correct, I'm up roughly $2,000 over my premiums so not "lost" except for 26 years of accumulated gains if it went into a Vanguard fund. I'm leaning towards getting rid of it, but was wondering if there was any reason to hold on?

Thanks for the advice!

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nedsaid
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Re: Insurance Advice needed

Post by nedsaid » Mon Mar 27, 2017 11:01 am

Generally, I advise people to keep older whole life policies. You get interest guarantees that are not available today. You will have to do the math and some soul searching to determine whether or not your want to keep it. I suppose you also have to figure your opportunity cost, that is the difference between what your premiums would earn if contributed to investments compared to your increases in cash value. I would also calculate the difference between a term policy for $100,000 at your age and the premiums you are paying now. Presumably, the difference is what is going into your cash value.

My guess is that at your age, you could purchase term insurance for $200-$250 a year for the same amount of $100,000. If your premiums are $680 a year, let's say $400 is going towards cash value. Your gain was actually $697 on a cash value of $18,229 (19,326-1,097) or about 3.8%. Not bad when the US Treasury 10 year bond yields about 2.5%. These are back of the envelope calculations. I would also take a look at how fast the cash value is projected to grow from here.

If you cash in the policy, your cash value is taxable. You are being taxed on dividends because you are receiving dividends are in excess of your premium payments. Normally, dividends are treated as overpayment of premium or return of capital. You are paying tax on only a portion of your dividend payments.

Actually, your insurance policy has life insurance of $81,771 because you have $18,229 of cash value. My foggy memory banks recall that you can use dividends to purchase additional life insurance. You probably have enough term insurance now. But for a more accurate calculation of returns, you could do the calculation above with premiums on $82,000 rather than $100,000.

If it were me, I would be inclined to keep it. But you have to consider your own personal situation and crunch the numbers for yourself. Any insurance agents out there who could shed further light on this?
A fool and his money are good for business.

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nedsaid
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Re: Insurance Advice needed

Post by nedsaid » Mon Mar 27, 2017 11:04 am

You can also do a tax free exchange of your cash value into an annuity. I believe this is called a 1035 exchange.
A fool and his money are good for business.

drawpoker
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Location: Delmarva

Re: Insurance Advice needed

Post by drawpoker » Mon Mar 27, 2017 12:51 pm

Am no insurance agent here, either. But at age 27 the most likely way OP would die anytime soon is by accident, not illness.
Was the whole life policy written to include double indemnity? For accidental death?

27 years ago that was pretty much the norm on term life policies as it didn't increase the premium by much.
Don't know about whole life, tho.

Paul69
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Joined: Mon Mar 27, 2017 8:09 am

Re: Insurance Advice needed

Post by Paul69 » Tue Mar 28, 2017 4:12 pm

Thanks for all the info! Very helpful and gave my some things to consider!

One thing I guess I should have conveyed was it was purchased when I was in my mid-20s, so now I am 50. I have more than enough term insurance, so no need for this from an insurance perspective. One interesting factor is I'm trying to keep my income down for a few years due to help from a college aid perspective, so cashing it in really doesn't help either!

Either way, I've learned something and appreciate the information!

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BL
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Joined: Sun Mar 01, 2009 2:28 pm

Re: Insurance Advice needed

Post by BL » Tue Mar 28, 2017 4:33 pm

Some ideas:
You could use the dividends to pay premiums and additional paid up insurance; perhaps no 1099 then??

You could drop a comparable term insurance if you do decide to keep this one, or just consider it an extension of what you already have.

Since it is this old, it is not such a bad deal. If it was pretty new, it makes sense to get rid of it.

Beware borrowing too much from it since you could be in risk of crashing the policy and owing taxes on it.

Cashing it in means you pay tax on amounts above cost. See about converting it to a Vanguard annuity to avoid current tax.

inbox788
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Re: Insurance Advice needed

Post by inbox788 » Tue Mar 28, 2017 8:37 pm

drawpoker wrote:Am no insurance agent here, either. But at age 27 the most likely way OP would die anytime soon is by accident, not illness.
Was the whole life policy written to include double indemnity? For accidental death?

27 years ago that was pretty much the norm on term life policies as it didn't increase the premium by much.
Don't know about whole life, tho.
Interesting you should mention that. I have a similar policy that has the ADD rider. Costs almost $100/year for $100k additional. The overall numbers seem similar to OP. I've been seeing 2-3% returns Y-Y, and getting free insurance, so I'm keeping it for now.

I'd like to get rid of it, but it's marginally good enough and I'd have to pay taxes if I cashed out today. When my tax rate goes down, I might consider turning it in then.

Borrowing is not an option, I recall interest rate is at least 6% and might be 7% or 8%. It was so high, I never even considered it. Options now are cash out, 1035 for tax reasons, or what seems like the best option right now is to keep it for the death benefit.

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