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Cash out small whole life policies?
Old 04-07-2019, 05:28 PM   #1
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Cash out small whole life policies?

Keying off ER50's thread on simplifying estates ( Think of your heirs!)
I am curious what the Forum thinks are the pros and cons may be. I have a vague recall that at one time your whole life policies dividends were tax free and therefore offered a cash flow benefit.
OTOH, our policies are relatively small by today's standards (5k. 10k and 20K), and the cash value is less than 1% of net worth, so liquidation seem to make
sense.
Any downsides we should consider?
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Old 04-07-2019, 06:15 PM   #2
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I believe dividends are still tax free, although interest on accumulated dividends is taxable. At least that is how it works with my policy.
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Old 04-07-2019, 06:31 PM   #3
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What's the cash-out value (surrender value, I think it's called?), versus the death benefit (which is likely higher than the face amount, with some added investment returns)?

If close, I'd cash out for the "simplify!" reasons I brought up in that other thread. If cash-out value is much lower, well then you have a decision to make.

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Old 04-07-2019, 06:32 PM   #4
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Confused by your terminology and/or information provided that you say makes cash out seem to make sense.

Cash value of a life insurance policy is what you'd get if you cashed out. Also known as the surrender value. I think you may be referring to the face value of the policy? The amount of the cash surrender value, especially as a % of face value, would seem to be important to me. If you're only getting 1% of face value, it doesn't really seem worthwhile to me.

I've heard people use life insurance as a way to pass part of the estate tax free. It's also a way to quickly get some funds to your heirs while they are waiting for probate. Could be handy for funeral expenses, medical, etc.

Sure, you can simplify things by cashing in the policy, but I don't think filing a death certificate with a life insurance company is that much work. I haven't done it but I've never heard complaints about that being complicated.

But if you're still paying premiums, that's one (three?) less bills to pay each year, and it doesn't sound like a significant amount. I've got a $50K policy that I'll probably keep up, though I also wonder if it's worth it. I've got TOD on my accounts so other money should come quickly. Partly I do nothing because my dad started the policy and it's not worth upsetting him if he found out I dropped it.
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Old 04-07-2019, 08:17 PM   #5
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My Dad has a number of whole life policies on him. Well, technically his three kids (me and my sisters) own them in an ILIT. They're all "paid-up" except one, which he continues to pay the annual premium for once a year.

They are a nice source of tax-free, estate-tax-free cash if that were needed. When my Mom passed away, it wasn't needed. When my Dad passes away, it will likely not be needed.

To RunningBum's point, it isn't hard to claim the death benefit. Send in a form with the policy number on it and a death certificate. Although sometimes they're not particularly prompt in paying, and they might lose the form, or claim it's not filled out properly, or, or, or. Also, they'll suggest other options (like annuities and other ideas) where they keep the money longer. After a month or two though, they'll send the check. That may or may not be soon enough to help with things, but it's certainly not a few days as they imply when you buy it.

Personally I'm not a fan of the investment aspect of life insurance, although that is sometimes touted as a benefit. I've watched my Dad pay premiums on this last policy for much longer than they initially projected - it was supposed to be 12 years and it is going on about 20 years I think. That pattern has held true for his other policies too.
That money in a taxable account would have grown much larger even after taxes are considered - although it would have been more erratic growth, which may be important to some people.

I don't have an life insurance on me and don't expect to buy any. I'll just invest what I would have spent on premiums in IRAs and taxable; I think my kids will be better off that way.

Another metric, besides surrender value versus death benefit, is surrender value versus total premiums paid.
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Old 04-07-2019, 08:18 PM   #6
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Quote:
Originally Posted by RunningBum View Post
...
Cash value of a life insurance policy is what you'd get if you cashed out. Also known as the surrender value. I think you may be referring to the face value of the policy? The amount of the cash surrender value, especially as a % of face value, would seem to be important to me. If you're only getting 1% of face value, it doesn't really seem worthwhile to me. ....

I believe he was saying that the surrender/cash value of the policies is ~ 1% of their net worth. IOW, pretty small potatoes if we are talking a % of that in scash versus face value.

Quote:
Originally Posted by RunningBum View Post
... Sure, you can simplify things by cashing in the policy, but I don't think filing a death certificate with a life insurance company is that much work. I haven't done it but I've never heard complaints about that being complicated. ....
It's not, but when you are dealing with a bunch of other things, it is just one more thing. And we did need to make a couple calls to figure out how to fill out the forms - not rocket science, but with two co-trustees, we wanted to make sure it was exactly right, so as to avoid a reject/re-submit cycle. And it will be two weeks next Tuesday since we mailed it in, with no word yet.

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Old 04-07-2019, 09:32 PM   #7
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Originally Posted by ERD50 View Post
It's not, but when you are dealing with a bunch of other things, it is just one more thing. And we did need to make a couple calls to figure out how to fill out the forms - not rocket science, but with two co-trustees, we wanted to make sure it was exactly right, so as to avoid a reject/re-submit cycle. And it will be two weeks next Tuesday since we mailed it in, with no word yet.

