Think I Should Dump this Whole Life Policy

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Nearly A Moose
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Think I Should Dump this Whole Life Policy

Post by Nearly A Moose » Fri Sep 29, 2017 4:55 pm

Dear Bogelheads,

I'd like some educated feedback on whether it makes sense to drop this Whole Life policy. I'm leaning toward exiting the policy via a 1035 exchange. I recognize these threads are common and usually lead to the same advice, but it's a significant, one-way decision and so I'm hoping the experts will entertain this post as they have with others.

Here are the basic details:
Mass Mutual Legacy 100
Bought: Feb. 2012
Annual premium: $6,000 (currently paid through to Feb. 2018), fixed
Riders: Accelerated Death Benefit, Transfer of Insured, Waiver of Premium
Current cash value: $25,490.89
Current death benefit: $723,219.04
Face amount / Guaranteed death benefit: $716,863.00
Dividends currently going to paid-up additions
Current Age: 34

I don't think I satisfy any of the special criteria that would cause someone to need a WL policy - no large un-dividable asset, no need for a permanent death benefit that I can think of, bank on yourself sounds needlessly complicated. I wouldn't buy this policy today. The question is whether it makes sense to keep it. I've decided I want more life insurance than I currently, so I'm going to be buying another few million in level term regardless of what I do with this policy (although the amount would change). I'd do that before getting out of this policy.

I've manually transcribed an in-force illustration from 2016 into a spreadsheet, which I've copied below. It starts at year 5 because that's what I have in the in force illustration. I hope this is legible for people. The order of the columns is:
Numerical Year * Calendar Year * My Age * Guaranteed Cash Value * Projected Dividend * Projected Cash Value * Projected Death Benefit

Year (Year) Age Guaranteed Cash Value Dividend Projected Cash Value Projected Death Benefit
5 2016 33 18877 322 19199 721064
6 2017 34 25511 404 26249 723049
7 2018 35 32390 488 33642 725365
8 2019 36 39528 568 41392 727968
9 2020 37 46917 686 49533 731006
10 2021 38 54572 809 58089 734463
11 2022 39 61718 950 66310 738387
12 2023 40 69095 1089 74937 742732
13 2024 41 76709 1248 84003 747543
14 2025 42 84546 1427 93521 752860
15 2026 43 92599 1636 103520 758751
16 2027 44 100874 2406 114577 767126
17 2028 45 109344 3237 126749 778026
18 2029 46 118015 4084 140090 791330
19 2030 47 126902 4973 154686 807007
20 2031 48 136011 5875 170591 824934
21 2032 49 145423 6301 187447 843543
22 2033 50 155129 6758 205299 862865
23 2034 51 165116 7268 224206 882982
24 2035 52 175383 7838 244245 903991
25 2036 53 185873 8491 265457 926034
26 2037 54 196578 9186 287897 949140
27 2038 55 207471 9998 311671 973521
28 2039 56 218507 10904 336841 999311
29 2040 57 229695 11846 363485 1026500
30 2041 58 241,033 12,850 391,683 1,055,134
31 2042 59 252,609 13,910 421,647 1,085,236
32 2043 60 264,400 15,043 453,453 1,116,861
33 2044 61 276,378 16,288 487,204 1,150,137
34 2045 62 288,465 17,702 522,992 1,185,302
35 2046 63 300,594 19,285 560,919 1,222,575
36 2047 64 312,745 20,987 601,096 1,262,070
37 2048 65 324,917 22,751 643,632 1,303,783
38 2049 66 337,118 24,570 688,619 1,347,699
39 2050 67 349,384 26,404 736,167 1,393,731
40 2051 68 361,765 28,183 786,353 1,441,672
41 2052 69 374,254 30,140 839,374 1,491,716
42 2053 70 386,886 32,081 895,332 1,543,725
43 2054 71 399,612 34,126 954,276 1,597,766
44 2055 72 412,410 36,280 1,016,301 1,653,907
45 2056 73 425,079 38,837 1,081,450 1,712,677
46 2057 74 437,668 41,395 1,149,847 1,773,972
47 2058 75 450,207 44,037 1,221,650 1,837,814
48 2059 76 462,667 46,826 1,296,996 1,904,315
49 2060 77 475,056 49,442 1,375,735 1,973,136
50 2061 78 487,293 52,250 1,457,912 2,044,465
51 2062 79 499,300 55,310 1,543,554 2,118,572
52 2063 80 510,976 58,719 1,632,768 2,195,855
53 2064 81 522,314 62,018 1,725,422 2,276,099
54 2065 82 533,236 66,024 1,821,965 2,360,156
55 2066 83 543,812 69,947 1,922,489 2,447,847
56 2067 84 554,065 73,971 2,027,108 2,539,232
57 2068 85 563,951 78,144 2,135,883 2,634,430
58 2069 86 573,413 82,340 2,248,578 2,733,425
59 2070 87 582,400 86,715 2,365,125 2,836,398
60 2071 88 590,884 91,104 2,485,396 2,943,342
61 2072 89 598,858 95,394 2,609,201 3,054,128
62 2073 90 606,342 99,459 2,736,293 3,168,488
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Think I Should Dump this Whole Life Policy

