Getting out of Whole Life Insurance

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jmhjmh
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Joined: Fri Jan 12, 2018 11:08 pm

Getting out of Whole Life Insurance

Post by jmhjmh » Sat Jan 13, 2018 12:03 am

So, I'll start by saying that I am so embarrassed by the position we are now in. Any advice would be greatly appreciated. Especially from someone with some experience with Life Insurance policies.

My husband and I were duped by our Northwestern Mutual Financial Advisor into buying an expensive Whole Life Policy because of our high income at the time. We had just finished our medical training and had NO investment education at all and entrusted him with our money.

Our annual premium is 96K a year (yes, $96,000!), and we are currently in our 7th year of funding it. Our cash surrender value is 434K (no surrender fees), and we have put in 624k (Cost/Tax basis). Our salaries have dropped significantly, and we can no longer afford to fund the policy. We can decrease our premium to 50k/year at most without it converting into a MEC. Even at 50k/year, our investment profile would be ultra conservative with most of our annual investment going toward funding this policy. My husband is 40 years old. The "cash value" in the policy is expected to grow at 4%. This is supposed to be tax free money at retirement so long as we withdraw according to the rules.

After much thought, I feel that I have 2 viable options. Both involve taking the 190k loss and moving on.

1. I can convert the Whole Life Policy to a Universal Policy. The expected returns are about 5% with returns linked to an index fund. I would just roll over the 434K and not pay any more premiums and let the policy grow. At this rate, it would actually catch up and perform slightly better than our current policy at time of retirement. In addition, I would also get some added death benefit.

2. I can take the cash (434k) and invest elsewhere. Anywhere. I would have the advantage of liquidity with this method.

Thoughts? I am desperate for some HONEST guidance. I'm leaning towards number 1 and thinking of it as part of my fixed income portfolio (the majority of it). My future investments would be more aggressive to help balance our portfolio. Of note, we will have to buy a term policy regardless of which choice we make.

PFInterest
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Re: Getting out of Whole Life Insurance

Post by PFInterest » Sat Jan 13, 2018 4:01 pm

you can also post on the whitecoatinvestor forums: https://www.whitecoatinvestor.com/forums/

Grt2bOutdoors
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Re: Getting out of Whole Life Insurance

Post by Grt2bOutdoors » Sat Jan 13, 2018 4:20 pm

Life insurance is not an investment. You were "taken" by this adviser (salesman in disguise). You've already realized this given your detailed post, after you've decided what alternative to take, the next step would be to FIRE the adviser. If you wish to purchase term life insurance, visit this site - www.term4sale.com, you can price out policies based on the term and amounts you need.

Good Luck.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

grog
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Re: Getting out of Whole Life Insurance

Post by grog » Sat Jan 13, 2018 4:35 pm

I would call and get an illustration and figure out exactly what your options are. You are currently 190k in the hole. Will this number get better or worse in the next few years (under various options)? And how does that compare to alternative investments?

MEC status isn’t ideal, but neither is paying 96k a year for this policy. In fact, since your policy has no taxable gain and won’t for quite a while, the MEC status isn’t all that relevant for now. It will only be an issue if you surrender or take a loan out once the policy has actual gains.

2b2
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Re: Getting out of Whole Life Insurance

Post by 2b2 » Sat Jan 13, 2018 4:47 pm

I wouldn't consider the 190K a "loss". If you do, then fine.
But you'd also have to then realize that after 2 years of saving the 96K annual premium, you'd be about "even"...and getting further "ahead" every year that you don't pay that premium.

2b2

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David Jay
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Re: Getting out of Whole Life Insurance

Post by David Jay » Sat Jan 13, 2018 5:11 pm

Take the cash out.

DO NOT convert one form of expensive life insurance to another form of expensive life insurance. Get out. Replace with low cost level term policies.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

ofckrupke
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Re: Getting out of Whole Life Insurance

Post by ofckrupke » Sat Jan 13, 2018 5:14 pm

If you can get sufficient group life through employer(s) plus term term life coverage to meet your death-benefit needs, another option is the 1035-exchange to two variable annuities as offered through Vanguard, Fidelity, and a select few other low-cost providers. Like the exchange to Universal mentioned in the OP, this would preserve each of the two original bases presently summing to 624k, and each transferred cash-value bolus can grow without accruing tax liability until reaching its basis. Then you surrender the VA(s), and invest the proceeds as tax-efficiently as possible. It's like being able to take a deduction for the loss (albeit at one's LTCG rate rather than the higher ordinary income rate), spread across the years it takes to grow back to the original basis...which is not comparable to being made whole, but is better than outright surrender of the WL policies.

