At what rate of return would you keep a whole life policy?

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Caduceus
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At what rate of return would you keep a whole life policy?

Post by Caduceus » Mon Nov 13, 2017 1:15 pm

What rate of return would you use in determining whether to keep a whole life policy? I've been looking at some whole life policies that family members have (they have been bad investments, but the question is whether to keep them going forward).

The overall return of the policy has been abysmal, but my calculation of the internal rate of return is about 5.02% going forward, even after ongoing premiums are included. Part of the surrender value is guaranteed and some is not, but the projections so far after 2009 have been accurate from year to year.

My thinking is that long term bonds yield less than 3%, so year on year 5% yield is fairly decent for the fixed income side of a portfolio. It can be surrendered at any time with no penalties.

Also, if interest rates go up, isn't it likely that the projected values will go up?

bloom2708
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Re: At what rate of return would you keep a whole life policy?

Post by bloom2708 » Mon Nov 13, 2017 1:21 pm

If you have a $50k policy and the cash value grows at 5, 10, 15%, I'm not sure how that helps.

If the person dies, the policy pays $50k. The cash value is gone. What good was the "growth"? If you cash the policy and get the growth (before the death), then you pay taxes on the growth.

Would the return even be a factor for keeping? I wouldn't keep for any rate. There are many nuances inside whole life policies, so I may be generalizing.

Only keep if the person is un-insurable (as mentioned in a later post) with term insurance.
Last edited by bloom2708 on Mon Nov 13, 2017 1:32 pm, edited 1 time in total.
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NYC_Guy
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Re: At what rate of return would you keep a whole life policy?

Post by NYC_Guy » Mon Nov 13, 2017 1:25 pm

Caduceus wrote:
Mon Nov 13, 2017 1:15 pm
What rate of return would you use in determining whether to keep a whole life policy? I've been looking at some whole life policies that family members have (they have been bad investments, but the question is whether to keep them going forward).

The overall return of the policy has been abysmal, but my calculation of the internal rate of return is about 5.02% going forward, even after ongoing premiums are included. Part of the surrender value is guaranteed and some is not, but the projections so far after 2009 have been accurate from year to year.

My thinking is that long term bonds yield less than 3%, so year on year 5% yield is fairly decent for the fixed income side of a portfolio. It can be surrendered at any time with no penalties.

Also, if interest rates go up, isn't it likely that the projected values will go up?
Conparable risk is high investment grade debt that is tax deferred. A 3%+ growth in cash value, adjusted for premium, if any, would be good enough for me. And treat it as fixed income portion of the portfolio.

Nate79
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Re: At what rate of return would you keep a whole life policy?

Post by Nate79 » Mon Nov 13, 2017 1:30 pm

I would always cancel them unless the insurance is needed and appropriate term can not be put in place.

There are tons of threads on here about whether to keep or cancel WL. Calculating so called return is extremely complicated because you have to look at the policy in entirety. But they are rarely worth keeping.

Chuck
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Re: At what rate of return would you keep a whole life policy?

Post by Chuck » Mon Nov 13, 2017 2:02 pm

I have a whole life policy that is "yielding" 4.98%.

Calculating return is not complicated. Take the difference between the current cash surrender value, and last year's cash surrender value. Subtract the premium. Divide that by last year's cash surrender value. Blammo, that was your return. (You only know the trailing returns, but in my case they have been steady.)

I can't find any fixed-income investment yielding close 4.98%, so I am keeping it until it's no longer advantageous. Yes, in the past it was a big fat loser and it was a mistake at the time I signed up for it. But looking forward, it's better to keep it than to cash it in.

The factors working against it are the ongoing premium (currently not an issue), and the tax-interestingness of actually "withdrawing" the cash. That will presumably be done taking advantage of low tax brackets during early retirement.

Caduceus
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Re: At what rate of return would you keep a whole life policy?

Post by Caduceus » Mon Nov 13, 2017 2:34 pm

Chuck wrote:
Mon Nov 13, 2017 2:02 pm
I have a whole life policy that is "yielding" 4.98%.

Calculating return is not complicated. Take the difference between the current cash surrender value, and last year's cash surrender value. Subtract the premium. Divide that by last year's cash surrender value. Blammo, that was your return. (You only know the trailing returns, but in my case they have been steady.)
If you calculate it like that, you will overstate the returns because that calculation assumes you are happy for your premium payment to have earned nothing in interest.