Post by mhalley » Fri Sep 29, 2017 5:43 pm

I would imagine a 5yo policy is worth dumping rather than exchanging. Wci has a post on evaluating wl.
https://www.whitecoatinvestor.com/how-t ... fe-policy/
Or you could pay the 100 bucks for a professional evaluation.
http://evaluatelifeinsurance.org/

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David Jay
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Re: Think I Should Dump this Whole Life Policy

Post by David Jay » Fri Sep 29, 2017 5:58 pm

If you want some confirmation that you should get out, if you put that same money into a retirement account for the next 25 years at a 5% return (that would be a pretty conservative asset allocation) you would have $328,000, the guaranteed cash value in year 30 (25 years from now) is $241,000.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

stevew7
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Re: Think I Should Dump this Whole Life Policy

Post by stevew7 » Fri Sep 29, 2017 6:25 pm

Good idea getting term in place before you cancel this policy.

In year 11, you will have paid 11 x 6k = 66k and your guaranteed value is 61.7k and non guaranteed value is 66.3k.

So if mass mutual doesn't cut its dividend in the next 5 years, that's your break even year, 5 years away. Put another way, you are guaranteed to lose money for at least 5 more years, possibly 6.

Personally, I would not keep throwing good money after bad and would want out of this policy, especially since you said you have no need for permanent life insurance. You have paid 6 x 6k = 36k and only have a policy value of 25.5k, so you have a loss of 10.5k that you could use to offset gains if you do a 1035 exchange to a vanguard variable annuity.

Good luck!
Last edited by stevew7 on Fri Sep 29, 2017 6:45 pm, edited 1 time in total.

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nedsaid
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Re: Think I Should Dump this Whole Life Policy

Post by nedsaid » Fri Sep 29, 2017 6:40 pm

My general advice is to dump newer whole life policies and keep the older whole life policies. Not sure where the dividing line is but certainly I would think long and hard before cancelling a 20 year old or older whole life policy. Your policy is 5 1/2 years old, so I would probably roll the balance into a Vanguard annuity and cancel the policy. Then buy lots and lots of term insurance if you have kids at home. I would look into level term, at age 44 I bought 20 year level term. Really life insurance is to protect your family in case of your early demise, it should not be purchased as an investment.
A fool and his money are good for business.

ofckrupke
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Re: Think I Should Dump this Whole Life Policy

Post by ofckrupke » Fri Sep 29, 2017 6:47 pm

You can't claw back the initial setback in a swell foop, but seems like based on the guaranteed column it's now paying 3+% annually on existing cash value, plus the value of the insurance. For now, that's better than your G fund. Since you do have a nonzero bond allocation target (30% from another topic), consider keeping this, marked as fixed income, for now, and weigh buying less term against the risk of becoming uninsurable before a) the WL cash value crosses the basis and subsequent growth starts being taxable, or b) you need to cash it out on emergency grounds, or c1) the G fund starts paying more than 3% and at the same time c2) the policy isn't paying dividends...at which point maybe it's time to exchange to an equity portfolio in a VA (exchanging C/S/I for G in the TSP to keep your overall allocation on target).
Whether to use any dividends in the interim to reduce net premium vs buying paid up insurance is up to you but I'd probably take the former since at this point your goal in an exchange would be to grow it back to par tax-free and I think that gets you there somewhat sooner.
I guess this approach also presumes that you have 20k/year savings (thus 6k to this pig is your 30% to fixed).
If not then yeah it's 1035->VA time.

