Whole life insurance - question for surrending

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vthokie100
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Joined: Thu Aug 24, 2017 3:41 pm

Whole life insurance - question for surrending

Post by vthokie100 » Wed Oct 11, 2017 1:04 pm

I wanted to ask advice and see if my thinking is correct on plans to surrender whole life insurance policies for my wife and myself. I know I have seen similar questions answered on here in the past, but wanted to check if advice for my situation is any different. My wife and I signed up for term as well as smaller whole life policies when we got married -- I have been educating myself a lot over the past year on finances/investing and have come to realize based on plenty of blog advice that whole life policies are a bad investment.

We have had our policies for 7 years, and have some cash value but not yet near the full cost basis we've paid in -- at about 50% cash value of the cost basis paid in. We had looked at it as an alternative investment to regular retirement, and of course the illustrations shown early on showed nice cash value returns possible. I know realize after researching that this is a bad investment and that we should cash out (even at a loss) and put that money into our retirement investments as we are not maxed out on those.

As I am starting towards this action, I wanted to ask if my understanding of future cash value for whole life policies is correct, just to confirm if I am on the right path.

The big things for me was realizing those illustration numbers for cash value likely aren't what we'd actually see (and even then are far below returns from a moderate stock/bond investment), and realizing that the cash value may not be easy to even use. My recent understanding on that is that there seems to be really two ways to use such cash value in retirement: surrender it for full cash value and pay taxes on all gains over the cost basis, or take loans out and incur interest (but risking a giant tax hit for all previous gains if ever withdrawing too much and having the policy lapse).

Would that understanding be correct?

Earlier on, the thought that maybe slightly smaller returns for cash value would be ok as an alternative/conservative retirement vehicle was why we kept it, but now I have come to believe the above that even with best possible returns, it would not be really all that accessible to use. Any thoughts would be appreciated, to help confirm if I am on right thinking path as I start to work to surrender these and better use those funds in our ROTH IRAs.

Thank you

michaelj
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Joined: Wed Nov 09, 2016 4:41 pm

Re: Whole life insurance - question for surrending

Post by michaelj » Wed Oct 11, 2017 1:25 pm

You potentially have another option if you want out of the whole live policies - do 1035 exchange to a variable annuity. There are some possible benefits for doing this. You might want to read viewtopic.php?f=1&t=229209&newpost=3567 ... ead#unread and https://www.whitecoatinvestor.com/how-t ... fe-policy/ from some more info.

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mickeyd
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Re: Whole life insurance - question for surrending

Post by mickeyd » Wed Oct 11, 2017 2:42 pm

Any thoughts would be appreciated, to help confirm if I am on right thinking path as I start to work to surrender these and better use those funds in our ROTH IRAs.
I tend to agree with your conclusion. WL insurance pays the agent first, the company next and the policy owner last. It's a sales process that makes it difficult for the consumer (policy owner) to win in the short term. We often say that we should keep our investments separate from our insurance for this reason.

Good luck in the future.
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

CnC
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Re: Whole life insurance - question for surrending

Post by CnC » Wed Oct 11, 2017 4:23 pm

Is this an x pay whole life or pay forever whole life.

X pay may not be that bad, I have a 10 pay. Halfway done while it may not be the best investment it will be done in 5 more years and it gives me piece of mind knowing I will have xxx dollars for my family no matter what.


That being said my parents took out a small whole life policy that was $100 year forever and I surrendered that one. Made a few thousand more than was paid in.

vthokie100
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Joined: Thu Aug 24, 2017 3:41 pm

Re: Whole life insurance - question for surrending

Post by vthokie100 » Thu Oct 12, 2017 8:12 am

This is a 65 life, paying up to 65. We also have term policies, and had looked at the whole life policies as alternative investments. The big revelation for me when researching it more recently was that the cash value in the future is not something we can just withdraw to use as needed, that it would either be a surrender and pay taxes or take out loans from. Realizing that, along with the fact that we are not able to max out 401k and Roth IRAs at the time being, brought me to the conclusion that we should surrender and put that monthly payment to our Roth IRAs.

I was pretty sure after looking into it more that I now understand how the cash value part can be used later, but still wanted to make sure I was correct in that understanding if any others had different views on it.

Thanks

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

Re: Whole life insurance - question for surrending

Post by inbox788 » Thu Oct 12, 2017 4:18 pm

vthokie100 wrote:
Wed Oct 11, 2017 1:04 pm
...I know realize after researching that this is a bad investment and that we should cash out (even at a loss) and put that money into our retirement investments as we are not maxed out on those.
...My recent understanding on that is that there seems to be really two ways to use such cash value in retirement: surrender it for full cash value and pay taxes on all gains over the cost basis, or take loans out and incur interest (but risking a giant tax hit for all previous gains if ever withdrawing too much and having the policy lapse).
There are several things to consider with whole life policy. First off, do you have sufficient insurance overall (i.e. need insurance; term policies)? If you haven't maxed out retirement investments, that's probably more important than whole life insurance. Sounds like your policy is not a good investment, but you have to look at the specific numbers in the in force illustration.

I've looked, and buying a whole life policy to cash out has never paid off. The alternative has always been a better option. But once you've sunken the high commissions and paid for many years, sometimes it does make sense to keep a decent policy if you need low risk returns. I've yet to see a loan make any sense, but most of policies I've seen have high interest rates. And I don't understand whether borrowing hurts your policy returns or not. Participating loan? If you can borrow at a low rate and the loan is against the insurance company and doesn't impact your policy, then it might be a good life insurance policy to borrow from, and you should borrow as much as you can for as long as you can.

I've been trying to learn about these bank on yourself schemes, and I think there is a very narrow case for it, but most policies don't fit the requirements.

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