Life Insurance Question - Take Cash Surrender Value

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Topic Author
antwerp
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Joined: Fri Aug 07, 2020 12:17 pm

Life Insurance Question - Take Cash Surrender Value

Post by antwerp »

I am seeking some advice to determine if I should surrender a Flexible Premium Life Ins Policy. I am 66 y/o, Single with 2 grown children who are not dependent on me. I am still working and my employer provides for and funds a 140k Group Term Policy which will end when/if I stop working. There is no provision to keep the policy when I leave employment.

My question is, should I take the cash surrender of $5600.00 and invest it in my 4-fund Vanguard Portfolio?

The policy details are as follows:

Policy Inception Date - 03/1988
Original Death Benefit - 200K
Current Death Benefit - 75K (I reduced it a few yrs ago to reduce premium and extend coverage period)
Guaranteed Interest - 4%
Current Interest - 4%
Premium - $600.00 per yr
Mortality Charge - ~ 975.00 per yr
Admin Charges - $60.00 per yr

The Insurance Co. Latest Projections:

If planned premiums are continued - Under guaranteed interest and mortality coverage will terminate 03/14/2024

If planned premiums are continued - Under current interest rates and mortality charge coverage will terminate 11/14/2026

The different termination dates do not make sense to me considering the premium and interest rates are the same. I will need to question the company on this but in the meantime I would appreciate any advice on keeping or cashing in at this time. Thanks, in advance, to all who respond.
Jack FFR1846
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Re: Life Insurance Question - Take Cash Surrender Value

Post by Jack FFR1846 »

You don't have anyone depending on you so you don't need insurance. The mortality charge eats up your premium and then your cash value. Yes, you should cash it in sooner rather than later. Otherwise, it's going to eat itself and be worth zero.
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Topic Author
antwerp
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Re: Life Insurance Question - Take Cash Surrender Value

Post by antwerp »

Thank you much. That's exactly what I was thinking but wanted to make sure I wasn't missing something. Appreciate your help.
petulant
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Re: Life Insurance Question - Take Cash Surrender Value

Post by petulant »

The amount of money in this policy is extremely small, so it might make sense to dump it and simplify.

But.

What you have is a universal life insurance policy with a very good interest rate guarantee (4%) that is well, well past the highest commission years. At this point you could likely dump money into the policy, more than the premium you're paying now, take a 2-3% premium haircut for premium tax, but then earn 4% going forward. You have an opportunity to use this policy to beat anything else you can get in your bond portfolio, but it would be a significant investment of your time and effort into learning how to use it for this purpose.
Topic Author
antwerp
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Re: Life Insurance Question - Take Cash Surrender Value

Post by antwerp »

petulant wrote: Thu Sep 03, 2020 7:36 pm The amount of money in this policy is extremely small, so it might make sense to dump it and simplify.

But.

What you have is a universal life insurance policy with a very good interest rate guarantee (4%) that is well, well past the highest commission years. At this point you could likely dump money into the policy, more than the premium you're paying now, take a 2-3% premium haircut for premium tax, but then earn 4% going forward. You have an opportunity to use this policy to beat anything else you can get in your bond portfolio, but it would be a significant investment of your time and effort into learning how to use it for this purpose.
Good point and analysis. Yes, 4% int guarantee in the current fixed rate climate is enticing. However, I'm at a point in my life where I would like to simplify things and spread the proceeds among my 4-fund portfolio to consolidate. Thank you. Your advice is appreciated.
ralph124cf
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Re: Life Insurance Question - Take Cash Surrender Value

Post by ralph124cf »

If you are in a position to dump $100K into this policy, it may be worthwhile keeping it for the guaranteed interest. You would have to check if this would be allowed. I would not just keep paying the premiums.

Ralph
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Stinky
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Re: Life Insurance Question - Take Cash Surrender Value

Post by Stinky »

Jack FFR1846 wrote: Thu Sep 03, 2020 4:41 pm You don't have anyone depending on you so you don't need insurance. The mortality charge eats up your premium and then your cash value. Yes, you should cash it in sooner rather than later. Otherwise, it's going to eat itself and be worth zero.
I agree with this. No reason to keep this policy.

The reason that the termination dates are different is that they use current vs guaranteed mortality rates. Yes, the interest rates are 4% in both illustrations, but guaranteed mortality charges are much higher than current.

I would not consider dumping a large amount of money into a policy like this. I would lapse the policy, collect the surrender value, and go on my way.
It's a GREAT day to be alive - Travis Tritt
bltn
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Re: Life Insurance Question - Take Cash Surrender Value

Post by bltn »

Why spend money on something oF no benefit to you? You don t need it. Take out your cash value.
“Investing” in life insurance is usually suboptimal.
afan
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Re: Life Insurance Question - Take Cash Surrender Value

Post by afan »

Once you subtract the mortality charges and expenses, you would be getting less than 4% on the policy. However, if you had a large amount of money in cash value, you could easily make more than available for bonds currently.
As it stands now, continuing to pay the premiums as you are just has the policy expire in a few years. That is a losing strategy.

