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Surrender Universal Life Policy?
Old 12-04-2018, 05:44 PM   #1
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Surrender Universal Life Policy?

After a year of lurking this site and increasing my knowledge, my wife and I finally fired our financial advisor of 6 years. Our entire portfolio is now safely self-managed and diversified at Fidelity with low cost index funds. Gone are the high fees and commissions. It is a humbling experience to realize that someone that you trust as an advisor and fiduciary is actually out for their own self-interest. Which brings me to the last piece of the puzzle. Our ex-CFP sold us a Eclipse Protector Indexed Universal Life Policy. I now understand that this was a bad investment and an expensive insurance policy that we don't want and don't need. Likely the most expensive lesson of my life. I'd like some insight as to how to move forward.

My wife and I have a Household income of $200,000 per year. I am 46 years old and my salary is the main source of income. My wife is 42 years old and works part time. We have $1.3m in Roth's, 401K, and brokerage accounts which is well diversified in low cost index funds. Our mortgage is paid off. We have a sufficient emergency fund in cash. We are maxing out our investments with $50K-$70K per year. We have no children nor plans for any dependents of any kind. We live off of a budget of less than $75,000 per year. Hope to retire early in 12 years at 58 years old.

The policy is a Eclipse Protector Indexed Unviversal Life Policy. Face amount is $500,000. Premium is $5000 per year. I have been paying in for exactly 5 years. Current accumulation value is $22,000. Current surrender value is $12,000. Surrender charge today is $10,000. Surrender charge in 4 years from today is $6000. Surrender charge in 6 years from today is $4000. The fees are very high. The returns are capped.

From everything that I have gathered, there is absolutely no reason that I should have been sold this Eclipse Protector Indexed Universal Life Policy other than to line my ex-CFP pockets. Please offer some insight on these options or offer new ideas.

1) Surrender the policy now and take the huge hit. Take the $5000 per year that I was paying on premiums and invest that into a three fund portfolio of index funds. Purchase a term policy.

2) Continue to pay the $5000 per year on this policy for a period of time and then when the accumulation value increases and the surrender charge decreases to a point in which it makes more sense to surrender. This seems like throwing good money after bad. I have not been able to make the math work out on this option but maybe someone can enlighten me.

3) Do a 1035 Exchange to an annuity. Either keep the annuity for a period of time or surrender the annuity and claim the loss.

4) Keep the Universal policy and keep paying the $5000 per year

I would appreciate any insight or suggestions on how to best move forward with or without this Universal Life Policy.
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Old 12-04-2018, 06:09 PM   #2
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Keep in mind that your loss at this point is not $13,000 because $500k of life insurance coverage for 5 years would cost something, even with affordable term insurance.... probably a couple thousand.

Even though this product was probably not a good fit for you, Minnesota Life is a good company IMO. You might call them and tell them that you are a policyholder and were mis-sold an Eclipse protector policy and would like to know what your options are... including what happens if you just stop paying premiums. Also ask what conversions options are available, including converting to paid-up life insurance. Be sure to use the word "mis-sold"... that is a key word that will likely escalate your situation to more seasoned representatives. Above all, be calm.

How much life insurance do you think you need?
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Old 12-04-2018, 06:14 PM   #3
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If I were in your shoes, I would do option #1, with a few comments:

1. Make sure you actually need insurance before buying the term policy. If your wife can live on $50K if you die then she is already FIRE (don't tell her, though! ).

2. If you decide you need it, buy the term policy first, then cancel the UL policy so you remain insured the entire time.

3. You've already taken "the huge hit". You took it when you were sold the policy 5 years ago. Maybe read up on "sunk cost fallacy" to help salve the wounds a bit and confirm your thinking about how to move forward.

Note that if you get back any of your $12K in cash surrender value, it will be tax free because it is less than the premiums you paid in. I guess you'll get $2K, because of the $10K surrender charge.

If you plow the saved premiums into taxable investments you'll recoup your loss on this purchase pretty quickly I think.
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Old 12-04-2018, 06:15 PM   #4
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Thanks for the response PB4. I didn't think to contact Minnesota Life directly and pleading my case. I'll look into that.

This policy was sold to me as an "investment" since I am already maxing out everything else.