Nearly A Moose
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Re: Think I Should Dump this Whole Life Policy

Post by Nearly A Moose » Fri Sep 29, 2017 8:03 pm

Thanks for the feedback thus far. To clarify, if I get out, I'd do a 1035 exchange to a vanguard annuity but would probably then cash in the annuity to claim the loss. Is that a loss against ordinary income, or against long term capital gains.

The only doubt in the back of my head is that I'd never be able to get into a WL policy this "cheaply" again (it's not cheap, I know). My former financial advisor who sold me this thing made some vague references to using the cash value in retirement, etc. But he never would get too specific. My intuition is that this isn't set up optimally to maximise cash value (and again, I don't really think I want to mess with that, especially when I'm old and likey wanting to simplify things). But any comments to that point would be welcomed. But again, interested in all perspectives. Especially now that I own the thing, I don't want to get rid of it if it's useful. But happy to drop it if it doesn't make sense.

As for treating this like part of my fixed income, what's the proper way to evaluate my return versus buying a bond fund? Is it the dividend on the existing cash balance, the marginal cash increase from my next premium, or something else? It's to the point now where the cash value basically increases each year by the amount of the premium. The projected dividends are a bit generous compared to what I've been getting. I want to say my last dividend was 2% on an annualized basis. My instinct is that more liquid holdings would be more appropriate.

As for my allocation, it's set at 70/30, but it's drifting closer to 75/25 because I wasn't planning to rebalance until the end if the year. I actually want to get a bit more aggressive (maybe 80/20) but am trying to make myself wait to decide. Our fixed income is a mix of G fund and intermediate bond (maybe some total bond in my 401k, I forget exactly which I have there). Annual savings are 75-100k, give or take based on bonus.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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nedsaid
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Re: Think I Should Dump this Whole Life Policy

Post by nedsaid » Sat Sep 30, 2017 1:34 pm

Another factor would be the difference in cost between your Whole Life policy and a replacement Level Term. What I don't know is how far out you can take a Level Term policy. Pretty much, you want coverage until retirement. I would do some more checking before cashing your policy in. In most cases, you do better if you buy term and invest the difference.
A fool and his money are good for business.

afan
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Re: Think I Should Dump this Whole Life Policy

Post by afan » Sun Oct 01, 2017 7:04 pm

The simplest way to compare the performance of the policy to a taxable side account:
Start with the current surrender value, this may still be less than your cash value depending on how long it takes for surrender charges to go away.
Start a spreadsheet with that surrender value as the starting value.
Add 6,000 at the start of each year.
Determine the percent return you would need to match the surrender value of the policy.
This amount may not be the same every year. The required retruns percent to match the policy over the next five years may be different than that for the next ten, for example.
It gets trick when you try to take account of taxes. Right now you can get returns on your policy that are truly tax free. Until your surrender value exceeds the total of your premiums the earnings in the policy are tax free.
Once the surrender value is more than the sum of premiums the excess is taxable.
So, for each year in the policy you have to compare the surrender value to the sum of premiums and deduct taxes on the amount in excess.
Compare this to the after tax returns on a bond fund, taxable or muni depending on your tax bracket.
A bond fund will not promise you any particular rate of return for your current holdings in the future, let alone for future investments. So the comparison is not perfect. But it is a good starting point.

Do not fall into the trap of interpreting the cash value of the policy as what you own. There is rarely any way to get that whole amount without surrender charges or taxes due.

