whole life options

[tapeinos]

Hi - new joiner to the forum, I have been reading/learning, would like feedback on options around whole life policies.

I am 55 yo and got sold 2 whole life policies along the way.
Additionally, I have a 20 year fixed term life insurance (year 20 is age 61).
After reading the forum, requested inforce illustrations, and now would like to figure out next steps.

Policy 1) $49,438 90 Life, age 26, Male, Select
Annual premium of $571.84, dividends purchase paid-up additons.
On the inforce illustration, mentions that Years 31-74 cash flows/benefits could be income tax free, next year will be year 31.

Thank you in advance!

First illustration is with premiums purchasing additons


Second illustration is with dividends paying premiums.

[arcticpineapplecorp.]

welcome to the group. You could try evaluatelifeinsurance.org

Who performs the Service

James H. Hunt, a retired actuary and several decades ago Vermont’s insurance commissioner, has reviewed thousands of policies since 1984 when he began the service. In a report added to the computer analysis, he comments on the derived RORs, suggesting changes if appropriate, and he notes future implications for policies worth keeping. The cost is $150 for the first illustration sent, $100 for each additional illustration; payment may be made via USPS or at PayPal with Mr. Hunt’s email: jameshhunt8@gmail.com. Call him at 603-224-2805 if you have any questions. He offers to discuss each evaluation when sending it.

[Stinky]

Hi - new joiner to the forum, I have been reading/learning, would like feedback on options around whole life policies.

I am 55 yo and got sold 2 whole life policies along the way.
Additionally, I have a 20 year fixed term life insurance (year 20 is age 61).
After reading the forum, requested inforce illustrations, and now would like to figure out next steps.

Policy 1) $49,438 90 Life, age 26, Male, Select
Annual premium of $571.84, dividends purchase paid-up additons.
On the inforce illustration, mentions that Years 31-74 cash flows/benefits could be income tax free, next year will be year 31.

Thank you in advance!

Welcome to the Forum! Glad that you posted your question, and very glad that you figured out how to post an image of your illustrations.

If you search for "whole life" threads on the Forum, you'll see that Bogleheads are pretty negative on purchasing new permanent life insurance policies such as the one that you've provided information upon. However, a whole life policy that is many years old can act as a type of "fixed income" investment.

In your case, let's look at the "fixed income" return on your policy. You provided illustrations for both the "dividends reduce premiums" and "dividends buy paid up additions" options, on both a guaranteed and "current" basis. The simplest calculation is to look at the "current scale" columns in the "dividends pay premiums" case.

--- The current year cash value is $34,725.
--- The next year cash value is $36,239.
--- So the increase in cash value during the current policy year is $1,514.
--- The "return" on the beginning of year cash value is ($1,514 / $34,725), or 4.36%.

In addition, you have pure death benefit protection of the death benefit minus the cash value, or $82,955 - $34,725 = $48,230.

You could do the same calculation for each future year on the projection. You could also do the calculation for the case with the dividends to buy paid up additions - just reduce the "increase in cash value" by the cash premium that you paid. You should use the "current scale" columns for the calculation, realizing that they will be less reliable (that is, more subject to future change) as the years go by.

As to what you should do going forward - You could surrender the policy if you'd like, get back the cash surrender value, pay taxes on the excess of the surrender value over the cumulative premiums paid, and then invest the proceeds per your asset allocation. Or you could just keep the policy as a $35,000 part of your fixed income allocation, and let it continue to build cash value at a 4+% rate.

Hope this is helpful. Post back with questions.

[tapeinos]

Thanks for the feedback, could you please take a look at Policy 2 Illustrations? I was sold this policy at Age 41 and it doesn't have as much time behind it.

Policy 2 with premiums purchasing additions



Policy 2 with Dividends paying premiums:

[Stinky]

Thanks for the feedback, could you please take a look at Policy 2 Illustrations? I was sold this policy at Age 41 and it doesn't have as much time behind it.

You'd go through the same type of analysis as above.

Just to give you some sample calculations for the second chart, with dividends paying premiums:

--- In the early years of the illustration, the rate of return is in the mid-3% range. For example, in the first displayed policy year, the return on investment is ($25,705 - $24,873) / $24,873 = 3.34%. In the second year, it's ($26,961 - $25,705 - $363) / $25,705 = 3.47%. (Remember to reduce the "gain in cash value" by the cash premium paid from your pocket, if any).

--- The rate of return is projected to increase as the policy ages. By policy year 30, when you stop needing to pay premiums, the return is ($57,957 - $55,552) / $55,552, or 4.33%.

In addition, you'll have "pure" insurance protection of the death benefit minus the surrender value in all years. In the earlier years shown, it's about $75,000 (your $100,000 face amount minus the $25,000 cash value).

This is the pattern with many whole life policies. It takes a good long while for the returns on cash value to achieve the ultimate 4+% level.

Post back with questions.

[Jack FFR1846]

Benefits are tax free if you die for your beneficiary. If you take money out and there actually are gains, they are fully taxable. I'm sure the salesman carefully worded this along the lines of saying "tax deferred" which people nearly always hear "tax free". And of course they talk about the death benefit being tax free for the beneficiary. There are loan benefits as well that can be taken without paying any tax and then when you die, the beneficiary would receive the death benefit minus any loan balance tax free.

So unless you're simply trying to pass money to your heirs tax free, there's no tax benefit to you.

[exodusNH]

Benefits are tax free if you die for your beneficiary. If you take money out and there actually are gains, they are fully taxable. I'm sure the salesman carefully worded this along the lines of saying "tax deferred" which people nearly always hear "tax free". And of course they talk about the death benefit being tax free for the beneficiary. There are loan benefits as well that can be taken without paying any tax and then when you die, the beneficiary would receive the death benefit minus any loan balance tax free.

So unless you're simply trying to pass money to your heirs tax free, there's no tax benefit to you.

Just a note on the loan -- OP, keep in mind that all loans are tax-free. The differences with the policy loans are that there's no credit check, no hit to your credit, and you might not have to pay it back, though that could either be taxable and reduce the tax benefit. It may reduce the dividends that you're eligible for. I'm not sure what provider you're using, but mine does not offer a competitive rate. Mine is at 8% interest. Interest payments go to the insurance company, not your policy.

[Rex66]

For future illustrations request they give you the pages with the IRR. That way you don’t have to compute returns. They hate doing that bc insurance companies love to pretend returns are better than they are but they will do it if pressed. If they at first refuse, tell them you will contact the state insurance commissioner and then they will do it.