Universal Life Insurance question - What to do?!?!

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FunnelCakeBob
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Universal Life Insurance question - What to do?!?!

Post by FunnelCakeBob » Sat Jul 21, 2018 10:18 am

Hello fellow Bogleheads! Been reading this forum for several months and this is my first post. I have a 25 yr old universal life insurance policy and would like your help in analyzing what I can/should do.

Age: mid-40s
Tax Filing Status: single, no kids
Death Benefit of Policy: $200,000 (fixed)
Total Yearly Premium: $840
Policy Dividends: none/never

Additional info in the form of (Year) (Annual Premium) (Total Premiums to Date) (Cash Surrender Value):
(2014) ($840) ($18,550) ($20,225)
(2015) ($840) ($19,390) ($21,515)
(2016) ($840) ($20,230) ($22,837)
(2017) ($840) ($21,070) ($24,192)

1. My other assets are greater than the death benefit and would more than cover the needs of dependents and heirs if I were to kick the bucket tomorrow. Thus I certainly wouldn’t hang onto this policy for dear life. (ba-dum-bumm!!)
2. The premium payment is not a burden but if it were freed up, I’d more than welcome it.
3. Due to the age of this policy, there’s no longer a surrender charge if I were to cash out tomorrow.
4. The cash value is currently growing faster than the addition of premium payments into the policy.
5. Based on the in-force illustration at the guaranteed rates, there’s another 3-5 years where the cash value will continue to grow faster than the premium payments. Beyond that point, the cost of insurance will begin to outstrip premium payments and interest earnings. If I continue to pay the same premium amount, the eventual exponential growth of insurance cost will completely consume the policy (cash value, thus also the death benefit) in 20-25 years.

I’d appreciate your help with assessing the current rate of return/yield and options to consider. Cash out? 1035 exchange? Stay put for now and come back in a few years?

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cheese_breath
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Re: Universal Life Insurance question - What to do?!?!

Post by cheese_breath » Sat Jul 21, 2018 11:35 am

I guess the first question is, do you even need insurance? Single with no kids, who will you be leaving the money to?

Assuming you do need insurance consider that you've been paying more than you should have for 25 years, but it's almost to the point where the costs will begin to exceed your premiums. So you could either continue paying the $840 and let it draw on the cash value for the excess, or take the cash value and apply it to getting insurance somewhere else. I don't know which is the better deal, but you probably could take something like this https://www.valuepenguin.com/average-co ... rance#nogo and Excel and get a good idea.

I was dumb when I was younger and got a UL too. When I finally figured what a bad deal it was I just stopped paying premiums and let it draw down the cash value for expenses until it was used up. That probably wasn't the wisest option.
The surest way to know the future is when it becomes the past.

57Ab90tH4
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Re: Universal Life Insurance question - What to do?!?!

Post by 57Ab90tH4 » Sat Jul 21, 2018 1:18 pm

Could you contact the insurance company and ask what your tax basis is in the policy? Then we would know how much of the cash value would be taxable under the cash out option.
Todd | Opinions expressed or information shared should not be relied upon to make investment decisions.

FunnelCakeBob
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Re: Universal Life Insurance question - What to do?!?!

Post by FunnelCakeBob » Sat Jul 21, 2018 1:40 pm

57Ab90tH4 wrote:
Sat Jul 21, 2018 1:18 pm
Could you contact the insurance company and ask what your tax basis is in the policy? Then we would know how much of the cash value would be taxable under the cash out option.
The amount subject to tax would be the difference between the Cash Surrender Value and the Total Premiums To Date in the OP. Thanks!

Dottie57
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Re: Universal Life Insurance question - What to do?!?!

Post by Dottie57 » Sat Jul 21, 2018 2:18 pm

So it looks like the capital gains are about 3k. And no real need for insurance. Would cash it out and invest in something else.

57Ab90tH4
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Re: Universal Life Insurance question - What to do?!?!

Post by 57Ab90tH4 » Sat Jul 21, 2018 2:54 pm

A quick phone call to the insurance company will yield the "tax basis". It's not as simple as the cash value minus premium paid. The taxable amount will be ordinary income (not capital gain).
Todd | Opinions expressed or information shared should not be relied upon to make investment decisions.

engel001
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Re: Universal Life Insurance question - What to do?!?!

Post by engel001 » Sat Jul 21, 2018 3:10 pm

You can avoid taxes by doing a 1035 exchange of your life insurance capital to the low-cost Vanguard variable annuity. Perhaps you want to want to buy term life, as needed, and still come out ahead.

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mickeyd
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Re: Universal Life Insurance question - What to do?!?!

Post by mickeyd » Sat Jul 21, 2018 3:11 pm

Why did you purchase this policy? Has your situation changed?
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

JBTX
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Re: Universal Life Insurance question - What to do?!?!

Post by JBTX » Sat Jul 21, 2018 4:31 pm

Best I can tell you are getting around 3.0% rate of return from accumulating cash value, less the value of term insurance. Given you don't need the insurance and it is only 3.0% there is little need to hold on to it.

Jack FFR1846
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Re: Universal Life Insurance question - What to do?!?!

Post by Jack FFR1846 » Sat Jul 21, 2018 4:32 pm

I was asking almost the same question a year ago about a 27 year old policy. It was a toss up. I cashed it in. Taxes were something like $20.
Bogle: Smart Beta is stupid

FunnelCakeBob
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Re: Universal Life Insurance question - What to do?!?!

