Another life insurance question

[67walkon]

This is probably one of those repeating threads, but you retired people need the mental stimulation, so here it goes.

I've got a 20 or so year old Whole Life Policy. Turns out it wasn't represented exactly correctly, but such is life.

I'm 61 and FI, trying to figure out exactly when to quit work.

The policy amount is $227,000, and there is an old $10,000 loan we used for a kid's college. The premium, after dividends, this year is around $1200. The cash value is right at $70,000.

What are the options with these policies? We paid the loan down by $10,000 this year and have $10,000 to go. Frankly, while getting $217,000 when I die would be nice for my wife and/or kids, it wouldn't make very much difference to her life style. In other words, she doesn't need it.

I haven't had an agent for years because they just kept trying to sell me more life insurance that I didn't want.

What I can figure out is: 1. Cash out and probably pay some taxes; 2. pay off the loan and let the cash value pay the premiums, probably forever; or 3, just keep paying it. I rather think there are other options, but I'm not savvy enough to know what they are.

Thanks!

 

[chinaco]

Here is a link to a recent similar discussion.

http://www.early-retirement.org/forums/f28/life-insurance-after-retirement-56949.html

 

[meierlde]

At this point how much does the cash value increase every year compared to the premiums? Also is it participating? I.E. are dividends payed or not? If you find that the increase in cash value is about the same as the premiums then its not really costing you much at this stage. A third alternative would be to convert the policy to a paid up policy using the cash value (likley detailed in the policy, i.e. stop paying the premiums, and convert to a paid up policy that the cash value would pay.

 

[Koolau]

What I can figure out is: 1. Cash out and probably pay some taxes; 2. pay off the loan and let the cash value pay the premiums, probably forever; or 3, just keep paying it. I rather think there are other options, but I'm not savvy enough to know what they are.

Thanks!

Check your policy to see if there is some "floor" interest payment on your cash value. I believe many policies have such in them. If taken out 20 years ago, and if there is a guaranteed minimum, you just might find that (by a fluke of timing) you can make more interest on your cash value in the policy than you can anywhere else (with safety that is arguably almost as good as a bank - depending upon the health of your Ins. Co., of course). Obviously, you could find investments with higher potential pay-out (more potential risk), but you indicated you don't depend upon the money - so why not keep it "safe"? At some point in the future (if banks' CD rates ever recover) reevaluate your keeping cash value in the policy. Just my $.02 worth and, of course, YMMV. Sounds like a nice problem to be dealing with.

 

[73ss454]

67walkon, I also have a whole life policy that I've been paying on for the last 23 years or so. It was also sold to me by an agent who lied to me about the length of time I'd have to pay the premium. I was told 10 years and that would be the end of my payments. Turns out the payments are due till the age of 99. There was a class action against this company and I was awarded 31.5K. I'm 62 and still hold the policy but not real sure why.

You said that you don't need the insurance so I think you should cancel it and take the cash or buy a SPIA. With the SPIA you won't have to pay the tax on the amount of the policy that is profit, at least that's what I was told.

As to you pulling the plug on your job, what are you waiting for? If you are FI and 61 years old you should enjoy what time you have left on this earth.

 

[pb4uski]

I have a similar situation and have found that the increase in the cash value compared to the cash value at the beginning of the policy year and the minor premiums I pay ($20/mo) is currently about a 6% return - much better than I am getting in other fixed income so I'm just letting the policy plug along.

You could see what options are available (using dividends to pay premiums if it is a par policy, converting to reduced paid up or whatever) to avoid having to pay premiums and let 'er ride.

My point is that at this point it is probably earning a pretty good return and if that is the case then take advantage of it.

 

[traineeinvestor]

Does the policy have a maturity date? The Whole Life Policy I have pays full value on the earlier of (i) my death or (ii) when I turn 55 (originally 65, but I had the maturity date lowered to 55 some years ago). I only get the much lower cash value if I surrender the policy before I turn 55.

 

[67walkon]

I think the maturity age is 99 or something. I need to check all the other suggestions. It is participating, so I get dividends that reduce the premium; the SPIA is an interesting idea I had not considered.

73ss, mine was similar. It was supposed to pay for itself forever after about 10 years. But I didn't get any class action settlement, just a bill of goods when I bought it.

Thanks for all the ideas. Probably I can't get much other than the case, but hey, you never know!

 

[chinaco]

... just a bill of goods when I bought it.

...

Maybe. But it sounds like you really don't know much about the details or have a good comparison against other products.... it helps to do comparative shopping (many quotes for products/companies that are similar).


