Cashing Out Old Insurance Policies

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HeelaMonster
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Cashing Out Old Insurance Policies

Post by HeelaMonster »

This is truly small potatoes (from a financial standpoint), but I am still interested in the thought process/analysis. Spouse and I each have a decades-old insurance policy, which we are not relying on for any purpose. We are inclined to surrender and take the cash value, but wanted to see if there were ANY arguments for keeping the insurance, before pulling the trigger. Cursory details:

HIS: Group paid-up insurance through Prudential, stemming from my first real employer. Total contributions of $606, last one made in 1994. Cash value at that time was $572, so I let it sit. CURRENT cash value is $2216. Total amount of paid-up insurance is $6419, which hasn't changed since 1994.

HERS: Universal life policy through Farm Bureau. This one started out in 1957 as a "Juvenile Endowment" with $5k coverage (I suppose this was intended as "burial policy" sold to many of our parents, which I also had but donated to charity many years ago). When we were married in 1984, this was converted to a universal life policy that fed on itself (no new contributions). Original death benefit was $25k, which we increased to $100k in 1989 when we started having kids. With interest (6% in the early 2000s) and low premiums, the cash value grew to $6350 by 2005, but has now steadily decreased as it consumes itself to keep paying premiums. CURRENT cash value is $2350. Current death benefit is $102k, which is also slowly declining, from high of $106k.

On that background, any reason to keep either of these policies in force, or just pull out the cash value? As above, we don't really need this insurance for anything.
Rex66
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Re: Cashing Out Old Insurance Policies

Post by Rex66 »

Drop that 2nd one unless expecting death in the next few years

Get an in force illustration for first one. Calculate current returns and see if you are happy with that as a pseudo fixed tax deferred item.
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HeelaMonster
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Re: Cashing Out Old Insurance Policies

Post by HeelaMonster »

Rex66 wrote: Mon Sep 20, 2021 9:35 am Drop that 2nd one unless expecting death in the next few years

Get an in force illustration for first one. Calculate current returns and see if you are happy with that as a pseudo fixed tax deferred item.
Interesting, I came into this thinking the 2nd one might be the keeper (with much larger death benefit in relation to cash value)... and the 1st one might be slam dunk to unload. So just the opposite, but then that's why I was looking for input!

As for the first one... It took a long time for Prudential to find me in their system (paid-up group policies seem to live in the dead letter files). The insurance payout never changes ($6419), but the cash value gets 4% per year. So I do see the point of letting it sit as a "pseudo tax deferred item," even if the amount is low, especially with current interest rates.

Thanks for feedback! :sharebeer
Rex66
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Re: Cashing Out Old Insurance Policies

Post by Rex66 »

With #2, the eating away will actually escalate with time

If you were very ill then best to keep in force but since not then don’t let all the cash go away since policy will lapse at that point and you get nothing

These things are all bad purchases but in general a very old WL or other paid up policy likely has better guaranteed “interest rates” then available today. With ULs, the cost of insurance increases with time so not necessarily the same conclusions about old policies.
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HeelaMonster
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Re: Cashing Out Old Insurance Policies

Post by HeelaMonster »

Rex66 wrote: Mon Sep 20, 2021 11:20 am With #2, the eating away will actually escalate with time

If you were very ill then best to keep in force but since not then don’t let all the cash go away since policy will lapse at that point and you get nothing

These things are all bad purchases but in general a very old WL or other paid up policy likely has better guaranteed “interest rates” then available today. With ULs, the cost of insurance increases with time so not necessarily the same conclusions about old policies.
Nope, thankfully neither of us shows any signs of cashing in (or cashing out?) anytime soon! And yep, I see that erosion happening year after year.

We covered our real insurance needs with term policies, and then just stopped when no longer needed... but have these few old legacy policies still hanging around.
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Raymond
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Re: Cashing Out Old Insurance Policies

Post by Raymond »

Would you have any objections to just closing both policies out, so you and your heirs have less things to track?
"Ritter, Tod und Teufel"
Topic Author
HeelaMonster
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Re: Cashing Out Old Insurance Policies

Post by HeelaMonster »

Raymond wrote: Mon Sep 20, 2021 1:23 pm Would you have any objections to just closing both policies out, so you and your heirs have less things to track?
No. That is one motivation and we do intend to close the universal policy immediately. I also recognize the cash value involved is trivial. OTOH, 4% guaranteed is better than I'm getting anywhere else (on cash)... and we have 20-30 years (with luck) to continue simplifying. So maybe I'll see what rates look like in another year or two....?

[ETA: I do recognize, however, that your "Ritter, Tod und Teufel" reminds us that life is short!]
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David Jay
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Re: Cashing Out Old Insurance Policies

Post by David Jay »

HeelaMonster wrote: Mon Sep 20, 2021 3:43 pmOTOH, 4% guaranteed is better than I'm getting anywhere else (on cash)...
The cash value of the policy was $6350 in 2005, current cash value is $2350 and you think you are getting 4% on your money?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Onlineid3089
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Re: Cashing Out Old Insurance Policies

Post by Onlineid3089 »

I'd get rid of them for simplicity.

This is Bogleheads, so probably not too relevant, but it isn't uncommon for people in Nursing Homes to have issues when they transition to Medicaid because there are old life insurance policies with a few thousand for cash value that their kids or whoever handles their finances don't know about. Those need to be cashed out and spent down before they'll qualify for Medicaid so they end up as self pay for additional months while that is worked out.
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HeelaMonster
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Re: Cashing Out Old Insurance Policies

Post by HeelaMonster »

David Jay wrote: Tue Sep 21, 2021 8:54 am
HeelaMonster wrote: Mon Sep 20, 2021 3:43 pmOTOH, 4% guaranteed is better than I'm getting anywhere else (on cash)...
The cash value of the policy was $6350 in 2005, current cash value is $2350 and you think you are getting 4% on your money?
You switched things up, which is understandable. That was for the second example (universal policy), which is undeniably shrinking. The cash value for first example (paid-up group policy) has grown over the years from $572 to $2216, and is the one with guaranteed 4%.

But as I acknowledged upfront, this is all small potatoes, and the recommendations to simplify are well taken. One surrender form is already in the mail today.
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Stinky
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Re: Cashing Out Old Insurance Policies

Post by Stinky »

In the spirit of simplicity, I'd get rid of both policies. Invest the proceeds per your asset allocation plan.

I'm glad that you have level term in place to take care of your life insurance needs.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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