Did we make a mistake?

[Frugaltravelerdc]

Hi all,

Long time lurker, first time poster. I have a question about life insurance that I hope you all can help me with.

I'm 38, DH is 39. We bought into a Northwestern Mutual Adjustable CompLife in 2007 for 600k each. It costs us $600 per month. At that time, we had a big (600k) mortgage (the DC area is not kind to homeowners). So our thought was: "if something happened to one of us, the NWM policy will help the other payoff the house."

Now, two things have happened: a) we did pay off the house and b) I've been doing some reading that tells me that these types of policies are not very good.

I don't quite understand all the reasons it is bad (high fees is one). The question for us is: should we continue to sink $1200 each month into NWM, or should we cancel, take the cash value and invest that $1200 elsewhere? Right now, we will get roughly 35k each if we cancel, I think.

What are the pros and cons of continuing with the policy vs canceling?

Any advice would be much appreciated.

[Lsbcal]

We always used term life insurance and invested the rest. Seemed by far the cheapest way to go. No need to mixup insurance and investing. Nowadays we have a big pile so can self insure.

[Trawler]

My Wife and I have a similar situation. We bought it originally to shelter income from investments and have $$ to pay off house in case of death. We paid off house as well no longer need the insurancepart. What we did was lowered the the face amount of the policy by 33% and no longer pay in the $400.00 into it each month . We have a cash balance of 68K. Decided to hang onto it untill 59 as at that time we will decide to use as income or cash out and invest elseware. At 59 we also will get back ALL insurance premiums back.
If I were to have a do over I would have bought Term

[2B]

Quote:

Originally Posted by Lsbcal We always used term life insurance and invested the rest. Seemed by far the cheapest way to go. No need to mixup insurance and investing. Nowadays we have a big pile so can self insure.

+1

You won't find many (if any) people here that would recommend any of the incarnations of whole life. I suspect your investment return has been very poor after fees. You should be able to check what it is with a financial calculator or a simple Excel spread sheet.

You have made some good financial moves but I wouldn't include your life insurance among them. If your health is good, sign up for level term whole life policies. At your ages, 15 yr terms are probably right for you. You can decide how much financial help the surviving spouse will need with the loss of the other's income. You also didn't mention any other dependents. They should also be considered in your insurance evaluation. Remember that "zero" may be an acceptable insurance amount if the other spouse is financially stable enough to not need a windfall if they suddenly become a widow.

I also bought a whole life policy many years ago. I realized I was not getting that wonderful return the agent talked about when I bought it. I cashed it in and got a level term.

[Frugaltravelerdc]

Thanks everyone. To answer 2B's question, we don't have any kids/other dependents. I don't know how exactly to calculate the performance. To do the rough math, the policy was opened in 05/2007. So in 8 years, for a 600k policy, we have already paid in: 8*12*600 = 57600 (for one person). The face value ("net cash value") on it right now is only 39k. (I guess all the upfront fees have eaten into it).

So very poor performance on it as an "investment" (facepalm!). The question is: should we wait till the net cash value catches up to the investment (ie., atleast get a 0% return) or take it out now and lose 18k each.

I didn't quite understand Trawler's idea of reducing the face value. Does that mean we say "I don't want a 600k policy, just a 200k policy. for the 200k policy, whatever premiums we have paid for until now is good enough." So no more monthly payments and if one of us kicks the bucket, the 200k is paid (or if the 20 year term is up, we will get whatever growth on the paid up amount is)? Could you clarify please?

[Trawler]

Quote:

Originally Posted by Frugaltravelerdc Thanks everyone. To answer 2B's question, we don't have any kids/other dependents. I don't know how exactly to calculate the performance. To do the rough math, the policy was opened in 05/2007. So in 8 years, for a 600k policy, we have already paid in: 8*12*600 = 57600 (for one person). The face value ("net cash value") on it right now is only 39k. (I guess all the upfront fees have eaten into it). So very poor performance on it as an "investment" (facepalm!). The question is: should we wait till the net cash value catches up to the investment (ie., atleast get a 0% return) or take it out now and lose 18k each. I didn't quite understand Trawler's idea of reducing the face value. Does that mean we say "I don't want a 600k policy, just a 200k policy. for the 200k policy, whatever premiums we have paid for until now is good enough." So no more monthly payments and if one of us kicks the bucket, the 200k is paid (or if the 20 year term is up, we will get whatever growth on the paid up amount is)? Could you clarify please?

Yes that what it means.
The Policy we have is a Variable Universal Life. The face changed 150K now 100K. Payment was $400 per month of which part when into investment the other part went to pay for the insurance and fees. My DW is the insured. If she passes yes now it pays the 100K . Today we send Zero in monthly payment however $96 per month comes out the cash value for the fees and a 100K in insurance. DW is 55 and two health strikes when she was underwritten.
To Sum it up no more outlay of cash and pays new face of 100K if death. As of next year all surrender fees gone. In 2019 all premiums paid for the insurance comes back to us . Our Rate of return on the investments in the account hav been 7.42% since 2004. I believe the rate of return is net of Insurance costs but fees included.