I am considering a 20 year $300k term policy if I decide to get out of this Universal Policy.
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Old 12-04-2018, 06:19 PM   #5
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....I guess you'll get $2K, because of the $10K surrender charge. ...
SC521, I'm pretty sure that the $12k CSV is after the $10k of surrender charge.

OP paid in $25k, account value is $22k not sure how it could be so low given the market over the last 5 years but that's what it is)... less $10k surrender charge is $12k CSV.
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Old 12-04-2018, 06:23 PM   #6
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Thanks for the response PB4. I didn't think to contact Minnesota Life directly and pleading my case. I'll look into that.

This policy was sold to me as an "investment" since I am already maxing out everything else.

I am considering a 20 year $300k term policy if I decide to get out of this Universal Policy.
How much is the 20 year term policy? From what you told us it doesn't seem like you need that much life insurance coverage.... if you get "hit by a beer truck" it sounds like a conservative withdrawal rate on the $1.3m of assets and your DW's part-time work will come close to covering her needs at $75k a year.
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Old 12-04-2018, 06:23 PM   #7
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Thanks SecondCor. I believe the Surrender Charge comes off the Accumulation Value and therefore I would be paid $12 if I surrender now.

I understand the
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Old 12-04-2018, 06:25 PM   #8
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At first blush it looks like the Eclipese was a more suitable policy for your situation.

http://shawamerican.com/pdfs/mnl/min-1.pdf
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Old 12-04-2018, 06:29 PM   #9
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How much is the 20 year term policy? From what you told us it doesn't seem like you need that much life insurance coverage.... if you get "hit by a beer truck" it sounds like a conservative withdrawal rate on the $1.3m of assets and your DW's part-time work will come close to covering her needs at $75k a year.
I got a few quotes for $30K policy 20 year term and all came back at around $400 per year. That may be overkill and so I might lower that term amount a bit. I also have another term policy through my work for $800k but that only covers me while I'm still employed.
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Old 12-04-2018, 06:31 PM   #10
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At first blush it looks like the Eclipese was a more suitable policy for your situation.

http://shawamerican.com/pdfs/mnl/min-1.pdf

Water under the bridge now. But maybe that can help someone else
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Old 12-04-2018, 06:32 PM   #11
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On the last part, it looks like your need for life insurance is declining rapidly as your assets grow through contributions and return and you will soon have no need for life insurance... so unless your employment prospects are shaky that $800k through work may be enough.
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Old 12-04-2018, 06:32 PM   #12
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Water under the bridge now. But maybe that can help someone else
Not necessarily, you can mention that when you talk with Minnesota Life about being mis-sold.
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Old 12-04-2018, 06:44 PM   #13
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Not necessarily, you can mention that when you talk with Minnesota Life about being mis-sold.
How does that work exactly? These products are known for having very high fees and low returns, and are generally pushed by sales people looking to earn a commission. What differentiates a legitimate mis-sold situation versus the generic sales person who sold a policy to someone that didn't understand how bad it is and trusted the sales person to look out for their best interests?
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Old 12-04-2018, 06:50 PM   #14
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Can you add a LTC rider? You’ll probably start shopping for LTC coverage at some point and you’ll see how expensive those are. With a rider you can pull 90% of the face value out for care. If you don’t, you still have tax free cash you can access for retirement.
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Old 12-04-2018, 06:51 PM   #15
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How does that work exactly? ...
OP stated:
Quote:
Originally Posted by SoaringEagle View Post
.... This policy was sold to me as an "investment" since I am already maxing out everything else.
in other words, the principal purpose was non-qualified tax-deferred savings.

The Eclipse Protector description indicates:
Quote:
Death benefit-focused for individuals seeking affordable permanent coverage with the potential for some accumulation
The Eclipse description indicates:
Quote:
Accumulation-focused for individuals seeking permanent coverage with an
opportunity for higher return on cash value
Since the OP's principal objective was non-qualified tax-deferred savings the Eclipse would have been the better product for him. Given the difference in the surrender charge periods I'm betting that the Eclipse Protector pays a much higher commission and that is why the ex-CFP sold him the Eclipse Protector rather than the Eclipse.
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Old 12-05-2018, 12:29 AM   #16
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Thanks SecondCor. I believe the Surrender Charge comes off the Accumulation Value and therefore I would be paid $12 if I surrender now.
Ahh, that makes sense. Thanks.

