Whole Life Insurance - Cancel or Keep?

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Mainiac325
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Joined: Mon Nov 27, 2017 9:00 pm

Whole Life Insurance - Cancel or Keep?

Post by Mainiac325 » Mon Dec 04, 2017 4:40 pm

So, when I just got out of college, my parents gave me a Modern Woodman of America Investment account that had ~20k in it. At the time, I thought it would be a great idea to convert that to a Whole Life Policy with John Hancock. Based on what I know now, that was probably the wrong thing to do, but I wanted to get the advice of the forum and if I should cancel the policy or keep it going. My wife and I both work full time and have some life insurance (1-2X Salary) through work. We had our first child last year. My wife does not have a life insurance policy outside of her work plan.

My financials:
Age:
His: 32
Hers: 28
Salary:
His: 68K
Hers: 73K (Recent Large Pay Raise)
Cash Accounts: ~25K
Retirement:
His: 45K (tIRA)
Hers: 23K (401K)
Taxable: 30K (40/60 Stocks/Bonds) (Used as partial Emergency Fund)
HSA:
His: 3.5K
Hers: 4.5K
House:
Mortgage: 285K
Home Value: 400K


Whole Life Policy:
Accumulation VUL Whole Life Policy through John Hancock Life Insurance Policy:
Death Benefit ($490,000 - I took $10,000 out of the cash value for a down payment on my house)
Policy Cash Value: $4,140 (In 25% "Managed Volatility Balanced, 75% "Managed Volatility Growth")
Surrender Charge - $0
Cash Surrender Value - $4,140
No Lapse Guarentee Information:
NLG Period is 20 years to 43 years: 01/09/2028
Annual NLG Premium: $955.23
Cumulative Premiums Required for NLG: $8,705.89
Cumulative Premiums Paid: $9,403.28
Monthly Premium Paid (for now): $35
For my 2016 year, for a Cash Value of ~4K, I paid, in total, approximately $770.78 in fees (face amount charge, administrative charge, cost of insurance charge)

My thoughts are that I should just cut bait and take the surrender value. Buy a 500K 30-year term insurance policy, and invest the remainder of the surrender value. I'm a little ashamed that I started this policy in the first place, but I was young and not really sure what I was doing. A whole life policy sounded like a great idea at the time. Any advice?

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Whole Life Insurance - Cancel or Keep?

Post by 123 » Mon Dec 04, 2017 4:44 pm

Always have your new policy in force before you cancel your old policy.

Edited to add:
I believe the IRS allows the conversion of a life insurance policy (including VUL) to an annuity. (Vanguard offers low cost annuities). By converting the policy to an annuity I believe a great deal of the insurance premiums that were paid over the years get converted to the "basis" of the annuity. When you withdraw from the annuity you are only taxed generally after you have recovered your "basis". As a consequence you get a mechanism to recover the insurance premiums you paid. It's something to look into.

Put "whole life annuity" in the search box in the top right corner of the screen to locate prior threads.
The closest helping hand is at the end of your own arm.

Mainiac325
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Joined: Mon Nov 27, 2017 9:00 pm

Re: Whole Life Insurance - Cancel or Keep?

Post by Mainiac325 » Tue Dec 05, 2017 8:23 am

Thank you for the reply. My main question was if I should cancel the policy or not. I have looked at what a 500K 30-year term life insurance policy would cost me, and it would be ~$700 a year, mostly due to me being overweight. Since my NLG annual premium is $955.23 until the age of 43, does it make sense to keep the policy until then?

Looking around the John Hancock website, it appears that I have paid $19,788.28 ( :oops: ) in premiums already. Does that include the cash value of the policy? Since I started the policy in January 2008, and have only been paying $35 a month, that only totals up to $4,200 in premiums. Did I prepay the premiums with the previous investment account? I wish I had been paying attention when I had initiated this policy or asked better questions.

Jack FFR1846
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Joined: Tue Dec 31, 2013 7:05 am

Re: Whole Life Insurance - Cancel or Keep?

Post by Jack FFR1846 » Tue Dec 05, 2017 8:31 am

Get an in force illustration. It's quite possible that you don't actually have whole live as you say it's a VUL. I also thought I had a whole life policy that my dad bought almost 30 years ago and paid the premiums on. Mine turned out to be a UL and came with a term. So at some point (actually soon), if I had continued paying premiums, the cash value went DOWN annually until the point where it became zero and also the death benefit became zero. I cashed it in before it lost any value. To show how little it was worth, the amount that was taxable on my $13k payout was $10.
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djpeteski
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Re: Whole Life Insurance - Cancel or Keep?