Assuming there are no loans outstanding:

Your choices are 1. Surrender the policy now or 2. Put in enough money to take advantage of the 4% rate.

You would have to contact the company to find out how much money you could add to make the cash value grow over, say, 15 years. Once it has grown a lot you could surrender it and pay taxes at ordinary income rates on the value in excess of premiums paid.
Last edited by afan on Sat Sep 05, 2020 9:36 am, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
pshonore
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Re: Life Insurance Question - Take Cash Surrender Value

Post by pshonore »

Be careful about adding too much cash. You can wind up with a modified endowment contract.

https://blog.massmutual.com/post/mec-rules
afan
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Re: Life Insurance Question - Take Cash Surrender Value

Post by afan »

That is why you need to ask the insurance company.

With a policy this old I think MEC is off the table, but the insurance company could be required to distribute some cash back to the owner if there were too much in as compared to the death benefit. The company should be able to tell you exactly how much you could put in, if you wanted to go that route.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Topic Author
antwerp
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Re: Life Insurance Question - Take Cash Surrender Value

Post by antwerp »

Stinky wrote: Thu Sep 03, 2020 10:07 pm
Jack FFR1846 wrote: Thu Sep 03, 2020 4:41 pm You don't have anyone depending on you so you don't need insurance. The mortality charge eats up your premium and then your cash value. Yes, you should cash it in sooner rather than later. Otherwise, it's going to eat itself and be worth zero.
I agree with this. No reason to keep this policy.

The reason that the termination dates are different is that they use current vs guaranteed mortality rates. Yes, the interest rates are 4% in both illustrations, but guaranteed mortality charges are much higher than current.

I would not consider dumping a large amount of money into a policy like this. I would lapse the policy, collect the surrender value, and go on my way.
Thanks for clarifying the current vs guaranteed charges. That answers one of my questions.
I decided to surrender the policy and take the cash value as suggested by the majority of the responses.
Thank you all for your help. The collective Boglehead brainpower never ceases to amaze me.
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Stinky
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Re: Life Insurance Question - Take Cash Surrender Value

Post by Stinky »

antwerp wrote: Fri Sep 04, 2020 9:22 pm
Stinky wrote: Thu Sep 03, 2020 10:07 pm
Jack FFR1846 wrote: Thu Sep 03, 2020 4:41 pm You don't have anyone depending on you so you don't need insurance. The mortality charge eats up your premium and then your cash value. Yes, you should cash it in sooner rather than later. Otherwise, it's going to eat itself and be worth zero.
I agree with this. No reason to keep this policy.

The reason that the termination dates are different is that they use current vs guaranteed mortality rates. Yes, the interest rates are 4% in both illustrations, but guaranteed mortality charges are much higher than current.

I would not consider dumping a large amount of money into a policy like this. I would lapse the policy, collect the surrender value, and go on my way.
Thanks for clarifying the current vs guaranteed charges. That answers one of my questions.
I decided to surrender the policy and take the cash value as suggested by the majority of the responses.
Thank you all for your help. The collective Boglehead brainpower never ceases to amaze me.
I think you’ve made a good decision in cashing out the life insurance.

Congratulations and best of luck to you.
It's a GREAT day to be alive - Travis Tritt
Rex66
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Re: Life Insurance Question - Take Cash Surrender Value

Post by Rex66 »

Be careful about assuming the 4% interest rate.

Many insurance companies over the last few years have jacked up the internal cost of insurance to make up for low returns. So far they are getting away with doing this since they don’t guarantee that they won’t (up to the max charges). That’s also why you see the different expiration dates. Mortality has actually improved since this policy was purchased but interest rates have not.......
Topic Author
antwerp
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Joined: Fri Aug 07, 2020 12:17 pm

Re: Life Insurance Question - Take Cash Surrender Value

Post by antwerp »

Rex66 wrote: Sat Sep 05, 2020 8:14 am Be careful about assuming the 4% interest rate.

Many insurance companies over the last few years have jacked up the internal cost of insurance to make up for low returns. So far they are getting away with doing this since they don’t guarantee that they won’t (up to the max charges). That’s also why you see the different expiration dates. Mortality has actually improved since this policy was purchased but interest rates have not.......
Yes, good point. The mortality is eating up the cash value against the 4% interest rate. I sent the paperwork in over the weekend to cash out and surrender the policy. Thanks to all who responded. Much appreciated.
Rex66
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Re: Life Insurance Question - Take Cash Surrender Value

Post by Rex66 »

And that’s before they try and shenanigans down the road. Cost of insurance always increases as you age but some companies are escalating that further on old policies.
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