Whole Life - Should we cash out? - Part II

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inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Whole Life - Should we cash out? - Part II

Post by inbox788 »

This wasn't my thread, but the conclusion was to cash out. My math came out differently and I have been holding on.

http://www.bogleheads.org/forum/viewtop ... =1&t=99669

Let me start at the beginning. About 25 years ago, I (actually parents) was sold a $100,000 whole life insurance policy, where the cash value the first 5-10 years was basically non-existent. Water under the bridge. Noticed that cash values started growing after that, and by my simple math were running about 5-6% after I backed out premiums, so I started treating this as a fixed income investment. This year, here are the numbers from the latest annual statement:

Annual Premium: $600
Current Death Benefit: $125,000 (due to PUA rider)

Cash value: $17,000
Additions: $5,500
Current Surrender Value: $22,500

Current Dividend: $350
PUA: $1500

I don't have immediate access to the original tables, but will try to track them down. My understanding is that if I cashed out last year, I would have gotten $17,000 (minus some cash out fees). Cashing out today would yield $22,500 (less fees). If I back out the premium, I got about 28% return this year, is that correct way to think about it? (that's how I've been getting 6% before) ((5500-600)/17000 or (5500-600)/(17000+600))

If this return calculation is in the ballpark, what happened last year to account for the large gain? Is this typical of a period during the life insurance policy where there are large gains? If so, when do they slow? Does it reach a point where I should just cash out? Please comment on exit strategy for this policy, or keep it till the end?

Returns in the 6% are indifferent to me - could just toss the CV into a bond fund as alternative. So far, 1) keeping life insurance because returns appear decent (really good this year), 2) not even considering COI which is a freebie right now, 3) learn more about whole life and other insurance (but would not do it over if starting out again or recommend most insurance products most of the time).

(Just learning about participating vs non-participating, but I'm guessing it's participating)
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Frugal Al
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Re: Whole Life - Should we cash out? - Part II

Post by Frugal Al »

I think you may have looked at the numbers incorrectly on previous reports. The additions cash value are cumulative, like the regular cash value. You very well may be achieving a 6% return on on older policy with paid up additions. Ask the insurer for an in-force illustration. Also, you shouldn't be indifferent to 6% returns from an insurer with sound financials. At this point the policy is probably keeper.
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inbox788
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Re: Whole Life - Should we cash out? - Part II

Post by inbox788 »

Frugal Al wrote:I think you may have looked at the numbers incorrectly on previous reports. The additions cash value are cumulative, like the regular cash value. You very well may be achieving a 6% return on on older policy with paid up additions. Ask the insurer for an in-force illustration. Also, you shouldn't be indifferent to 6% returns from an insurer with sound financials. At this point the policy is probably keeper.
Thanks for your suggestions. I may be misreading or misunderstanding the annual statement. Some else in PM also pointed out PAU may be cumulative. I'll look to prior year statements to confirm and provide better data. Come to think of it, I might have been using year to year CV or surrender values to compute the return. Is that appropriate?

Yes, 6% is a good return these days, but past and my future expectations, just not near term, is that there will be better fixed income choices. If long term rates ever got to the 7-9% range, or the policy returns fall, I'll have to value the insurance and tax benefits to my heirs. The reason for my indifference is that the value of the policy was small and has become relatively smaller, and for simplicity, I'd like to eliminate it. I had looked into increasing the size at one point, but aside from the PAU rider, there isn't much else that can be done with the policy. All I got was an aggressive salesperson trying to sell me on a new policy, which I politely declined, but he kept hounding me. He finally stopped calling, but I could never get off his mailing list. Didn't make a big deal about it after a few tries, I just started flagging his mails as spam, and once in a while I see them when I scan my spambox for mistakes.
dhodson
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Re: Whole Life - Should we cash out? - Part II

Post by dhodson »

you dont need the agent to get your illustrations. Just write the company a letter directly.

I personally would keep a policy that has been in force that long assuming i was ok leaving some death benefit and not just an investment.

Its almost always best to keep these things to the end but then again you must want or need to give away some cash at your death. To me the best way to approach this at this point (and im not an agent and i think almost nobody should purchase whole life to begin with but what to do after purchased is a seperate question) is to pay yearly to avoid fees, have dividends set to PUAs, overfund with more PUAs if possible, take out very late in life a loan for up to 90% of the CSV. I say late in life so the loan doesnt crash the policy. If you ever surrender or lapse one of these then the gains are taxed as income all at once which is a big hit and makes the low return even lower. Your other option in my view if you dont want to leave anyone any cash is to 1035 exchange this into an annuity in order to defer taxes. Id use a lower cost annuity via vanguard.
letsgobobby
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Re: Whole Life - Should we cash out? - Part II

Post by letsgobobby »

similar thread, similar situation, similar conclusion, math somewhat different:

http://www.bogleheads.org/forum/viewtop ... 2&t=110711
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Frugal Al
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Re: Whole Life - Should we cash out? - Part II

Post by Frugal Al »

But such is the problem with WL if one truly has little utility for the insurance and the structure of the return. As we've said many times, most people with a sound investment plan don't need permanent insurance. This is not an indictment of anyone, many of us (me) have done it. Even converting to a low cost annuity might not be very appealing for some. Inbox, find out your cost basis from the insurer. Your tax liability on a policy termination may not be as much as you think.
letsgobobby
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Re: Whole Life - Should we cash out? - Part II

Post by letsgobobby »

But isn't the point that a 5% annualized return for a very safe investment pretty darn good these days? In other words this is part of one's fixed income investments?
dhodson
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Re: Whole Life - Should we cash out? - Part II

Post by dhodson »

letsgobobby wrote:But isn't the point that a 5% annualized return for a very safe investment pretty darn good these days? In other words this is part of one's fixed income investments?
just to refresh, im not an agent but just want to help people avoid bad decisions.

do you mean the csv or the death benefit? do you mean a policy purchased today or one from the distant past?
here is a graph of where dividends have been and where they are now.
http://www.insurance-forums.net/forum/l ... 52727.html

a policy purchased today under current assumptions will have a death benefit a little over 5% if you die when expected. The cash value much less. The guaranteed collum of course even lower than the curren assumptions. The guarantees may not even beat inflation especially for CSV. whitecoatinvestor.com has a good article on the returns of these products.

many times agents like to talk about a return that really is in the past. For some reason picking times with higher dividends. thus the cash value may or may not return bond like returns when you use current numbers. The real return on these products is always in the death benefit especially since if you surrender you are taxed as income. One should get an inforce illustration of any product they own yearly (which the company must provide upon request). Using such illustrations can give you an idea where you are heading.

for the OP, most of the costs are sunk so going forward the return on death benefit and possibly even csv is good for a conservative investment. for someone without a policy, purchasing it means with a plain vanilla whole life that cash value wont equal premiums for around 16 years or more. once you add in inflation, you get the picture.
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