Post by djpeteski » Tue Dec 05, 2017 9:08 am

Mainiac325 wrote:
Mon Dec 04, 2017 4:40 pm
At the time, I thought it would be a great idea to convert that to a Whole Life Policy with John Hancock. Based on what I know now, that was probably the wrong thing to do,
It was. However, small potatoes as far as poor financial decisions. Best thing to do now, cut your losses and move on.
My financials:
His: 32 - 68K
Hers: 28 - 73K
If it was me, I would get 1 mil each (minimum) in a 20 year level term. Get those policies in force first, which will take a bit. Medical examinations are probably required.
Then drop the whole life.
I would also make a plan to have your home paid off in 20 years (or less).
I'm a little ashamed that I started this policy in the first place
On a scale of 1-10, this is like a 3. You can be proud that you were attempting to provide for your family in the event of your untimely death. My wife is acquainted with a couple, where the husband recently died in a motorcycle wreck in his early 30's. No life insurance and survived by three young children and a spouse. While he was not the main bread winner, it will be a horrible blow to them financially.

So say "ah poop" and move on in a wise manner. That is get the new life insurance in place first, then cancel the WL policy. No need to engage (argue) with the agent, just cancel it.

Why so much insurance? Well you are buying something for 20 years, what will your salary look like in 20 years? What will your lifestyle look like? Both will probably be higher and possibly a lot higher. Better to error on the side of a bit too much.

You will probably have to adjust your budget to afford this level of insurance:

Him: $710/year
Her: $550/year

However, it is the right thing to do.

inbox788
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Re: Whole Life Insurance - Cancel or Keep?

Post by inbox788 » Tue Dec 05, 2017 11:37 am

1) it does appear the UL/VUL Whole Life is mucking up the product. Clarity what it truly is and get an in force illustration.
2) Your health doesn't provide you with preferred rates, so that makes your policy more valuable. Term4sale.com quotes around $400/year for 30 year term preferred plus health and around $800 for average health.
3) Figure out how much you'd be paying for insurance and what is left over to invest. And whether you want the insurance past 30 years. It's a liability if you don't want the guarantee and an extra expense, both the cost of insurance and the guarantee rate cost. It's an asset if you plan to keep the policy until death and use it for inheritance purposes.
4) There is the cost of investment to tease out, which is often high in these products vs. BTIR. In your case, BT cost may be higher than typical and might be a swing factor.

technovelist
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Re: Whole Life Insurance - Cancel or Keep?

Post by technovelist » Tue Dec 05, 2017 11:45 am

Mainiac325 wrote:
Tue Dec 05, 2017 8:23 am
Thank you for the reply. My main question was if I should cancel the policy or not. I have looked at what a 500K 30-year term life insurance policy would cost me, and it would be ~$700 a year, mostly due to me being overweight. Since my NLG annual premium is $955.23 until the age of 43, does it make sense to keep the policy until then?

Looking around the John Hancock website, it appears that I have paid $19,788.28 ( :oops: ) in premiums already. Does that include the cash value of the policy? Since I started the policy in January 2008, and have only been paying $35 a month, that only totals up to $4,200 in premiums. Did I prepay the premiums with the previous investment account? I wish I had been paying attention when I had initiated this policy or asked better questions.
Yes, from the numbers you quote it looks as though your original $20K was included in the premiums you have paid.

However, you did take $10k out and have $4k left in cash value, so if we add $20k (investment account value) and $4k premiums, you are basically $10k in the hole.

Which is not great, but not disastrous either.

I would look at some 30 year term. Once it is in place, you can drop this policy.

Also, may I ask what state you live in?
In theory, theory and practice are identical. In practice, they often differ.

Mainiac325
Posts: 5
Joined: Mon Nov 27, 2017 9:00 pm

Re: Whole Life Insurance - Cancel or Keep?

Post by Mainiac325 » Tue Dec 05, 2017 12:03 pm

So, I took another look at the policy and it is an "Accumulation VUL." Not technically a whole life policy but it will stay in effect until the cash value has been depleted (Once the No Lapse Guarantee is expired in 2028). I have been unable to find how fees are assessed, but they seem high. I have requested an in force illustration, which they said would take 3-5 days. When I receive that, I will follow up with more questions.