My Dad has a bunch of whole life insurance policies through NWML. After comparing them to his taxable investments over the past 10 years, I personally don't plan on buying any kind of life insurance policy for investment reasons.(*) I'd rather just do LTBH of index stock funds, which is pretty nearly equivalent to tax deferred anyway without the surrender charge and the life insurance company as a middleman.

It sounds like pb4uski knows more about this area than I do, though, so I'd weight his advice more heavily than my own.

(*) One reason he bought some of the life insurance was to pay any estate taxes that might be due, in order to prevent selling assets if he should happen to die in a bear market. I think it would be a more efficient way to meet this need by just holding a little bit higher AA in bonds.
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Old 12-05-2018, 01:25 AM   #17
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Retired CLU here....
First of all, how much income does your wife need if you "check out"?. Much like figuring your retirement income needs, determine what she will need. Next, How much cash is needed to make that income?

If you determine she needs $500k, for example, deduct your investable assets (no home value), and your employer life insurance. (Check to see if it can be "converted" at your severence). Purchase term life for the difference between $ needed and insurance/assets provided. Project "break even" period of assets exceeding income projections and buy a term policy for that time period: 10 year, 15 year, etc. At that time, you should not NEED life insurance.

(Remember, if you pay the premium directly (not an employer paid policy) your death benefit should not be taxed when paid to your beneficiary. That is a valuable consideration....)

UL has a term insurance element inside the policy (called mortality rate charge). That charge is deducted from your payment or cash value each month. It most likely shows up on your annual statement. Check that charge, plus any policy fees against the cost of a replacement term insurance policy (Ignore the premium payment). In my opinion, most modern term policies are cheaper than the internal mortality cost of a UL policy.

UL and whole life policies were really never designed for "forum type readers" IMHO. We are most likely going to "invest the difference" and should buy term. However, many who "cannot save money" may be well served with a UL or whole life plan that offers a more level premium over the life of the policy. At some point as we age, term insurance will be very expensive. Spendthrifts may let a term policy drop at that time-whole life/UL helps prevent that.
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Old 12-05-2018, 06:42 AM   #18
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.... My Dad has a bunch of whole life insurance policies through NWML. After comparing them to his taxable investments over the past 10 years, I personally don't plan on buying any kind of life insurance policy for investment reasons.(*) I'd rather just do LTBH of index stock funds, which is pretty nearly equivalent to tax deferred anyway without the surrender charge and the life insurance company as a middleman. ....

(*) One reason he bought some of the life insurance was to pay any estate taxes that might be due, in order to prevent selling assets if he should happen to die in a bear market. I think it would be a more efficient way to meet this need by just holding a little bit higher AA in bonds.
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..... UL and whole life policies were really never designed for "forum type readers" IMHO. We are most likely going to "invest the difference" and should buy term. However, many who "cannot save money" may be well served with a UL or whole life plan that offers a more level premium over the life of the policy. At some point as we age, term insurance will be very expensive. Spendthrifts may let a term policy drop at that time-whole life/UL helps prevent that.
SC521, what you are referring to is BTID, "buy term and invest the difference"... as bruce points out few people have the financial discipline to actually do it and that is where over a long period of time a whole life or fixed UL policy can be attractive. And whole life is commonly used to fund estate taxes as your Dad did or partnership/business succession... often bought by farmers or small business owners.

I bought a small whole life policy when I was 21. The agent was a family friend of my parents. I bought the policy principally for the death benefit and to ensure that I could later get life insurance without the need for medical underwriting.... the policy allowed me to increase the face amount every so often without underwriting but I never did so.

The policy was issued on 6/1/1977 with a monthly premium of $19.83. My most recent policy anniversary was 5/31/2018. At that time the CSV was $32,533.46 and the death benefit was $61,180.

The IRR of the cash value growth is 5.06%... in other words, ignoring any life insurance protection and considering the policy simply as a financial instrument, if I deposited $19.83 a month for 41 years and it earned 5.06% per annum in that 41 years it would grow to $32,533.46. And this of course, ignores the value of the life insurance protection that I received for those 41 years so the actual value received was higher than 5.06%.