You should calculate year-on-year return like this: (1) Start with your current surrender value prior to renewal of the insurance for the next period; (2) add the previous year's premium to previous year's surrender value; Divide the number in (1) by the number in (2) - the numbers to the right of the decimal point is the year on year return. (if it's 1.05, you have a 5% return).

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Doc
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Re: At what rate of return would you keep a whole life policy?

Post by Doc » Mon Nov 13, 2017 3:43 pm

bloom2708 wrote:
Mon Nov 13, 2017 1:21 pm
If the person dies, the policy pays $50k. The cash value is gone. What good was the "growth"? If you cash the policy and get the growth (before the death), then you pay taxes on the growth.
If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken.
https://www.ameriprise.com/research-mar ... insurance/

I'm not sure if these two quotes are consistent or not. It depends on what "growth" is.
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Caduceus
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Re: At what rate of return would you keep a whole life policy?

Post by Caduceus » Mon Nov 13, 2017 3:47 pm

bloom2708 wrote:
Mon Nov 13, 2017 1:21 pm
If you have a $50k policy and the cash value grows at 5, 10, 15%, I'm not sure how that helps.

If the person dies, the policy pays $50k. The cash value is gone. What good was the "growth"? If you cash the policy and get the growth (before the death), then you pay taxes on the growth.

Would the return even be a factor for keeping? I wouldn't keep for any rate. There are many nuances inside whole life policies, so I may be generalizing.

Only keep if the person is un-insurable (as mentioned in a later post) with term insurance.
WL does not work like that, otherwise there would be no reason to keep the policy. In the policies I've seen, the death benefit is always bigger than the surrender value; but you are right that you can get only one and not the other.

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Re: At what rate of return would you keep a whole life policy?

Post by bloom2708 » Mon Nov 13, 2017 4:06 pm

Caduceus wrote:
Mon Nov 13, 2017 3:47 pm
WL does not work like that, otherwise there would be no reason to keep the policy. In the policies I've seen, the death benefit is always bigger than the surrender value; but you are right that you can get only one and not the other.
I'm not following. Are you saying you buy a $50k whole life policy and the $50k amount goes up over time? That may be a universal life type of insurance product.

How can you benefit from BOTH the face value (death) and growth (gain each year)? I don't think you can. One or the other.

Maybe I'm wrong, but not saying it right. If you are alive (assuming the policy is on you), then you can cash out/get a loan against the cash value (or pay the premiums). If you cash out, you no longer have insurance. So you paid all those premiums, got 3, 5 or x% and didn't get the insurance.

If you are dead, you get $50k. Well, not you, your beneficiary.
Last edited by bloom2708 on Mon Nov 13, 2017 5:02 pm, edited 1 time in total.
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Doc
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Re: At what rate of return would you keep a whole life policy?

Post by Doc » Mon Nov 13, 2017 4:18 pm

Caduceus wrote:
Mon Nov 13, 2017 3:47 pm
WL does not work like that, otherwise there would be no reason to keep the policy. In the policies I've seen, the death benefit is always bigger than the surrender value; but you are right that you can get only one and not the other.
I do not understand all the terms.

I just pulled a statement from a whole life policy that I bought when I was ~20.

There's ia a "Base Plan Guaranteed Cash Value"
Plus "Dividends on Deposit"
Plus a couple of minor adjustment amounts.

All these added together are the "Net Cash Value"

It is my understanding that none of these are taxable. The dividend are tax free to the extent that they are less than the total premiums paid and if any exceed that amount I have already paid the tax on it. (I get a 1099-R.)

I belive this policy is "Paid up at 85" and at that time the "Base Plan Guaranteed Cash Value" will equal the face value of the policy and the dividends on deposit are additional to that so the total cash value at some time may/will be more than the face.

I'm also earning 3% taxable interest on the dividends on deposit which ain't that bad given today's yield curve.

Every year when I download Turbo Tax this insurance thing gets my mind swimming. My mind started swimming about an hour ago.

I have no idea how to calculate the return on this "investment".
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: At what rate of return would you keep a whole life policy?

Post by Chuck » Mon Nov 13, 2017 4:26 pm

Caduceus wrote:
Mon Nov 13, 2017 2:34 pm
If you calculate it like that, you will overstate the returns because that calculation assumes you are happy for your premium payment to have earned nothing in interest.
Fair enough. 4.78%.