Nevertheless. You have to think back about your primary goal. It was to insure against a financial loss to your family if you died young and they were left without your income. It is easy to dismiss that value after the fact (because you did not die). While, I do not know all of the details... chances are that was a good decision.

If you are going to dump it... a 20 yr term policy may have been your best option. But, the agent dangled the self sustaining carrot.


But that was then and now is a different time and you face different problems. What might go wrong financially where the policy might help. You have to look at the negative side of things to figure that out.

You should create a financial plan and figure out how this asset fits into it.... and determine if it can provide some benefit.

Those policies have certain tax benefits.

Are you from a family of men that live into their 90s or in their 70's? Would $227k of benefit (with its tax benefit) help your DW if you experienced a big financial loss? For example, is there a chance you could lose some of your assets? What might go wrong? How can the policy help you if something goes wrong financially?

 

[67walkon]

Chinaco,, you're absolutely right. I don't know enough about the product. The primary purpose at the time was to protect my kids. I was a single dad, had (and still have) some good insurance through work and worked the numbers based on the kids receiving social security benefits and the various insurances if I died early. Between SS, 2 policies through work and this one, my kids would have been fine; not rich, but enough to support them and get them through college. It was good for that purpose.

I married again, about 22 years ago, and together we managed to save enough to become FI; my wife inherited a piece of income producing property that certainly helped tremendously, by the way, but we did well even without that. And every year, I kept paying the policy and kept refusing to talk to the agents when they called, so they gave up. This whole subject just came up in a review by our investment guy. We did cash out of an old, fairly small, policy my wife had and she got a new kitchen out of the deal!

It did work as forced savings in those early years, so it was good for that, too. The way I'm looking at it now is that we could take about $70,000 out with me alive or $217,000 if I should die; that is only a $147,000 spread. $147,000 wouldn't make all that much difference to my wife at this point. However, I do think my wife wouldn't mind getting the full amount if I were to die soon.

The guy that handles our investment stuff is looking at it for us. When we understand the options, my wife and I will decide what is best, but I will certainly check back here as the information here is outstanding.

 

[73ss454]

67, now you just have to quit work and enjoy your life.

Maybe read a few investment books and ditch the investment guy. This should give you more money to spend in the time you have left.

 

[panacea]

If you no longer need the life insurance and taxes are a concern you may want to consider exchanging the policy for a better investment. For example, you could look at a plain vanilla, low cost variable annuity at places like Fidelity or Vanguard. Using a 1035 exchange, you can replace the policy without tax consequence. You can select from several different underlying investments (from conservative to growth) and avoid all sales commissions and surrender charges. You can also 1035 into long-term care insurance, if that's something you need.

 

[Sarah in SC]

Some first post, eh?

 

[panacea]

Yep- first post. Saving money by eliminating unnecessary insurance is great.

 

[FinanceDude]

If you no longer need the life insurance and taxes are a concern you may want to consider exchanging the policy for a better investment. For example, you could look at a plain vanilla, low cost variable annuity at places like Fidelity or Vanguard. Using a 1035 exchange, you can replace the policy without tax consequence. You can select from several different underlying investments (from conservative to growth) and avoid all sales commissions and surrender charges. You can also 1035 into long-term care insurance, if that's something you need.

Probably have to go through underwriting on the LTC, OP did not mention what kind of health he was in..........

 

[67walkon]

If I am the OP, I'm in good health.

I got a bunch of illustrations from Prudential. I'm leaning toward keeping it in place for 2 to 5 years, then cashing it out and putting it into some kind of income producing asset. I looked at the SPIA, but right now you can get fairly close to that return on tax sheltered municipals, and the little bit of income difference won't matter. My wife will be fine without the insurance.

 

[mathjak107]

Chinaco,, you're absolutely right. I don't know enough about the product. The primary purpose at the time was to protect my kids. I was a single dad, had (and still have) some good insurance through work and worked the numbers based on the kids receiving social security benefits and the various insurances if I died early. Between SS, 2 policies through work and this one, my kids would have been fine; not rich, but enough to support them and get them through college. It was good for that purpose.

I married again, about 22 years ago, and together we managed to save enough to become FI; my wife inherited a piece of income producing property that certainly helped tremendously, by the way, but we did well even without that. And every year, I kept paying the policy and kept refusing to talk to the agents when they called, so they gave up. This whole subject just came up in a review by our investment guy. We did cash out of an old, fairly small, policy my wife had and she got a new kitchen out of the deal!

