Cash value taxable?

[2B]

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Originally Posted by Gumby So far, the annual reports on the policy match my expectations.* I guess the acid test comes in another eight years when I try to pull the money out.

You may have been protected by the military affiliation. If so, great.

My first experience with insurance products was right after my first child was born I rushed off to buy life insurance. I didn't want to "throw away my premiums" into term life plus I would get "great returns" with my whole life policy.

Being anal-retentive, I took their high and low "projections" for the interest rates and I plotted out where my cash value would be far off into the future. The agent was really impressed.

Three years later when I checked my statement my cash value was less than half of my "low end" projection. I called the company and found out that the interest rate had fallen below their "low end" interest rate even though every other interest rate in the country had gone way up.

That was the first of many times that I've seen the "ol' switcheroo" done on an insurance product. I've just never been personally taken in as badly.

[saluki9]

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Originally Posted by Rich_in_Tampa The dividends are set to pay premiums and then increase cash value. Are you saying that I can stop paying premiums, forego the death benefit, and just leave the cash value to accumulate like a "real" investment? That might work well since the dividends are sheltered until withdrawn, if the rate of return is good.

Not quite... Look at your last year's statement. What were the dividends for the last 12 months compared to the annual premium? In many cases the dividends on older whole life policies can far exceed the annual premium. If you leave the policy in place you have no choice but to keep the insurance part. That being said you can stop your out of pocket costs, keep the insurance, and possibly still grow the cash value.

[Rich_by_the_Bay]

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Originally Posted by saluki9 If you leave the policy in place you have no choice but to keep the insurance part. That being said you can stop your out of pocket costs, keep the insurance, and possibly still grow the cash value.

Oh, that.. yep, the dividends have exceeded the premiums for years; the remaining balance is used to increase cash value.

More I think about it, and the more I realize just how opaque the insurance company is about just how much money is going where, and what the real returns are, I am inclined to cash out, bite the bullet and invest it wisely.

[2B]

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Originally Posted by Rich_in_Tampa More I think about it, and the more I realize just how opaque the insurance company is about just how much money is going where, and what the real returns are, I am inclined to cash out, bite the bullet and invest it wisely.

Weren't you the guy defending annuities a while back? The same people you are dealing with now will let you put your life insurance cash value into an annuity. They will be just as opaque.

[Rich_by_the_Bay]

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Originally Posted by Cute & Fuzzy 2B Weren't you the guy defending annuities a while back? The same people you are dealing with now will let you put your life insurance cash value into an annuity. They will be just as opaque.

Uh.. nice troll, but no, I wasn't defending annuities; I was pointing out that in selected situations there may be a place for immediate annuities only as a small part of a FIRE plan, depending on circumstances.

Anyway, back to topic, there seems to be an interest by the ins companies in discouraging cash outs; by taking the most conservative stance re: 1099s, they keep the IRS happy, accomplish their goal regarding impeding cash-outs, and have no risk.

Seems like you either go against their 1099 calculation (with the risk of flagging your income tax return for audit), or else just eat it, pay the tax, and move on.

Not sure which I'll do. May be worth a call to the accountant.

[mickeyd]

Gumby,

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universal life policy, which I plan to cash out when it is paid up,

I don't believe that a UL policy will ever be paid up . Read the policy.

One thing that you did not mention is whether or not you needed the life insurance protection that this policy provides. If so, consider keeping it. If not, consider dumping it.

[Gumby]

I can never keep the terminology straight. On reflection, I think it is properly referred to as interest sensitive whole life, which I think some people call variable whole life. I do know that it will be paid up at the end of the 15 years. The interest rate started at 7.51%, dropped to 7.25% for a few months and has been back up at 7.4% for a couple of years. Because performance was good enough, the death benefit has increased over time as well as the cash value.

[Rich_by_the_Bay]

Well, I looked over some old documents and compared annual statements on the policy mentioned in my original post. I did surrender some cash value a few years ago, but that still left just enough for the dividends to pay the premium, so in this case they may be right that the cash basis is quite low.

On the positive side, the cash value increase seems to be about 6-7% per year. So I might as well just let it sit there til I need it and, hopefully, til I am in a lower semi-FIRE tax bracket.

[saluki9]

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Originally Posted by Rich_in_Tampa On the positive side, the cash value increase seems to be about 6-7% per year. So I might as well just let it sit there til I need it and, hopefully, til I am in a lower semi-FIRE tax bracket.

That's my point. Despite what you think about insurance companies, NML is a class act. We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run.

I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

[brewer12345]

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Originally Posted by saluki9 That's my point.* Despite what you think about insurance companies, NML is a class act.* We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run.* I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

I agree that NWM is a class shop, and it is one of the three companies I would even consider buying something as twitchy as LT disability insurance from. Having said that, Their life insurance policies are expensive, particularly because you (the customer) has to pay their agents a huge commission. If you have already been pounded for the commission, it may indeed be worth keeping the policy, particularly if you need the mortality coverage. But NWM wouldn't be the first place I would suggest to go price a policy.

[Martha]

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Originally Posted by Rich_in_Tampa Course the other strategy is to take the cash value out, and get your accountant to jusfity not paying taxes on the full 1099 amt. Just because the ins company thinks this is taxable (and it's to their advantage to discourage cash-outs), doesn't mean that this is the only or best interpretation. And even if you take it out as income, you will probably come out ahead by investing these after-tax dollars elsewhere. I don't know -- got some calls to make Monday.

Rich, let us know what you find out.

[Rich_by_the_Bay]

This policy had some cash-value surrender activity about 5 years ago. The surrender amount was calculated to leave just enough cash value in the policy to have the dividends cover the premiums.