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Re: At what rate of return would you keep a whole life policy?

Post by bloom2708 » Mon Nov 13, 2017 5:05 pm

Doc wrote:
Mon Nov 13, 2017 4:18 pm
I have no idea how to calculate the return on this "investment".
I think the cash value and other items are "look over there!!!". They get you confused and distract you from the fact that you "earn" interest/dividends that you won't collect.

You will be dead and the face value will be paid to the beneficiary.

The salesman is the only one making money.

What is the sverdenuergian return (as expressed in a percentage) on your whole life policy? I do not know. How do you calculate that return? It does not matter. :shock:
Last edited by bloom2708 on Mon Nov 13, 2017 5:53 pm, edited 1 time in total.
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Re: At what rate of return would you keep a whole life policy?

Post by Nate79 » Mon Nov 13, 2017 5:47 pm

And this is why I say that evaluating the return rate is complicated and those that quote a return generally don't take everything into account or don't have a clue how they work. Unless you care about imaginary paper returns you need to market the value as what you can actually put in your (or your beneficiary) pocket and the secondary impact of actually putting that cash in your pocket (such as loss of the value of the insurance and cost to replace that insurance at the time with term).

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Re: At what rate of return would you keep a whole life policy?

Post by Riley15 » Mon Nov 13, 2017 6:00 pm

bloom2708 wrote:
Mon Nov 13, 2017 4:06 pm
Caduceus wrote:
Mon Nov 13, 2017 3:47 pm
WL does not work like that, otherwise there would be no reason to keep the policy. In the policies I've seen, the death benefit is always bigger than the surrender value; but you are right that you can get only one and not the other.
I'm not following. Are you saying you buy a $50k whole life policy and the $50k amount goes up over time? That may be a universal life type of insurance product.

How can you benefit from BOTH the face value (death) and growth (gain each year)? I don't think you can. One or the other.

Maybe I'm wrong, but not saying it right. If you are alive (assuming the policy is on you), then you can cash out/get a loan against the cash value (or pay the premiums). If you cash out, you no longer have insurance. So you paid all those premiums, got 3, 5 or x% and didn't get the insurance.

If you are dead, you get $50k. Well, not you, your beneficiary.
Not all whole life policies surrender the cash value when called upon. I have a whole life policy through my employer that the beneficiary will receive the face value + cash value of the policy. Cash value does earn interest. You have see the details of your particular policy.

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Re: At what rate of return would you keep a whole life policy?

Post by gougou » Mon Nov 13, 2017 6:29 pm

Caduceus wrote:
Mon Nov 13, 2017 1:15 pm
The overall return of the policy has been abysmal, but my calculation of the internal rate of return is about 5.02% going forward, even after ongoing premiums are included. Part of the surrender value is guaranteed and some is not, but the projections so far after 2009 have been accurate from year to year.
Why is overall return abysmal but the IRR is 5.02% (which doesn't seem too bad)?

My whole life insurance has IRR of 4.8%+ depending on when I die (assuming the current dividend scale stays constant, which has been so for the past 3 years). If I live to 100 years then the IRR is about 4.8%. If I die at 85 years old the IRR is about 5.6%. If I die at 70 years old the IRR is about 6.68%. If I die today the IRR is too high and it doesn't make sense at all.

westrichj312
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Re: At what rate of return would you keep a whole life policy?

Post by westrichj312 » Mon Nov 13, 2017 6:49 pm

In general, whole life policies are for suckers. They are sold by salesman trying to make commissions. Sorry.

Dead Man Walking
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Re: At what rate of return would you keep a whole life policy?

Post by Dead Man Walking » Mon Nov 13, 2017 7:30 pm

bloom2708 wrote:
Mon Nov 13, 2017 5:05 pm
Doc wrote:
Mon Nov 13, 2017 4:18 pm
I have no idea how to calculate the return on this "investment".
I think the cash value and other items are "look over there!!!". They get you confused and distract you from the fact that you "earn" interest/dividends that you won't collect.

You will be dead and the face value will be paid to the beneficiary.


The salesman is the only one making money.

What is the sverdenuergian return (as expressed in a percentage) on your whole life policy? I do not know. How do you calculate that return? It does not matter. :shock:
Many policies purchase additional paid-up insurance with dividends; therefore, the death benefit is greater than the face value. I'm not advocating whole life policies, just stating the facts.