If you do need death benefit coverage then definitely fill this with term. Do not deal with the person who sold you the whole life policy.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Nearly A Moose
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Joined: Fri Apr 22, 2016 5:28 pm

Re: Think I Should Dump this Whole Life Policy

Post by Nearly A Moose » Sun Oct 01, 2017 7:52 pm

afan wrote:
Sun Oct 01, 2017 7:04 pm
The simplest way to compare the performance of the policy to a taxable side account:
Start with the current surrender value, this may still be less than your cash value depending on how long it takes for surrender charges to go away.
Start a spreadsheet with that surrender value as the starting value.
Add 6,000 at the start of each year.
Determine the percent return you would need to match the surrender value of the policy.
This amount may not be the same every year. The required retruns percent to match the policy over the next five years may be different than that for the next ten, for example.
It gets trick when you try to take account of taxes. Right now you can get returns on your policy that are truly tax free. Until your surrender value exceeds the total of your premiums the earnings in the policy are tax free.
Once the surrender value is more than the sum of premiums the excess is taxable.
So, for each year in the policy you have to compare the surrender value to the sum of premiums and deduct taxes on the amount in excess.
Compare this to the after tax returns on a bond fund, taxable or muni depending on your tax bracket.
A bond fund will not promise you any particular rate of return for your current holdings in the future, let alone for future investments. So the comparison is not perfect. But it is a good starting point.

Do not fall into the trap of interpreting the cash value of the policy as what you own. There is rarely any way to get that whole amount without surrender charges or taxes due.

If you do need death benefit coverage then definitely fill this with term. Do not deal with the person who sold you the whole life policy.
Thanks. Did something sort of like this in excel earlier. If it wasn't obvious from the large text table with values in my OP, I haven't taught myself how to post images yet, so I can't easily show the results. But I tried to compare the net value of my estate across several scenarios: (1) cash out via 1035 exchange, buy 30-yr term and invest the difference plus the cash out value. Assume 8% nominal returns (because the life illustration is nominal value); (2) continue to keep this policy in place, pay full premium, and assume it gives the projected values (is best case scenario); and (3) do number 2, but once the dividend exceeds the premium, have the dividend pay the premium and invest the rest. Option 1 beat the others with the exception of a roughly 5 year period after the term policy lapses and before the investment amount grows the exceed the value of the WL policy. This of course isn't precise, but it's probably making overly optimistic assumptions in favor of the WL policy.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Nearly A Moose
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Re: Think I Should Dump this Whole Life Policy

Post by Nearly A Moose » Sun Oct 01, 2017 7:53 pm

Best way to confirm the surrender value? Just call mass mutual? I want to avoid the agent / old advisor for the obvious reasons. I don't actually see a surrender charge listed in my contract.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

inbox788
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Re: Think I Should Dump this Whole Life Policy

Post by inbox788 » Tue Oct 03, 2017 5:59 pm

Why did you add the "Riders: Accelerated Death Benefit, Transfer of Insured, Waiver of Premium" and how much is each one costing you? They're all highly unlikely to come into play, and even if it were, the Accelerated Death Benefit might only be slightly useful decades from now. And how are your finances that you need the Waiver of Premium? If you can't afford to pay the premiums, maybe you shouldn't have bought policy. It's like those credit card disability insurance that only cost a few dollars here or there, but in reality only pay a little in very rare circumstances, so they turn out to be very expensive for what you're getting. And this Transfer of Insured, who does it let you transfer the policy holder to or what is its purpose? Do you own a business/partnership?