It did work as forced savings in those early years, so it was good for that, too. The way I'm looking at it now is that we could take about $70,000 out with me alive or $217,000 if I should die; that is only a $147,000 spread. $147,000 wouldn't make all that much difference to my wife at this point. However, I do think my wife wouldn't mind getting the full amount if I were to die soon.

The guy that handles our investment stuff is looking at it for us. When we understand the options, my wife and I will decide what is best, but I will certainly check back here as the information here is outstanding.

exactley what the insurance company hopes. for ...

they over charged you for decades just in case you wanted life insurance to death at old age . you payed far more than any term policy for that right.

mostly everyone takes the tiny cash value instead leaving the insurance company the big winner.

 

[rayvt]

If you are retired, why do you need life insurance? Insurance is for replacing your income if you die. If you are retired, you don't have any income that needs to be replaced.

The amount of true insurance you have is the face value MINUS the cash value and MINUS the loan amount. So you have 147K of insurance for which you are paying $1200/yr.

Really? Is that enough insurance? A couple of years salary? I would think that if you need insurance, you'd need around $500k.

 

[fritz]

This is probably one of those repeating threads, but you retired people need the mental stimulation, so here it goes.

I've got a 20 or so year old Whole Life Policy. Turns out it wasn't represented exactly correctly, but such is life.

I'm 61 and FI, trying to figure out exactly when to quit work.

The policy amount is $227,000, and there is an old $10,000 loan we used for a kid's college. The premium, after dividends, this year is around $1200. The cash value is right at $70,000.

What are the options with these policies? We paid the loan down by $10,000 this year and have $10,000 to go. Frankly, while getting $217,000 when I die would be nice for my wife and/or kids, it wouldn't make very much difference to her life style. In other words, she doesn't need it.

I haven't had an agent for years because they just kept trying to sell me more life insurance that I didn't want.

What I can figure out is: 1. Cash out and probably pay some taxes; 2. pay off the loan and let the cash value pay the premiums, probably forever; or 3, just keep paying it. I rather think there are other options, but I'm not savvy enough to know what they are.

Thanks!

Sounds like you've done quite well if what you've stated and my calculations are correct. Investing $100.00/mos compounded monthly for 20 years would reward you with $70,000.00 at a return of apprx 9.5% (and you paid for insurance out those monthly payments).

 

[mathjak107]

If you are retired, why do you need life insurance? Insurance is for replacing your income if you die. If you are retired, you don't have any income that needs to be replaced.

The amount of true insurance you have is the face value MINUS the cash value and MINUS the loan amount. So you have 147K of insurance for which you are paying $1200/yr.

Really? Is that enough insurance? A couple of years salary? I would think that if you need insurance, you'd need around $500k.

ooooh lots of creative reasons.

wealth passing to a spouse and making forever taxable money never taxable..

rather than leave my taxable iras to my wife i can use some of the money for a single premium policy of equal value.. that money gets leveraged and my wife gets 100% tax free money instead of taxable ira's with rmds. you almost never pay anywhere near what you get out.

whatever is left from the ira's go to the kids where they can pay the tax over a lifetime.

2nd marriages are another example. my wife and i are leaving everything to each other. but we each leave a small policy to our kids. that way they dont have to wait for the surviving spouse to die to see something from their parents estate.


its all about being creative and thinking outside the box.

maybe i should sell this stuff ha ha ha

 

[TN_INVEST]

ooooh lots of creative reasons.

wealth passing to a spouse and making forever taxable money never taxable..

rather than leave my taxable iras to my wife i can use some of the money for a single premium policy of equal value.. that money gets leveraged and my wife gets 100% tax free money instead of taxable ira's with rmds. you almost never pay anywhere near what you get out.

whatever is left from the ira's go to the kids where they can pay the tax over a lifetime.

2nd marriages are another example. my wife and i are leaving everything to each other. but we each leave a small policy to our kids. that way they dont have to wait for the surviving spouse to die to see something from their parents estate.


its all about being creative and thinking outside the box.

maybe i should sell this stuff ha ha ha

Yes, there are plenty of good reasons for folks to own/buy life insurance.

I wonder if the folks that suggest cancelling the policy would put their recommendations in writing? I shudder to think about how confident they might be should the policy holder ever die (oh wait...he IS going to die). It's a slippery slope when it comes to professionally recommending dropping insurance.

 

[rayvt]

Sounds like somebody bought the malarky from an insurance agent. There are lots of ways to pass money down other than via an insurance policy. And ways to do so without the (often hidden) fees that are buried in the policy.