To answer the question from one of the responses, I live in Maine.

Mainiac325
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Joined: Mon Nov 27, 2017 9:00 pm

Re: Whole Life Insurance - Cancel or Keep?

Post by Mainiac325 » Wed Dec 06, 2017 1:50 pm

So I received the illustration on policy. The following are their assumptions and the projected outcomes:

Yearly Premium: $420
Current Charges/6% Gross Rate: 43 Years (Last until 66)
Maximum Charges/6% Gross Rate: 16 Years (Last until 39, unless NLG premium is continued until 43)
Maximum Charges/0% Gross Rate: 16 Years (Last until 39, unless NLG premium is continued until 43)

The charges consist of the following:

Premium Charge: From the report, "Premium charge of 6% of premium will be deducted from each premium payment. The maximum premium charge is 6% in all years."
A monthly administrative charge: $10/month
Base Face Amount Charge: $0.071 per $1,000 of Base Face Amount Charge (This fee expires in January 2018, so it's not a concern)
Cost of Insurance: Unknown, but says based on company experience.

In the report, it also states that "in determining the net rate, this illustration assumes 0.72% total portfolio annual expenses based on the specified Subaccount Allocation shown on the Summary Page."

I'm a little unsure of what "maximum charges" means. What charges can go up? Can the Total Portfolio Annual Expenses increase?

Based on my research, there are two options:

Option 1: Cancel Policy and Buy 30-Year Term (For comparison sake) for $750/year
Invest Cash Policy Value of $4,100 for 30-years (Assume 6% rate of return)
Net Value: +$1,000 ($22,500 - $23,500)

Option 2: Keep Policy
Invest Difference in Premium (750-420) for 30 years
Net Value: +$13,500 ($12,600 - $26,100)

Edit: I have made edits to this post as I forget to incorporate the difference in the premium which could have been invested.

It seems that if the assumptions that the current charges will be maintained at a 6% gross rate, then keeping the existing policy makes the most sense at this point. Does anyone know what "maximum charges" entails and the likelihood that it happens?
Last edited by Mainiac325 on Thu Dec 07, 2017 9:41 am, edited 1 time in total.

technovelist
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Re: Whole Life Insurance - Cancel or Keep?

Post by technovelist » Wed Dec 06, 2017 4:42 pm

Mainiac325 wrote:
Wed Dec 06, 2017 1:50 pm
So I received the illustration on policy. The following are their assumptions and the projected outcomes:

Yearly Premium: $420
Current Charges/6% Gross Rate: 43 Years (Last until 66)
Maximum Charges/6% Gross Rate: 16 Years (Last until 39, unless NLG premium is continued until 43)
Maximum Charges/0% Gross Rate: 16 Years (Last until 39, unless NLG premium is continued until 43)

The charges consist of the following:

Premium Charge: From the report, "Premium charge of 6% of premium will be deducted from each premium payment. The maximum premium charge is 6% in all years."
A monthly administrative charge: $10/month
Base Face Amount Charge: $0.071 per $1,000 of Base Face Amount Charge (This fee expires in January 2018, so it's not a concern)
Cost of Insurance: Unknown, but says based on company experience.

In the report, it also states that "in determining the net rate, this illustration assumes 0.72% total portfolio annual expenses based on the specified Subaccount Allocation shown on the Summary Page."

I'm a little unsure of what "maximum charges" means. What charges can go up? Can the Total Portfolio Annual Expenses increase?

Based on my research, there are two options:

Option 1: Cancel Policy and Buy 30-Year Term (For comparison sake) for $750/year
Invest Cash Policy Value of $4,100 for 30-years (Assume 6% rate of return)
Net Value: +$1,000 ($22,500 - $23,500)

Option 2: Keep Policy
Net Value: -$12,600

Am I missing something? And with Option 2, I am not guaranteed insurance if the policy value ever reaches $0.
I don't think you are missing anything. I would buy term first, then cancel this policy. That's because when you apply for the term, you might turn out to be uninsurable for some reason that you don't know now and in that case you might want to keep the other policy. Aside from that, I don't see any advantage to keeping it.
In theory, theory and practice are identical. In practice, they often differ.

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