Being 190k in the hole, it may previously have been more efficient to surrender the VA some months after the 1035-exchange and then claim a miscellaneous itemized deduction for the loss...but as of 1 Jan 2018 that ship has sailed, and the next scheduled departure is in 2025.

inbox788
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Re: Getting out of Whole Life Insurance

Post by inbox788 » Sat Jan 13, 2018 7:43 pm

While insurance salespeople aren't the most honest, you should take some responsibility in buying a product you don't fully understand. Maybe I missed it, but how much coverage did you buy? Might be a deal if it's $1B. Why did you buy this specific policy over other choices? Did you comparison shop? It's like hiring a contractor with the first and only bid and not asking any questions.

Anyway, are there features you're overlooking that might have some value? Get an inforce illustration and post it here to help understand what is guaranteed by your policy. How long before you're paid up? Any riders? Is it a participating policy? What's your borrowing rate?

https://www.kitces.com/blog/bank-on-you ... e-banking/

The reality is you've already taken the $190k loss. Cashing out finalizes that and isn't the worst option. Don't understand why converting (i.e buying and paying more fees and costs) to a Universal Policy does to help recoup any of the $190k loss. Compare to a new Universal Policy with similar payments, what is the difference of a conversion. If none, then don't bother.

Someone above discussed a way to convert loss to another policy/annuity where you could deduct losses, but looks like they've close the strategy. Converting to an equity based policy/annuity would give you tax-free growth for first $190k, but you'd be incurring high costs to start as well as high ongoing costs as well as potentially lower returns while tying up your monies for unknown time period before you break even, but keeping it beyond that would lose the tax-free benefit, so you'd likely want to get out. It's often simpler to bite the bullet and just cash out and invest more efficiently, and not worry about recouping the losses this way, but you've got to do the comparisons.

BTW, if the Universal policy is linked to an index fund, with potential losses and no guaranteed performance or guaranteed cash values, additionally the risk of needing to add funds beyond the premium, then I wouldn't even think of comparing it to fixed income.

jmhjmh
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Re: Getting out of Whole Life Insurance

Post by jmhjmh » Tue Jan 16, 2018 1:00 pm

Thank you all for your input!!! I really appreciate it.

I have looked at the inforce illustration in much detail. From this point forward, the returns are estimated and illustrated to be around 4% based on NWM's current dividend rate. After reading all your comments, I'm leaning more and more towards no longer funding the policy and just buying term insurance.

That being said, which of these 2 options would you recommend?

1. Take the cash value (434k) out and invest elsewhere. I am already maxing out on our non-qualified investments(401k, 529, 403b, and 457b, backdoor rollover to a Roth IRA). Investment would be elsewhere.

2. Leave the cash in the policy (now a MEC), and wait for it to reach the cost/tax basis value (624k). I have calculated it to be 7 years if i receive the projected 4% return. This gain will not be taxed so long as i withdraw that cash prior to it exceeding my basis (before 7 years). This would be similar to the comment that suggested converting to an annuity to regain the loss tax free. But, I wouldn't have to insure any additional costs to do so. Further, the dividend is linked to interest rates not returns from an Index Fund. I don't think rates will be going down anytime soon. Maybe this is a safer option considering a looming crash in the market in the near future.....???

Raabe34
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Re: Getting out of Whole Life Insurance

Post by Raabe34 » Tue Jan 16, 2018 1:43 pm

ofckrupke wrote:
Sat Jan 13, 2018 5:14 pm
If you can get sufficient group life through employer(s) plus term term life coverage to meet your death-benefit needs, another option is the 1035-exchange to two variable annuities as offered through Vanguard, Fidelity, and a select few other low-cost providers. Like the exchange to Universal mentioned in the OP, this would preserve each of the two original bases presently summing to 624k, and each transferred cash-value bolus can grow without accruing tax liability until reaching its basis. Then you surrender the VA(s), and invest the proceeds as tax-efficiently as possible. It's like being able to take a deduction for the loss (albeit at one's LTCG rate rather than the higher ordinary income rate), spread across the years it takes to grow back to the original basis...which is not comparable to being made whole, but is better than outright surrender of the WL policies.