DMW

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Re: At what rate of return would you keep a whole life policy?

Post by slowbutsteady » Mon Nov 13, 2017 9:14 pm

westrichj312 wrote:
Mon Nov 13, 2017 6:49 pm
In general, whole life policies are for suckers. They are sold by salesman trying to make commissions. Sorry.
Quite unessessary. Departure from rational debate into name calling.

Regarding the question around estimating the rate of return, this is an empirical question but the earlier dialogues read more of opinions than someone authoritatively confirming the correct approach. Will be helpful if someone can kindly help readers with a closure on the correct computation.
The tortoise wins every time I read that story.

Caduceus
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Re: At what rate of return would you keep a whole life policy?

Post by Caduceus » Tue Nov 14, 2017 3:16 am

gougou wrote:
Mon Nov 13, 2017 6:29 pm
Caduceus wrote:
Mon Nov 13, 2017 1:15 pm
The overall return of the policy has been abysmal, but my calculation of the internal rate of return is about 5.02% going forward, even after ongoing premiums are included. Part of the surrender value is guaranteed and some is not, but the projections so far after 2009 have been accurate from year to year.
Why is overall return abysmal but the IRR is 5.02% (which doesn't seem too bad)?

My whole life insurance has IRR of 4.8%+ depending on when I die (assuming the current dividend scale stays constant, which has been so for the past 3 years). If I live to 100 years then the IRR is about 4.8%. If I die at 85 years old the IRR is about 5.6%. If I die at 70 years old the IRR is about 6.68%. If I die today the IRR is too high and it doesn't make sense at all.
Because the costs are frontloaded. I don't have the spreadsheet in front of me, but I think the IRR from inception so far is something like 2.9%. The policy has barely kept up with inflation. It should never have been bought in the first place, but the only relevant question is what to do with it going forward.

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Re: At what rate of return would you keep a whole life policy?

Post by djpeteski » Tue Nov 14, 2017 7:16 am

bloom2708 wrote:
Mon Nov 13, 2017 1:21 pm
If you have a $50k policy and the cash value grows at 5, 10, 15%, I'm not sure how that helps.

If the person dies, the policy pays $50k. The cash value is gone. What good was the "growth"? If you cash the policy and get the growth (before the death), then you pay taxes on the growth.

Would the return even be a factor for keeping? I wouldn't keep for any rate. There are many nuances inside whole life policies, so I may be generalizing.

Only keep if the person is un-insurable (as mentioned in a later post) with term insurance.
+1 This, this, this.

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Doc
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Re: At what rate of return would you keep a whole life policy?

Post by Doc » Tue Nov 14, 2017 1:16 pm

bloom2708 wrote:
Mon Nov 13, 2017 5:05 pm
They get you confused and distract you from the fact that you "earn" interest/dividends that you won't collect.
Won't collect?

We get a check every year for the interest on the dividends on deposit for each of our policies where we invest the dividends. This is no different than the money I get twice a year on my Treasury notes except the return is less on the Treasuries and it's once a year not twice.

On some policies I also get a check for the dividends every year for those policies that I choose not to reinvest the dividends. And those dividends are tax free until they exceed the total premiums I'v paid in the past.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

Chuck
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Re: At what rate of return would you keep a whole life policy?

Post by Chuck » Tue Nov 14, 2017 1:25 pm

Caduceus wrote:
Tue Nov 14, 2017 3:16 am
Because the costs are frontloaded. I don't have the spreadsheet in front of me, but I think the IRR from inception so far is something like 2.9%. The policy has barely kept up with inflation. It should never have been bought in the first place, but the only relevant question is what to do with it going forward.
2.9% is an admirable fixed-income return. The Vanguard total bond market index is returning 2.35%, and you get to enjoy principal risk with that.

I-Bonds barely keep up with inflation, and there's a new exciting thread about them every few weeks. My whole life policy is earning way more than my I-Bonds!

Whole life has a lot of issues. (Like the obligation to add money annually. Or how do you actually spend the money when the time comes?) But knocking the rate of return makes no sense. It's not a stock, so you can't compare it to stock. It's more like a weird annoying tax-deferred CD that you have to feed all the time until you slaughter it.

I would never get a new whole life policy now, knowing what I know. But when it comes to the question of keeping one that I was tricked into buying 20 years ago... I'm keeping it.

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