Really, think about this. It's called "Life Insurance Policy", not "Transfer Money Policy". That kinda indicates the the primary function is to insure your life, and any money transferring function is a secondary function.

Oftentimes, people spend or lose more money in trying to avoid taxes than the amount that the tax would actually be. And in the OP's case, the policy face value is only $227K -- so amount of tax that can be avoided is trivial.

OTOH, the deal with whole life insurance is that in the early years you grossly overpay to offset the fact that you underpay in the later years. The OP is in this late phase, so the overpaying has already been done.

The OP said:
1) The policy turned out to be mis-represented (quelle surprise!)
2) The actual amount of insurance is $147K. (The $70K cash value is his money, whether he lives or dies.)
3) His wife wouldn't need that $147k when he dies.
4) His premium is $1200/yr

 

[rockyj]

Sounds like somebody bought the malarky from an insurance agent. <snip>

...so the overpaying has already been done.

I similarly continue to hold a whole life policy after about 20 years. At this point, the "malarky buying" and overpaying are in the past - water under the bridge and no longer a factor in deciding whether what I hold *now* is worth retaining, which is really what the OP is trying to decide.

The particulars on my policy are:

1) Current cash value is about $60K on $350K policy.
2) Annual rate of return in cash value of the policy (after subtracting premium for current period) has been running about 7.5%.
3) This year's net premium (guaranteed premium less dividends) is about $1200.
4) Net premiums have been declining (roughly) as originally illustrated and at current rate should zero out in about 10 years.

I continue to hold for several reasons:

Even if I were just looking at cash value, the policy is performing about as well or better than any other bond, CD or similar savings vehicle I can identify (again, at present - the past is gone).

Also, the $350K death benefit (I will die) can serve any of several functions:

1) Help to self-insure for extended care for me if needed (i.e. replenish kitty for DW should I predecease her and need some nursing home or similar home care on my way out), reducing the need to buy LTC or otherwise self-insure.
2) Provide some extra buffer (perhaps not really needed, but reassuring nevertheless) for DW if I predecease her.
3) Offset costs of estate taxes or otherwise provide greater transfer to heirs.

I realize I don't get to exercise all of the above, but any one will suffice.

Also, as I age, any trade off between cashing out early for my needs and awaiting my death for the greater benefit of others will be reduced, and as mentioned above, rate of return on cash value only is respectable. Should I live to 100, the point will be moot. ;-)

So at this point, it doesn't matter what the product is called. Nor does it matter if there are other ways to do these things - only if there are better ways to do them. For *now*, for me, and considering 1) the relatively low (and declining) annual cost, 2) the comparatively good and tax deferred return compared with other savings-like vehicles, and 3) the multiple scenarios in which the insurance proceeds could be of benefit (and the certainty that at least one of them will occur), I guess I'm still drinking the kool aid.

 

[TN_INVEST]

Sounds like somebody bought the malarky from an insurance agent. There are lots of ways to pass money down other than via an insurance policy. And ways to do so without the (often hidden) fees that are buried in the policy.

Really, think about this. It's called "Life Insurance Policy", not "Transfer Money Policy". That kinda indicates the the primary function is to insure your life, and any money transferring function is a secondary function.

Oftentimes, people spend or lose more money in trying to avoid taxes than the amount that the tax would actually be. And in the OP's case, the policy face value is only $227K -- so amount of tax that can be avoided is trivial.

OTOH, the deal with whole life insurance is that in the early years you grossly overpay to offset the fact that you underpay in the later years. The OP is in this late phase, so the overpaying has already been done.

The OP said:
1) The policy turned out to be mis-represented (quelle surprise!)
2) The actual amount of insurance is $147K. (The $70K cash value is his money, whether he lives or dies.)
3) His wife wouldn't need that $147k when he dies.
4) His premium is $1200/yr

Sounds like he's got $77K of death benefit in that policy (for a cost of $1,200 a year). Not too bad. And if you don't think there is value in life insurance policies...try to convince a retiree to drop their life insurance policy.

If you plan to have any money left at death, you could do a lot worse than to pass it via a life insurance policy. Especially since putting in other places often creates taxes for folks that don't spend it (banks are full of CD owners that pay taxes for decades on their interest that will never spend that CD money).

I suspect they could look in to a family limited partnership and everything that goes along with that, but that's usually a bit too complicated for most folks.

Always perfect? Nope
Always wrong? Nope