Being 190k in the hole, it may previously have been more efficient to surrender the VA some months after the 1035-exchange and then claim a miscellaneous itemized deduction for the loss...but as of 1 Jan 2018 that ship has sailed, and the next scheduled departure is in 2025.
You need to take the time to truly understand the mechanics of what he is saying because the top part of this is genius. It's akin to option 2 but you get 190k of capital gains for free.

jmhjmh
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Joined: Fri Jan 12, 2018 11:08 pm

Re: Getting out of Whole Life Insurance

Post by jmhjmh » Tue Jan 16, 2018 1:53 pm

Raabe34 wrote:
Tue Jan 16, 2018 1:43 pm
ofckrupke wrote:
Sat Jan 13, 2018 5:14 pm
If you can get sufficient group life through employer(s) plus term term life coverage to meet your death-benefit needs, another option is the 1035-exchange to two variable annuities as offered through Vanguard, Fidelity, and a select few other low-cost providers. Like the exchange to Universal mentioned in the OP, this would preserve each of the two original bases presently summing to 624k, and each transferred cash-value bolus can grow without accruing tax liability until reaching its basis. Then you surrender the VA(s), and invest the proceeds as tax-efficiently as possible. It's like being able to take a deduction for the loss (albeit at one's LTCG rate rather than the higher ordinary income rate), spread across the years it takes to grow back to the original basis...which is not comparable to being made whole, but is better than outright surrender of the WL policies.

Being 190k in the hole, it may previously have been more efficient to surrender the VA some months after the 1035-exchange and then claim a miscellaneous itemized deduction for the loss...but as of 1 Jan 2018 that ship has sailed, and the next scheduled departure is in 2025.
You need to take the time to truly understand the mechanics of what he is saying because the top part of this is genius. It's akin to option 2 but you get 190k of capital gains for free.
Sorry, I'm a little confused about the capital gains part. Would you mind clarifying? my option 2 wouldn't incur any capital gains either.

DarkHelmetII
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Re: Getting out of Whole Life Insurance

Post by DarkHelmetII » Tue Jan 16, 2018 1:55 pm

1) With respect to the Variable annuity option, also consider Jefferson National in the low cost bucket.

2) Possible 1035 into a low cost VUL such as that from TIAA. Might be able to drop death benefit significantly upon doing 1035. Specific data point: I recently 1035'd a UL to a VUL, dropping the death benefit from $6.4 mil to under $1 mil. I have no idea why this is the case but I checked with multiple brokers / carriers and this is some kind of known loophole. TIAA has low cost funds e.g. Vanguard S&P 500 and Vanguard Total Bond Market. At TIAA current M&E charge is 0.35% for balances over $500,000 (which you are close to).

3) You can get affordable (couple hundred dollars) impartial life insurance advice from http://evaluatelifeinsurance.org/. Basically James Hunt is a retired life actuary and insurance commissioner who seems to be doing this to help consumers out in his retirement years.


Honestly, option #1 to do low-cost VA up until your basis and then switch to taxable (per other poster suggestion) is probably the least complicated. BUT if you want to consider permanent life insurance 1035 into a low cost carrier, and an impartial review (e.g. via evaluatelifeinsurance.org) suggests this is not a bad idea, can consider that.

DarkHelmetII
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Re: Getting out of Whole Life Insurance

Post by DarkHelmetII » Tue Jan 16, 2018 1:58 pm

Sorry, I'm a little confused about the capital gains part. Would you mind clarifying? my option 2 wouldn't incur any capital gains either.
I think the key is that in the Variable Annuity scenario, you can get your money into more aggressive investments than 4% "guaranteed" from life insurance carrier. Even if you went something like 60% bonds / 40% equities would probably climb more quickly up to your basis.