Post by FunnelCakeBob » Sat Jul 21, 2018 7:38 pm

57Ab90tH4 wrote:
Sat Jul 21, 2018 2:54 pm
A quick phone call to the insurance company will yield the "tax basis". It's not as simple as the cash value minus premium paid. The taxable amount will be ordinary income (not capital gain).
I will do that, and that's useful information. Thank you friend.

mickeyd wrote:
Sat Jul 21, 2018 3:11 pm
Why did you purchase this policy? Has your situation changed?
The policy got started by my mother, and I took over paying the premium when I graduated from school. She and my father were the beneficiaries. I don't need this policy now. If I were to cash this out, I wouldn't need to get a term policy.

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cheese_breath
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Re: Universal Life Insurance question - What to do?!?!

Post by cheese_breath » Sat Jul 21, 2018 8:48 pm

FunnelCakeBob wrote:
Sat Jul 21, 2018 7:38 pm
57Ab90tH4 wrote:
Sat Jul 21, 2018 2:54 pm
A quick phone call to the insurance company will yield the "tax basis". It's not as simple as the cash value minus premium paid. The taxable amount will be ordinary income (not capital gain).
I will do that, and that's useful information. Thank you friend.

mickeyd wrote:
Sat Jul 21, 2018 3:11 pm
Why did you purchase this policy? Has your situation changed?
The policy got started by my mother, and I took over paying the premium when I graduated from school. She and my father were the beneficiaries. I don't need this policy now. If I were to cash this out, I woulnd't need to get a term policy.
Then the answer seems pretty obvious. Cash out and invest it in your retirement portfolio.
The surest way to know the future is when it becomes the past.

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mickeyd
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Re: Universal Life Insurance question - What to do?!?!

Post by mickeyd » Sun Jul 22, 2018 4:23 pm

I don't need this policy now.

Nuf said. Invest it.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

FunnelCakeBob
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Re: Universal Life Insurance question - What to do?!?!

Post by FunnelCakeBob » Sun Jul 22, 2018 6:36 pm

Jack FFR1846 wrote:
Sat Jul 21, 2018 4:32 pm
I was asking almost the same question a year ago about a 27 year old policy. It was a toss up. I cashed it in. Taxes were something like $20.
I just read your post from last January. Funny how we both found ourselves in similar situations. After cashing in, do you recall receiving a Form 1099 outlining the taxable portion?


And thanks to everyone who responded. These permanent life insurance policies are incredibly opaque products. In the last year, I literally read through the contract and statements multiple times to understand the underlying mechanics and to model the numbers on a spreadsheet. Your nudging in the right direction is certainly appreciated!

57Ab90tH4
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Re: Universal Life Insurance question - What to do?!?!

Post by 57Ab90tH4 » Mon Jul 23, 2018 3:16 pm

If you decide to cash in a life insurance policy, you will receive a 1099-R if any of the distribution is taxable. The form will show a gross distribution amount and a taxable amount.

Often, no 1099 is issued because there is NO gain on the policy. Policy costs ate up all of the dividends and part of the premiums and the amount returned ends up being non-taxable because you're simply getting your own $ back with no return. (This happens often).

Insurance companies track your taxable basis in their systems and can provide this information when asked. It may not be clearly shown on policy statements.

These products are opaque to say the least.
Last edited by 57Ab90tH4 on Mon Jul 23, 2018 3:34 pm, edited 1 time in total.
Todd | Opinions expressed or information shared should not be relied upon to make investment decisions.

Jack FFR1846
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Re: Universal Life Insurance question - What to do?!?!

Post by Jack FFR1846 » Mon Jul 23, 2018 3:28 pm

FunnelCakeBob wrote:
Sun Jul 22, 2018 6:36 pm
Jack FFR1846 wrote:
Sat Jul 21, 2018 4:32 pm
I was asking almost the same question a year ago about a 27 year old policy. It was a toss up. I cashed it in. Taxes were something like $20.
I just read your post from last January. Funny how we both found ourselves in similar situations. After cashing in, do you recall receiving a Form 1099 outlining the taxable portion?


And thanks to everyone who responded. These permanent life insurance policies are incredibly opaque products. In the last year, I literally read through the contract and statements multiple times to understand the underlying mechanics and to model the numbers on a spreadsheet. Your nudging in the right direction is certainly appreciated!
Yes. It was something like $20
Bogle: Smart Beta is stupid

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Artful Dodger
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Re: Universal Life Insurance question - What to do?!?!

Post by Artful Dodger » Mon Jul 23, 2018 4:06 pm

FunnelCakeBob wrote:
Sat Jul 21, 2018 10:18 am

5. Based on the in-force illustration at the guaranteed rates, there’s another 3-5 years where the cash value will continue to grow faster than the premium payments. Beyond that point, the cost of insurance will begin to outstrip premium payments and interest earnings. If I continue to pay the same premium amount, the eventual exponential growth of insurance cost will completely consume the policy (cash value, thus also the death benefit) in 20-25 years.
I think that is the real problem with a lot of universal life plans sold in the past. Twenty five years ago, interest rates were often 6-8%, and these rates were assumed to continue into the future, and if they did, would have provided a steady increase in cash value easily covering the increased mortality charges (term insurance cost) as you age. But, they don't work anymore, and i would bail out now. If you wait, in another few years, the increased mortality cost and policy fee will exceed your annual premium, and the cash account will begin to decline. In some cases, the insurance company will continue the death benefit at the current premium, but I've seen other policies where the holder gets a notice that they'll have to pay additional premiums just to keep the policy in force.

If you still need insurance, price a specific term (10, 20) plan, and buy that.

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