As far as whether to cancel the policy, the answer depends on what you substitute the Whole Life Policy with. You can likely cover your insurance needs with a 20 or 30 term, for about 10% the cost, so the question really is what you do with the existing cash value and cash flow of about 90% the payments. Who would be spending this cash stream? What kind of investment would you put it into? I don't think bonds today are yielding more than the policy right now.
Nearly A Moose wrote:
Fri Sep 29, 2017 8:03 pm
As for treating this like part of my fixed income, what's the proper way to evaluate my return versus buying a bond fund? Is it the dividend on the existing cash balance, the marginal cash increase from my next premium, or something else? It's to the point now where the cash value basically increases each year by the amount of the premium. The projected dividends are a bit generous compared to what I've been getting. I want to say my last dividend was 2% on an annualized basis. My instinct is that more liquid holdings would be more appropriate.
It's more complicated to me. You should replace "projected" with "meaningless" and "guaranteed" with "actual", then the numbers will be much more real. There are various parts to the policy that confuse things like cost and value of insurance, return calculation and liquidity. If you ignore them, you undervalue the policy, but if you do a face number calculation, you overvalue it, so you pretty much figure out both and see whether it's worth it somewhere in between.
ofckrupke wrote:
Fri Sep 29, 2017 6:47 pm
You can't claw back the initial setback in a swell foop, but seems like based on the guaranteed column it's now paying 3+% annually on existing cash value, plus the value of the insurance. For now, that's better than your G fund. Since you do have a nonzero bond allocation target (30% from another topic), consider keeping this, marked as fixed income, for now, and weigh buying less term against the risk of becoming uninsurable before a) the WL cash value crosses the basis and subsequent growth starts being taxable, or b) you need to cash it out on emergency grounds, or c1) the G fund starts paying more than 3% and at the same time c2) the policy isn't paying dividends...at which point maybe it's time to exchange to an equity portfolio in a VA (exchanging C/S/I for G in the TSP to keep your overall allocation on target).
Whether to use any dividends in the interim to reduce net premium vs buying paid up insurance is up to you but I'd probably take the former since at this point your goal in an exchange would be to grow it back to par tax-free and I think that gets you there somewhat sooner.
I guess this approach also presumes that you have 20k/year savings (thus 6k to this pig is your 30% to fixed).
If not then yeah it's 1035->VA time.
Great thoughts. I see the Guaranteed Cash Value is growing around 2% thru age 65 or 70 (then trails off), so I'd use this more conservative number and expect the policy could rail up against this lower bound. The so called projected (read meaningless) dividends require somewhat higher than Guaranteed Cash Value, that I wouldn't count on (as you've already noticed). From what I see here, I'd keep the main Whole Life Policy, deferring decision with this discussion in mind, but get rid of the riders (unless they're basically free). Use the Cash Value as amount of bond invested, and plan to hold it a long time or even forever.

BTW, can you break out the current dividends and elaborate on the paid up additions? I suspect it's worth it to keep using dividends to buy them.

pintail07
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Re: Think I Should Dump this Whole Life Policy

Post by pintail07 » Tue Oct 03, 2017 6:23 pm

Be careful 1035 into annuity and cashing in prior to age 591/2. Think there would be an IRS penalty.

Nearly A Moose
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Re: Think I Should Dump this Whole Life Policy

Post by Nearly A Moose » Tue Oct 03, 2017 8:32 pm

inbox788 wrote:
Tue Oct 03, 2017 5:59 pm
Why did you add the "Riders: Accelerated Death Benefit, Transfer of Insured, Waiver of Premium" and how much is each one costing you? They're all highly unlikely to come into play, and even if it were, the Accelerated Death Benefit might only be slightly useful decades from now. And how are your finances that you need the Waiver of Premium? If you can't afford to pay the premiums, maybe you shouldn't have bought policy. It's like those credit card disability insurance that only cost a few dollars here or there, but in reality only pay a little in very rare circumstances, so they turn out to be very expensive for what you're getting. And this Transfer of Insured, who does it let you transfer the policy holder to or what is its purpose? Do you own a business/partnership?

As far as whether to cancel the policy, the answer depends on what you substitute the Whole Life Policy with. You can likely cover your insurance needs with a 20 or 30 term, for about 10% the cost, so the question really is what you do with the existing cash value and cash flow of about 90% the payments. Who would be spending this cash stream? What kind of investment would you put it into? I don't think bonds today are yielding more than the policy right now.

...

BTW, can you break out the current dividends and elaborate on the paid up additions? I suspect it's worth it to keep using dividends to buy them.
The waiver of premium is $158 /yr. The others are baked into the premium on the policy issue it seems. So at most I could cut the cost $158/yr. As for why I have these riders, you'd have to ask the former FA who sold it to me. (I did at one point and didn't get a clear answer.). My guess is that the transfer of insured would let me change my wife to the insured or something if I thought she'd outlive me, to let the thing grow more. But I really don't know the strategy.

If I cancelled the policy, I'd replace the coverage with term and invest the rest in a portfolio thats around 75/25.

My last dividend was $233. It says I have to call for the paid up addition, which seems a bit odd. I feel like that used to be available on the website. But it does say I have in total $788 paid up additions available to withdraw, with $3900 total insurance bought with dividend. If I understand correctly, that should more or less be my total dividends over the life of the policy and what they bought.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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