Raabe34
Posts: 175
Joined: Tue Apr 14, 2009 9:58 am

Re: Getting out of Whole Life Insurance

Post by Raabe34 » Tue Jan 16, 2018 2:56 pm

jmhjmh wrote:
Tue Jan 16, 2018 1:53 pm
Raabe34 wrote:
Tue Jan 16, 2018 1:43 pm
ofckrupke wrote:
Sat Jan 13, 2018 5:14 pm
If you can get sufficient group life through employer(s) plus term term life coverage to meet your death-benefit needs, another option is the 1035-exchange to two variable annuities as offered through Vanguard, Fidelity, and a select few other low-cost providers. Like the exchange to Universal mentioned in the OP, this would preserve each of the two original bases presently summing to 624k, and each transferred cash-value bolus can grow without accruing tax liability until reaching its basis. Then you surrender the VA(s), and invest the proceeds as tax-efficiently as possible. It's like being able to take a deduction for the loss (albeit at one's LTCG rate rather than the higher ordinary income rate), spread across the years it takes to grow back to the original basis...which is not comparable to being made whole, but is better than outright surrender of the WL policies.

Being 190k in the hole, it may previously have been more efficient to surrender the VA some months after the 1035-exchange and then claim a miscellaneous itemized deduction for the loss...but as of 1 Jan 2018 that ship has sailed, and the next scheduled departure is in 2025.
You need to take the time to truly understand the mechanics of what he is saying because the top part of this is genius. It's akin to option 2 but you get 190k of capital gains for free.
Sorry, I'm a little confused about the capital gains part. Would you mind clarifying? my option 2 wouldn't incur any capital gains either.
Your option 2 is a good option, hands down. This option is better in that you basically get the next 190k in cap gains/interest for free.

KSActuary
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Re: Getting out of Whole Life Insurance

Post by KSActuary » Tue Jan 16, 2018 5:19 pm

I would also point towards Jefferson National.

NWM life agents are great at capturing early docs and having their way with them. The plan set forth may have been conservative but may also have been okay if the circumstances had not changed.

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White Coat Investor
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Re: Getting out of Whole Life Insurance

Post by White Coat Investor » Tue Jan 16, 2018 5:37 pm

jmhjmh wrote:
Sat Jan 13, 2018 12:03 am
So, I'll start by saying that I am so embarrassed by the position we are now in. Any advice would be greatly appreciated. Especially from someone with some experience with Life Insurance policies.

My husband and I were duped by our Northwestern Mutual Financial Advisor into buying an expensive Whole Life Policy because of our high income at the time. We had just finished our medical training and had NO investment education at all and entrusted him with our money.

Our annual premium is 96K a year (yes, $96,000!), and we are currently in our 7th year of funding it. Our cash surrender value is 434K (no surrender fees), and we have put in 624k (Cost/Tax basis). Our salaries have dropped significantly, and we can no longer afford to fund the policy. We can decrease our premium to 50k/year at most without it converting into a MEC. Even at 50k/year, our investment profile would be ultra conservative with most of our annual investment going toward funding this policy. My husband is 40 years old. The "cash value" in the policy is expected to grow at 4%. This is supposed to be tax free money at retirement so long as we withdraw according to the rules.

After much thought, I feel that I have 2 viable options. Both involve taking the 190k loss and moving on.

1. I can convert the Whole Life Policy to a Universal Policy. The expected returns are about 5% with returns linked to an index fund. I would just roll over the 434K and not pay any more premiums and let the policy grow. At this rate, it would actually catch up and perform slightly better than our current policy at time of retirement. In addition, I would also get some added death benefit.

2. I can take the cash (434k) and invest elsewhere. Anywhere. I would have the advantage of liquidity with this method.

Thoughts? I am desperate for some HONEST guidance. I'm leaning towards number 1 and thinking of it as part of my fixed income portfolio (the majority of it). My future investments would be more aggressive to help balance our portfolio. Of note, we will have to buy a term policy regardless of which choice we make.
The typical way to get out of these is to exchange the cash value to a Vanguard variable annuity, invest it in stuff you would invest in anyway (REITs, TIPS maybe) and when the value of the VA grows back to the basis (total of your WL payments over 7 years), surrender the VA. This way you get to have some tax-free gains on the earnings. Kind of a way of making lemonade out of lemons. If you don't want to hassle with the VA, then you can surrender and walk away knowing you're giving up some future tax benefits by not doing so.

If you don't like this whole life policy I certainly wouldn't buy an IUL and pay another big fat commission.

If it makes you feel any better, I know hundreds of doctors who have done the same thing, although often in much smaller amounts. My loss after 7 years in a NML policy was something like a cumulative -32%.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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