Life Insurance - What would you do?

[fireorbust]

We Fired last year after selling our business. While I owned the business, I kept 1.5m of life insurance (600k whole life / 900k term). I did that to protect my wife incase I passed so she wouldn't have to rely on trying to sell the business.

Now that the business is behind us, we have plenty saved for retirement which supports our modest withdrawal rate.

So here is the delima. I'll keep the term policies until they expire when I hit 65. The whole life has a cash value of 40K. We no longer pay any premiums on it and the cash value will pay the cost of insurance until I'm about 70.

Our kids are raised and on their own, our health is good and we have zero debt. House is paid for, but would like to upgrade in the next year or so.

How many of you would cash out the whole life and pocket the 40K or would you let it ride to keep the 600K whole life policy in place?

 

[pb4uski]

I have an old whole life policy and no longer need the life insurance... but the interest credited on the cash value has been over 3%... it was over 5% in 2012 and has been drifting lower commensurate with the decline in interest rates.

I figure where else can I invest in an decent investment grade credit at over 3% with no interest rate risk... so I'm keeping the policy as somewhat of a bond substitute. In fact, I'm still paying premiums but they are only $20/month.... and then since it is likely that we'll never need to tap this asset when I pass then DW or DS/DD will get the tax-free death benefit.

Are you saying that your CSV is $40k and the death benefit is $600k? If so and if you can keep the $600k face amount in force without any cash outflows and you don't need the money then I would probably keep it for your heirs.

To get an idea of what it is earning, use this tool: http://www.moneychimp.com/features/portfolio_performance_calculator.htm using beginning and ending CSV for balances and premiums paid as additions.

 

[njhowie]

70 is relatively young and the likelihood is you'll still be with us at that age.

So, I'd take the $40k.

 

[pb4uski]

How much are the annual premiums?

 

[CRLLS]

If you no longer have the need for life insurance, why let the cash value pay the premiums. Tha is unless you are planning to pass on before the policy expires. Read your whole life contract very carefully. Don't ask a representative, They typically don't know your particular policy. Older policy's may have a guaranteed monthly payment option that is greater than cashing in and buying an immediate annuity.

To answer your question, unlike pb4uski, I did convert my policy per the above para. The monthly check is about 20% higher than any immediate annuity would have been for me. If you heirs already are accounted for, why not take it for yourself? Any money from other sources is just that much less than I need to withdraw from assets.

 

[gravy train]

Take the money and run!

 

[fireorbust]

How much are the annual premiums?

Premiums are 4k/yr. We are not planning to pay them any longer. That means the cash value will pay the cost of insurance until age 70 or so. Right now, CSV is about as high as it will get. Every year we let it ride, the cost of insurance goes up and the net cash value will go down.

Like I said in original post, I'll keep 900K of term in place should I kick the bucket in the next 10 years.

 

[fireorbust]

Like I told the DW, if I knew when I was going to croak, this would be pretty easy to figure out.

 

[jazz4cash]

It sounds like you no longer need the insurance and if that's case, I would cash it in. You certainly don't need as much as before.

 

[rk911]

if your nest egg is sufficient to support either of you upon the other's death then i would cash in the whole life and invest the proceeds. you will undoubtedly get a better ROI.

 

[Cayman]

Take the 40k and invest it. Or spend it on something other than life insurance. Right now, it sounds like you're paying for a policy that you don't need.

My husband was the primary $ earner. When we became FI a few years before he retired, I canceled the multi $M life insurance policy I carried on his life. Saved us thousands.

 

[EastWest Gal]

I wonder why you want to keep paying for the term insurance as well. Being FI is your life insurance.

 

[pb4uski]

Premiums are 4k/yr. We are not planning to pay them any longer. That means the cash value will pay the cost of insurance until age 70 or so. Right now, CSV is about as high as it will get. Every year we let it ride, the cost of insurance goes up and the net cash value will go down.

Like I said in original post, I'll keep 900K of term in place should I kick the bucket in the next 10 years.

I assume that $4k/yr is the whole life premiums? How much are the term premiums?

If you are FI then I don't see the logic in keeping the term insurance until you are 65... you're paying premiums for that right? and if you have enough, then you have enough and don't need the insurance.

If the whole life grows at a decent rate, I would keep it as part of your fixed income asset allocation and use the money that would have been used to pay for term insurance premiums for whole life premiums so the $40k will grow at a more attractive risk-adjusted rate than a bond and when you kick the bucket your heirs will get the $600k tax-free death benefit. In the interim, if the SHTF then you can always tap the CSV through loans or surrender.

Another thing to consider is, if you did surrender the whole life policy, what would your gain be? and what would it cost you in taxes (at ordinary tax rates not long-term capital gain tax rates)?. The gain is the CSV less the premiums that you have paid and the tax would be the gain times your ordinary marginal tax rate.

 

[pb4uski]

70 is relatively young and the likelihood is you'll still be with us at that age.

So, I'd ....

cancel the term insurance.

 

[HarveyS]

When I reached FI I cancelled all my life insurance since I no longer needed it. Yes, the idea of a tax-free lump of money is appealing, but not at the cost the insurance companies were asking. In your shoes, I'd cash out the whole, and cancel the term.

 

[OldShooter]

It's really like any other purchase decision. Sunk cost and history are totally irrelevant.

If you had the $40K in hand today would you use it to purchase the future benefits promised by the insurance or would you spend it on something that is more desirable to you? Only you can say.

 

[pb4uski]

^^^ Make that $40k less the tax on the gain.

 

[OldShooter]

^^^ Make that $40k less the tax on the gain.

OK. I can always count on you to be my fact checker.

 

[LakeRat1]

Right or wrong, why keep the Life Insurance if you don't need it?? I no longer carry Life Insurance, not sure if that is good or bad...... I am curious

 

[Sunset]

OP - the business is sold, and you are FI.
Having life insurance is like a lottery ticket, except you only win if you die.

There is no longer any need for the life insurance, as there are no earnings to replace for a young spouse and children.

I would cash in.
Just last night DW said to me, she could buy life insurance, I told her we don't need it.

 

[pb4uski]

Right or wrong, why keep the Life Insurance if you don't need it??....

Because mine credits over 3% a year interest on the CSV and it is hard to get that over 3% elsewhere for money with no interest rate risk and negligible credit default risk.... and that is attributing no value at all to the life insurance coverage.

 

[CardsFan]

Because mine credits over 3% a year interest on the CSV and it is hard to get that over 3% elsewhere for money with no interest rate risk and negligible credit default risk.... and that is attributing no value at all to the life insurance coverage.

We are in the same boat. 2 WL (one for each of us) policies bought years ago. Were they a good deal at the time, probably not, but they were not as bad as I had suspected, when I ran the numbers.

Ours are now on auto pilot. Distributions pay for the annual cost, plus some added Life insurance. They are now about $28k cash value (each), or $75k benefit on death (each). Costs nothing to keep them, they are returning fair value, and the death benefit almost triples the value.

 

[pb4uski]

....Were they a good deal at the time, probably not, but they were not as bad as I had suspected, when I ran the numbers. ...

Ditto... I wouldn't buy whole life knowing what I know today and don't generally recommend whole life even though it is a good product for certain situations like estate planning, business succession, etc.

From 1977 to 2019, mine has returned 5% (IRR of premiums paid in relation to cash value) and if I were to pass a tad over 7% tax-free (IRR of premiums paid to tax-free death benefit). I can live with that mistake... sort of like when I skull an approach shot and it still ends up on the green... a good miss.