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My permanent life insurance policy
Old 11-16-2013, 06:20 PM   #1
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My permanent life insurance policy

In 1974 I bought a permanent life insurance policy (our first child was born that year).


Iíve been paying $384 a year to keep the policy active.

On my latest insurance statement (11-13) it has this information:

INSURANCE COVERAGE:

Basic policy coverage: $20,000
This Yearís Paid Up Additional Coverage: 2,841
Prior Yearsí Paid Up Additional Coverage: 47, 832
Total Coverage: $70, 673

FINANCIAL INFORMATION:

Basic Policy Cash Value $12,776
This Yearís Paid Up Additional Coverage $ 2,144
Prior Yearís Paid Up Additional Cash Value $36,100
Net Cash Value $51,021

I havenít spoken to the insurance salesman since 1974, so Iíve pretty much have forgotten what he told me about this policy, except that if I loved my wife and child that I do need to pay the insurance company $384 every year. I asked if I could get a discount if I were only fond of my wife and child. No discount. (Iím terrible at negotiating).

Iíd appreciate if some of you would comment on what I have been doing for the last 39 years (re: this policy) and how well or poorly Iíve done with this policy. Feel free to start with the good news.
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Old 11-16-2013, 07:34 PM   #2
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One suggestion check the policy and see what going to a paid up policy would leave you in the way of an original death benefit? This would not affect the paid up policy amounts, nor dividends. Since your kids are now of an age where they should be able to support themselves (the oldest would be 40 this year from your info), you might go to a paid up policy, and just keep the policy to pay final expenses.
Note that whole life participating policies tend to work best if you keep them a long time such as the 40 years you have in with this one.
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Old 11-17-2013, 03:51 PM   #3
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Do you currently need the $70K in life insurance coverage? If so keep it (use the annual dividends to pay the premium instead of buying more insurance). If not, consider cashing it in.
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Old 11-17-2013, 04:17 PM   #4
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I have a similar situation.

Figure it this way, over that 39 year period you have paid $14,976 in premiums. If you put your $384 annual premiums in a bank account that paid 5.64% for 39 years you would have $51,021 today so totally ignoring any value of life insurance coverage for the last 39 years, you have earned a 5.64% annual return. (5.00% after-tax if you cashed out now and have a 20% marginal tax rate).

Plus, you have had "free" insurance coverage for 39 years. If you die tomorrow, the return would be 6.97% after-tax since the death benefit would be tax-free.

I would suggest that you also look at what last year's "return" was by taking:

[51,021 current CV/(PV CV + 384/2)]-1 (assumes you pay the $384 over the year rather than as one check).

That is the current rate of "interest" that you are receiving ignoring the value of the life insurance coverage. Unless you have access to fixed income investments that pay more with no interest rate risk and minimal credit risk (assuming that the carrier has good ratings) the I would probably keep it and think of it as being part of my fixed income allocation. That is what I do.

Mine has paid 5.07% since inception in 1977 and 4.65% last year, so I'm still paying premiums. If I were to die tomorrow, DW would receive tax-free death benefit and the IRR comparing the tax-free death benefit to premiums paid would be 8.29% after tax and would be equivalent to 9.76% assuming a 15% marginal tax rate. Not bad IMO.
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Old 11-20-2013, 02:37 PM   #5
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I'm no insurance expert (although I probably think about such things more than the average person -- or more than is mentally healthy), but I think you might have a pretty good deal here. $384 a year for $70K in life insurance probably beats what you could find in a comparable term policy. Some would probably argue that you only really have about $19K in insurance -- the difference between the total coverage and the cash value. But your cash value is probably performing pretty good as a fixed income surrogate for your overall investment allocation. If you dislike continuing to pay the premium, I would second the suggestion to find out much permanent coverage you could obtain by going to a fully paid up status. If life insurance is no longer an issue for you, this might be a nice little fund (at least a starter) for paying for a long-term care policy, if you don't have one yet. I understand it's possible to arrange for tax-free transfers from an insurance cash value to pay for LTC premiums, although I'm not sure of all the details and difficulties involved.
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Old 11-21-2013, 02:56 PM   #6
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Quote:
Originally Posted by pb4uski View Post
I have a similar situation.

Figure it this way, over that 39 year period you have paid $14,976 in premiums. If you put your $384 annual premiums in a bank account that paid 5.64% for 39 years you would have $51,021 today so totally ignoring any value of life insurance coverage for the last 39 years, you have earned a 5.64% annual return. (5.00% after-tax if you cashed out now and have a 20% marginal tax rate).

Plus, you have had "free" insurance coverage for 39 years. If you die tomorrow, the return would be 6.97% after-tax since the death benefit would be tax-free.

I would suggest that you also look at what last year's "return" was by taking:

[51,021 current CV/(PV CV + 384/2)]-1 (assumes you pay the $384 over the year rather than as one check).

That is the current rate of "interest" that you are receiving ignoring the value of the life insurance coverage. Unless you have access to fixed income investments that pay more with no interest rate risk and minimal credit risk (assuming that the carrier has good ratings) the I would probably keep it and think of it as being part of my fixed income allocation. That is what I do.

Mine has paid 5.07% since inception in 1977 and 4.65% last year, so I'm still paying premiums. If I were to die tomorrow, DW would receive tax-free death benefit and the IRR comparing the tax-free death benefit to premiums paid would be 8.29% after tax and would be equivalent to 9.76% assuming a 15% marginal tax rate. Not bad IMO.
+1 I did the same math on my policy and, although mine is only paying 3.65%, it is worth continuing.
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Old 11-21-2013, 07:22 PM   #7
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Quote:
Originally Posted by pb4uski View Post
I would suggest that you also look at what last year's "return" was by taking:

[51,021 current CV/(PV CV + 384/2)]-1 (assumes you pay the $384 over the year rather than as one check).

That is the current rate of "interest" that you are receiving ignoring the value of the life insurance coverage. Unless you have access to fixed income investments that pay more with no interest rate risk and minimal credit risk (assuming that the carrier has good ratings) the I would probably keep it and think of it as being part of my fixed income allocation. That is what I do.
+1

I don't care about what I've earned since the issue date, just what I'm currently getting. This math seems reasonable to me. When I did it I my policy, I was surprised that I was getting a good rate compared to alternatives. I didn't need to think about the death benefit to decide to keep it.

However, if you want to push this further, it looks like your dividend is more than enough to pay the premium. You could change dividend options if it just bugs you to write the check.
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