In Reading your post again I would recomend that you take a look at the three costs. Insurance cost. Surrender Costs and fees seperately and analyyze .
1. how much the surrender fees are reduced each year.
2. Is there an option to reduce face value to better fit your needs.
3. What is the true cost of the underlying policy another way is how much does the insurance piece of this cost vs how much a term policy would costs.
4. What are your investment options and underlying performance of those investments.
5. How much are the underlying fees going forward

my guess is that depending how much the surrender fees go down each year you have own the policy will determine weather to stay or go. I know when I did this it was more benificial to stay and get the suurrender fees back. I am sure that is by design to keep you. Every situation is a little different.

[Texas Proud]

Before you can make a decision on what to do, you need to get a quote on a term life policy...


IOW, you did not 'lose' money as you did actually have a life insurance policy during those years... the cost of that policy is probably a multiple of a term policy, but it is what it is....


Another question that I would look at if you plan to reduce your policy amount.... what would a term policy cost you now IOW, that $35K can produce a return and it might be cheaper to take the money, invest it yourself and buy a 20 year term (or whatever you like)....

[Frugaltravelerdc]

Thanks again everyone! I am off to dig up the original policy documents. Guess I have no choice but to call my NWM rep and ask about surrender fees etc.

[cardinal93]

I would suggest getting an updated policy illustration from your agent to see where you stand so you can make an informed decision.

I don't know your particular circumstances or your policy setup, but you can ask your agent if the policy was setup for maximizing death benefit, maximizing cash value accumulation or both (which is not really possible, as far as I know). It makes a very significant difference. If you maximize DB, much of your premium goes to paying for a death benefit which increases your Rate of Return on the DB. If you minimize the DB, more of your premium goes to the cash value accumulation thereby boosting your Rate of Return on your cash value (while lowering the RoR on your DB).

Only you can know what's best for you, or whether you need permanent insurance at all. If not, look at the project RoR on your policy (based on your updated illustration) if u don't need the insurance. If you think you can safely beat those returns, then by all means dump it.

I own several permanent insurance policies (whole life and indexed universal life), as well as several term policies, and they're the cornerstone of my financial planning. I have an autistic child, so I do have a need to leave behind a legacy.

But I went into it after doing my own due diligence and buying my insurance only after fully understanding their utility for my own specific situation. It also helped in that I was rated preferred plus health, so my cost of insurance is very low.

I specifically optimized them for cash value accumulation so my Whole Life's policy's long-term internal rate of return on cash is around 4.5% after tax and almost risk free (insurer could default, but I chose a highly rated insurer). Nothing to write home about, but it's a safe place to store cash for my emergency fund. Couldn't find anything else that gave me 4.5% aftertax that I could put on auto-pilot.

In fact, I don't bother to own bonds in my own asset allocation. Just stocks/equities, real estate, cash and high cash value life insurance.

Just my two cents.

[gindie]

Quote:

Originally Posted by Frugaltravelerdc Thanks again everyone! I am off to dig up the original policy documents. Guess I have no choice but to call my NWM rep and ask about surrender fees etc.

To reiterate Texas Proud's post, do not surrender a current policy until you have a replacement one in place. It's best to have a short-term overlap in coverage rather than a gap.

[pb4uski]

The first question to ask is do you need life insurance? IOW, if you or DH were to die, could the survivor live on their income and assets or would they need something additional? If they would need something additional, then that is what life insurance provides. If you need the insurance, then options might be to keep the policy, convert it to paid up or cash it in an buy term insurance to cover your needs.

Let's say that you don't need the insurance. Then the next question becomes, is your existing policy, from this point forward, a decent investment. It might be. Look at the growth in the cash value over the last policy year compared to the value at the beginning of the year and the premiums paid. Your "return" is roughly the [cash value @ end of year/(cash value at beginning of year + premiums paid)]-1. Compare that "return" to other alternative fixed income investment opportunities that you have. If the policy is better, then it may be worth keeping. Also look at the projected values for the next few years the same way.

For example, I have an old whole life policy whose return last year was 4.65% and that is totally ignoring the value of any life insurance coverage. Since that is a pretty attractive return in this low interest rate environment, I'm keeping it for its investment attributes rather than for the insurance. The life insurance aspects are gravy to me. (If I were to die tomorrow the death benefit DW would receive would be equal to the premiums I have paid over the last 36 years compounded at 8.29% tax-free).

Would I go out and buy a new whole life policy? No - I no longer need life insurance. But it makes more sense at this point to keep the one I have than to cash it in and invest the proceeds in bonds paying 3% that have more credit risk and much more interest rate risk than my policy.

NML is a great company - one of the best in the business - so if your policy is generating a decent return then keep it and consider it part of your fixed income allocation. If not, then cash it in and reinvest the proceeds.

[2B]

As pb4uski points out you may have some favorable interest rate provision in your policy. If it's old enough you may have a high minimum guaranteed interest rate that currently works in your favor. If so, you should continue to monitor the return against other fixed income alternatives. Our current interest rate environment will not last forever.