Since then, the cash value has increased a bit and now the dividends exceed the premiums. The net growth of the remaining money was about 6.3% and 7% over the past two years. At those returns, I decided to let it sit (beats any bond funds I own, by far).

Alas, when we do withdraw, it will be almost all taxable because the cash basis of the policy was neutralized by the cash value surrender. Thus, it will sit at 6-7% return until I am old and decripit, or at least in a lower tax bracket.

[2B]

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Originally Posted by Rich_in_Tampa The net growth of the remaining money was about 6.3% and 7% over the past two years. At those returns, I decided to let it sit (beats any bond funds I own, by far).

I find this very hard to believe. My total experience with insurance products is that they pay low interest rates. The rates you quote are safely above government bonds. I can only think that they are quoting a "pre-fee" interest rate. After which you get the normal 3%. The other option is that this policy goes all the way back to the 70's and they screwed up and put in a 6% floor and a high premium over an interest index. Back then, people were convinced that interest rates would never go below 10% again.

[saluki9]

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Originally Posted by Return of 2B I find this very hard to believe. My total experience with insurance products is that they pay low interest rates. The rates you quote are safely above government bonds. I can only think that they are quoting a "pre-fee" interest rate. After which you get the normal 3%. The other option is that this policy goes all the way back to the 70's and they screwed up and put in a 6% floor and a high premium over an interest index. Back then, people were convinced that interest rates would never go below 10% again.

You must not have any experience with NML. The sell very fully priced whole life policies. These policies are well in excess of what their competitors charge for the same coverage.

That being said, they have the highest ratings available from all of the ratings services. Also, through work I have had to analyze many of their existing policies. It is not uncommon at all to see 10+ year old policies that pay dividends of 8%+ AFTER paying all of the premiums with dividends.

Don't forget that they are a mutual company (similar to vanguard) and the profits flow to the policy holders.

[FinanceDude]

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Originally Posted by saluki9 That's my point.* Despite what you think about insurance companies, NML is a class act.* We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run.* I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

The "dividend" is a return of principal based on favorable loss experience. The reason NML has had a high dividend rate for many years, is they don't insure anything but healthy people, and rate the heck out of the rest........but the model works for them................

They might have the best actuaries in the US, though..........

No one should think of the dividend rate on a CV policy as a "fixed income" investment..........it is a return of premium..........plain and simple..........

[saluki9]

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Originally Posted by FinanceDude The "dividend" is a return of principal based on favorable loss experience. The reason NML has had a high dividend rate for many years, is they don't insure anything but healthy people, and rate the heck out of the rest........but the model works for them................ They might have the best actuaries in the US, though.......... No one should think of the dividend rate on a CV policy as a "fixed income" investment..........it is a return of premium..........plain and simple..........

Did you read the first 3 pages of this thread?

This isn't a discussion about whether he should buy a new policy. HE ISN'T PAYING ANY PREMIUMS

the policy is running all by itself and on top of paying the entire premium it is also adding 6% to the cash value each year. So, we have a chunk of money that is tax deferred, not fluctuating (downside at least) and kicking out 6%+ per year. From an asset allocation perspective that sounds like a fixed income investment to me

[FinanceDude]

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Originally Posted by saluki9 the policy is running all by itself and on top of paying the entire premium it is also adding 6% to the cash value each year.* So, we have a chunk of money that is tax deferred, not fluctuating (downside at least) and kicking out 6%+ per year.* From an asset allocation perspective that sounds like a fixed income investment to me

Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........

For purposes of our discussion, that's fine if you want to look at it as a fixed income investment. However, you and I would be subject to losing our licenses if we presented it to a client as such.............. At least, if you believe the NAIC or SEC's thoughts on cash value life insurance..........

[saluki9]

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Originally Posted by FinanceDude Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........ For purposes of our discussion, that's fine if you want to look at it as a fixed income investment. However, you and I would be subject to losing our licenses if we presented it to a client as such.............. At least, if you believe the NAIC or SEC's thoughts on cash value life insurance..........

Too bad NML doesn't sell 10 year old policies

And fear not, I don't have an insurance license

[Rich_by_the_Bay]

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Originally Posted by FinanceDude Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........

I am sketchy on the details since it was a few years ago, but we surrendered some cash value on an NML EOL policy. NML kicked out a 1099 for just about the entire amount of the surrendered cash value. My accountant discussed this with them and advised us that in his opinion NML failed to accurately explain why the cash basis would be nearly 0.

My question: How likely is it that NML's calculations would be wrong or "open to interpretation?" Could it be that my accountant is correct or is interpreting things differently? After all, it is in NML's interests to discourage cash-outs and to play it very safe on the 1099 side.

I'm not asking about my particular situation so much as whether there is some room for differences in opinion, or is it best to assume that NML is virtually always "right in such things?

[FinanceDude]

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Originally Posted by Rich_in_Tampa IMy question: How likely is it that NML's calculations would be wrong or "open to interpretation?" Could it be that my accountant is correct or is interpreting things differently? After all, it is in NML's interests to discourage cash-outs and to play it very safe on the 1099 side. I'm not asking about my particular situation so much as whether there is some room for differences in opinion, or is it best to assume that NML is virtually always "right in such things?

It's a case of "my actuary can beat up your CPA"...............you guys think investing is murky, try reading a life insurance policy........

The IRS and life insurance companies have a symbiotic relationship.............you take care of me, I'll leave you alone.........

If asked to produce documentation, actuaries can scribble down enough algorithms to confuse a mathmatician...............

Sort of like the time I tried to figure out the IRR of ten different cash value life policies.............I kept coming up with 1.5-2.0 %, and then I'd contact the companies, and they would "explain" how it really was 9%, and I wasn't reading it right.........

Want confusion? Ask your agent for a policy illustration........