-ERD50
As a data point, my Mom passed away on June 6th. We had to deal with two different companies, both of which are national name brands in the LI industry. One required two rounds of paperwork submittal. We received the proceeds on July 25th. And we were on top of things and are in general capable people.
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Old 04-07-2019, 09:34 PM   #8
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Quote:
Originally Posted by ERD50 View Post
I believe he was saying that the surrender/cash value of the policies is ~ 1% of their net worth. IOW, pretty small potatoes if we are talking a % of that in scash versus face value.


Yeah, probably, but comparing surrender value to net worth as a % and talking about face value in $ terms just doesn't pull information together to draw a conclusion. Apples and % of oranges kind of thing.
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Old 04-07-2019, 10:29 PM   #9
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Quote:
Originally Posted by RunningBum View Post
Confused by your terminology and/or information provided that you say makes cash out seem to make sense.

Cash value of a life insurance policy is what you'd get if you cashed out. Also known as the surrender value. I think you may be referring to the face value of the policy? The amount of the cash surrender value, especially as a % of face value, would seem to be important to me. If you're only getting 1% of face value, it doesn't really seem worthwhile to me.

I've heard people use life insurance as a way to pass part of the estate tax free. It's also a way to quickly get some funds to your heirs while they are waiting for probate. Could be handy for funeral expenses, medical, etc.

Sure, you can simplify things by cashing in the policy, but I don't think filing a death certificate with a life insurance company is that much work. I haven't done it but I've never heard complaints about that being complicated.

But if you're still paying premiums, that's one (three?) less bills to pay each year, and it doesn't sound like a significant amount. I've got a $50K policy that I'll probably keep up, though I also wonder if it's worth it. I've got TOD on my accounts so other money should come quickly. Partly I do nothing because my dad started the policy and it's not worth upsetting him if he found out I dropped it.
To clarify--amounts listed are face value of policies. All are paying premiums from dividends as well as throwing off annual cash dividends. The biggest check (from the largest policy)is maybe 165/yr. Surrender value is about 67% of face value. The 1% reference is sum total of surrender value as percent of total net worth.
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Old 04-07-2019, 10:38 PM   #10
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I would favor holding them. Using my whole life policy as an example.... issued when I was 22 and now ~40 years old.

CSV100
Prem paid30
Gain if surrendered70
Tax on gain at 12%8
Net proceeds if surrendered92
Tax-free death benefit188
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Old 04-08-2019, 10:23 AM   #11
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I took my whole life policy and converted all the cash value to pay for premiums for approximately 7 years. Then it's gone and I'll be 100% self insured. Small policy ($100k) by most standards.
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Old 04-08-2019, 11:05 AM   #12
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I'm keeping the three small WL policies on myself with DW as the primary beneficiary and DS as the contingent beneficiary. In aggregate, they'll pay out about $55k to DW upon my demise and would give her cash to handle the first few months after I'm gone. This frees me from worrying about liquidity issues she'd have to deal with if I leave this world unexpectedly.

The polices are near zero effort to maintain. The annual dividends are greater than the premiums so they automatically pay for themselves annually and the excess dividend beyond the premium buys additional paid-up LI so the death benefit more or less keeps up with inflation. I just look over and file an annual statement that is mailed to us, say ten minutes a year total effort.

There is just no reason to cash them in that I can see. The surrender value added to our FIRE portfolio wouldn't be enough to change anything. And since I'd invest that money in short term fixed, I doubt it would earn more than the LI divs.

The fact that these policies likely weren't good investments over the decades they've existed is completely moot. My parents bought them 50 - 60 years ago and it's water under the bridge at this stage. Deciding what to do with the current situation is the only question at this point. And I'm just letting them sit with the divs paying the premium and excess divs buying additional paid-up insurance.
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Old 04-08-2019, 12:09 PM   #13
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I have a long term care rider on my two policies which leverage the death benefit into LTC dollars. I plan to hold them.
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Old 04-08-2019, 02:09 PM   #14
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I "cashed out" as you say last year. The policy I had, had a section on settlement options and had a stated minimum monthly value per $1k converted. few policies in the last 20-30 years have that guarantee. I found out that I got a better deal if I "annuitized" the cash value instead of cashing in the policy and then buying an "annuity". Different beasts. Different taxation forms. It took me months to convince the rather large insurance company that I wanted and what my policy actually specified. I found out it cost them about $10K to do it my way.

For the purposes of taxes, the cash value that I paid in was subtracted from the cash value converted. That became the taxable portion. The premiums I paid were considered a return of cash paid in and as such, are tax free. I get a monthly check. Only part is taxed, about 74% is taxed.
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Old 04-08-2019, 02:31 PM   #15
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I'm 71 and I'm keeping mine for the reasons mentioned above. If I surrender today, I'll pay income taxes on the gain. If I hold it until I die, my wife will get the larger death benefit without income taxes.

The CV and DB are growing at reasonable rates for a non-equity asset.

I keep a list of assets. The life insurance is on the list. I don't think she'll have any significant trouble calling and getting the DB after I die.
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