Further, if I got run over by a beer truck on 5/31/2018, my beneficiaries would have received $61,180 tax free. The after-tax "return" implicit in the cash outflows for premiums of $19.83/month and the $61,180 tax-free benefits is 7.3%.... and that is an after-tax return.... grossed up at a conservative 15% tax rate that would be a pre-tax equivalent of 8.6%. 8.6% is about the same as the return from a 60/40 portfolio over that same 41 years period... so not too shabby.

Subsequent to that whole life insurance purchase, I saw the light and thereafter decided to buy term and invest the difference, but I kept that small whole life policy since I had already paid a number of years of premiums and the monthly premium cost was low in relation to my growing income. Today I continue to keep it and consider the CSV as a bond equivalent. The net interest credited in the last policy year was 3.53%... pretty good for a financial instrument with no interest rate risk and negligible credit risk.

I guess my point is that while whole life has its downsides, if held for a long time the returns are not bad.
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Old 12-06-2018, 02:44 PM   #19
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After a year of lurking this site and increasing my knowledge, my wife and I finally fired our financial advisor of 6 years. Our entire portfolio is now safely self-managed and diversified at Fidelity with low cost index funds. Gone are the high fees and commissions. It is a humbling experience to realize that someone that you trust as an advisor and fiduciary is actually out for their own self-interest. Which brings me to the last piece of the puzzle. Our ex-CFP sold us a Eclipse Protector Indexed Universal Life Policy. I now understand that this was a bad investment and an expensive insurance policy that we don't want and don't need. Likely the most expensive lesson of my life. I'd like some insight as to how to move forward.

My wife and I have a Household income of $200,000 per year. I am 46 years old and my salary is the main source of income. My wife is 42 years old and works part time. We have $1.3m in Roth's, 401K, and brokerage accounts which is well diversified in low cost index funds. Our mortgage is paid off. We have a sufficient emergency fund in cash. We are maxing out our investments with $50K-$70K per year. We have no children nor plans for any dependents of any kind. We live off of a budget of less than $75,000 per year. Hope to retire early in 12 years at 58 years old.

The policy is a Eclipse Protector Indexed Unviversal Life Policy. Face amount is $500,000. Premium is $5000 per year. I have been paying in for exactly 5 years. Current accumulation value is $22,000. Current surrender value is $12,000. Surrender charge today is $10,000. Surrender charge in 4 years from today is $6000. Surrender charge in 6 years from today is $4000. The fees are very high. The returns are capped.

From everything that I have gathered, there is absolutely no reason that I should have been sold this Eclipse Protector Indexed Universal Life Policy other than to line my ex-CFP pockets. Please offer some insight on these options or offer new ideas.

1) Surrender the policy now and take the huge hit. Take the $5000 per year that I was paying on premiums and invest that into a three fund portfolio of index funds. Purchase a term policy.

2) Continue to pay the $5000 per year on this policy for a period of time and then when the accumulation value increases and the surrender charge decreases to a point in which it makes more sense to surrender. This seems like throwing good money after bad. I have not been able to make the math work out on this option but maybe someone can enlighten me.

3) Do a 1035 Exchange to an annuity. Either keep the annuity for a period of time or surrender the annuity and claim the loss.

4) Keep the Universal policy and keep paying the $5000 per year

I would appreciate any insight or suggestions on how to best move forward with or without this Universal Life Policy.
Even with a 1035 exchange, you pay the surrender charge.

The way a IUL policy works is charging the cost of insurance to your cash value. You probably can just stop paying premium and the policy will stay in force until the cash value can no longer pay the cost of insurance. This is probably a cheaper option than surrendering the policy and paying for term life right away. You need to find out the cost of insurance each month and have the carrier run an in force illustration.

PM me and I'll help you out.
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Old 12-06-2018, 08:51 PM   #20
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Your analysis may be different than ours, but we bought a VUL policy and paid into it for several years until we realized that the fees were so high that the long-term tax savings weren’t enough to justify the policy costs. I don’t recall what our surrender charge was, but we got out of it ASAP and invested the proceeds in our taxable portfolio of equities. No regrets, except for buying it in the first place.
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