I plugged your numbers into my financial calculator and you have a negative 0.8% return. If I make a deduction of $50/month for my guess of what a 30 yr old male would pay for a level term policy, it now has a negative 0.67% return. These numbers are rough but whole life is really cheap for 30 year olds so $50/month is probably high.

It's highly unlikely that your initial purchase of whole life was better than buying term and investing the rest. Unless you have a favorable minimum interest rate (which I doubt), don't "wait to break even" and continue to lose more money.

You are clearly helping the profitablility of Northwestern Mutual which is in my index mutual fund. I would like to heartily thank you for this contribution to my financial well being.

[growing_older]

Quote:

So very poor performance on it as an "investment" (facepalm!). The question is: should we wait till the net cash value catches up to the investment (ie., atleast get a 0% return) or take it out now and lose 18k each.

You cannot change retroactively what you paid for the poor return you received. You can however calculate how much it will cost you in premiums to get to the point you suggest of cash value equals premium paid. You will need a POSITIVE return to do so, because you will be pumping in new premiums. In all likelihood, your return on incremental dollars paid in will still be so low, that you will be better off investing them in some other investment, but it should be possible to calculate this.

Your policy is with a good company. If you intend to switch to term, you should get that in place BEFORE you cancel this one. It is almost never a good idea to throw more money into a poor investment to try to "get back" some of what was lost.

[pb4uski]

Quote:

Originally Posted by 2B As pb4uski points out you may have some favorable interest rate provision in your policy. If it's old enough you may have a high minimum guaranteed interest rate that currently works in your favor. If so, you should continue to monitor the return against other fixed income alternatives. Our current interest rate environment will not last forever. I plugged your numbers into my financial calculator and you have a negative 0.8% return. If I make a deduction of $50/month for my guess of what a 30 yr old male would pay for a level term policy, it now has a negative 0.67% return. These numbers are rough but whole life is really cheap for 30 year olds so $50/month is probably high. It's highly unlikely that your initial purchase of whole life was better than buying term and investing the rest. Unless you have a favorable minimum interest rate (which I doubt), don't "wait to break even" and continue to lose more money. You are clearly helping the profitablility of Northwestern Mutual which is in my index mutual fund. I would like to heartily thank you for this contribution to my financial well being.

While it may be tempting to look at your "return" since policy inception, it is really irrelevant - the past is the past and there is nothing you can do about that past performance. What is relevant to the decision is your options going forward, hence my advice to look to the performance of the policy for the last year and the next few years and compare it to other fixed income alternatives. The past is a sunk cost.

NML is a great company and if you hold your policy for a long time (25 years +) it will likely work out to be quite positive. I have a 35+ year old policy from another good company and the current cash value is equal to the premiums paid compounded at 5.07% and as previously mentioned if I died the return would be 8.29% tax free.

The good thing about NML and the other mutuals is to the extent that there is profitability in excess of what they need to retain to support the block it is returned to the policyholders in the form of dividends (and doesn't go to help 2B's index fund ).

[tryan]

Yes you made a mistake ... If you both work and have no kids why have insurance AT ALL?

You die she'll "move on" and vice versa.

[In-control]

I am a member of an organization that offers Insurance products to their members. I got a great deal on Long term care for my wife and I. They kept pushing Whole Life as an investment. I asked them where the $ was invested, letting them know that most of my $ was with VG.

They told me the $ is with VG as well. So then said why do I need you. The silence was loud!!!

I agree with most and do not look at insurance products as investments - you give up all the control and get so little back.

[ERhoosier]

+1 on making an assessment of your options from NOW, inc how "Adjustable" your CompLife policy is. As was said, often the high fees of whole life are front-loaded. Cancelling the policy will not get those fees back. What is the current rate of increase in your policy's cash value? Is your health still good enough to qualify for decent rates on term life? Those type questions should help you decide what to do.
FWIW- I have a 25+yr old WL policy that I realized too late was an expensive mistake, but I am holding on to it now as the dividends more than cover premiums plus cash value (tax-advantaged) returns (>2%) as a part of my ST "bond" AA.

[Al in Ohio]

Dave Ramsey Life Insurance Explained - Slams Whole Life - YouTube

I recommend Dave's simple comparison between Term and Whole Life. Best explanation around why it's so good for the Insurance Company and such a bad deal for you.

[Gulfer]

I know this post is older but I'm so glad I found it. I wish I had found it before we bought into North Western Mutual 4 years ago. Their comp life is such a rip off.
We finally dropped all policies with NWM. Now I can sleep at night.
Two main reasons went into dropping NWM:
1. I spent too many sleepless night worrying about the absolutely ridiculous premiums.
2. The agent we had was so unwilling to work with us to make any adjustments to our policies to fit our new budget.

I literally feel free again. We're really starting to see a difference in our debt pay down.

[CountryGal]

This one is good too and may be newer. We switched in our 20s and so thankful we did.

https://www.youtube.com/watch?v=c4lnaZJKGvU