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What to do about cash value Life insurance?
Old 08-18-2019, 04:27 AM   #1
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What to do about cash value Life insurance?

I will be retiring in about 4 years and at that time will have quite a chunk of money in cash value life insurance. I'm not proud of that , and if i was smarter years ago I would have never agreed to it. But, here we are, and I need a little advice.

I can draw tax free income on that cash value for many years which was my original plan. However, as I have started getting into more and more dividend investing I wondered about taking out my cash value basis and investing in my dividend portfolio. My thought being I would not be depleting the dividend account but living on the dividends and holding stocks vs the slow decline of withdrawals on the cash value life insurance.

Is this just a judgement of tax equivalent yield between the two investments?
Thoughts?

Thanks in advance.
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Old 08-18-2019, 06:07 AM   #2
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Are you still paying premiums for this cash value insurance policy? That might make a difference on how to handle it. Also, do you still need the life insurance coverage?

"If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken"

Some of the proceeds could be taxable.
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Old 08-18-2019, 06:17 AM   #3
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Are you still paying premiums for this cash value insurance
Yes, at the moment I am still paying premiums, for another 2 years. Although I could stop at any time- so I am told. I understand that withdrawals above the basis have potential taxable consequences. The way this was pitched to me years ago by my "salesman friend" is that in retirement one draws monthly income to eventually exhaust the basis and then take policy loans which you never repay, and thus stay non taxable. A bit fuzzy to me- but that was the pitch.

The whole thing is confusing and frustrating, but I am stuck with it at the moment. Again , my crazy thought was do I pull out my basis lump sum , tax free at retirement and invest in dividend stocks or just do what my "salesman friend" suggested.
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Old 08-18-2019, 06:40 AM   #4
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It is not as simple as comparing dividend rate as stocks will have changing price as well as dividend. The life insurance may be more like a bond. Also look at the rating of the insurance company. The dividend from the life insurance could change.

One other option would be to do a 1035 exchange and get a low cost annuity to do dividend investing using MF. Check Schwab, Fidelity or vanguard for these annuities.

We still have a small joint whole life that we were sold when we were young. Ours was not sold for bank on yourself.

Be careful not to lapse the policy as if you do the withdraw scheme.
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Old 08-18-2019, 06:42 AM   #5
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I would do a tax calculation to determine if taking the entire cash value would be the best solution. Your health and need for permanent insurance is still a consideration. How much more death benefit than cash value is involved. I do not consider permanent life insurance an investment, but it could fill a need to protect your estate for a spouse or children. This is the part of the decision that is unknown for me. Think about how the decision will affect taxes and further estate planning. There is no simple answer at this point. There is much more risk for this money in the Dividend stock market, but you are already aware of that. Continuing to pay premiums if the coverage is not needed does not make sense to me.
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Old 08-18-2019, 07:59 AM   #6
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Originally Posted by NJSail View Post
I will be retiring in about 4 years and at that time will have quite a chunk of money in cash value life insurance. I'm not proud of that , and if i was smarter years ago I would have never agreed to it. But, here we are, and I need a little advice.

I can draw tax free income on that cash value for many years which was my original plan. However, as I have started getting into more and more dividend investing I wondered about taking out my cash value basis and investing in my dividend portfolio. My thought being I would not be depleting the dividend account but living on the dividends and holding stocks vs the slow decline of withdrawals on the cash value life insurance.

Is this just a judgement of tax equivalent yield between the two investments?
Thoughts?

Thanks in advance.
I have a whole life insurance policy that I purchased when I first got out of college at age 21. Like you, knowing what I know now I wouldn't recommend it but it hasn't been all that bad.

At this point, I view the cash value as a bond equivalent.... for the last policy year the IRR was 3.31%... which IMO isn't bad for a bond with negligible credit risk and no interest rate risk.

If I die tomorrow, my overall return (tax-free death benefit in relation to premium payments for 42 years) is 7.06%... not a bad risk-adjusted after-tax return. If I cash it in, pay the tax due on the inside build-up, my after-tax return would be about 4.67%. The difference is due to taxes and the difference between the death benefit and the cash value.

I still pay premiums, but they are only $20/month.

I probably should explore my settlement options, like converting it to a life annuity, but unless it was a joint life annuity with DW or a life annuity with a certain number of guaranteed payments I doubt that I would take the risk (not that I'm expecting to die soon but you never know).

So, I'm keeping it as long as it is paying more than 3% (which it is).... if the yield dips below that then perhaps I'll do something. On its current trajectory, it may well be sub 3% in a year or two.
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Old 08-18-2019, 08:19 AM   #7
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Maybe just keep it and your beneficiary will get the benefit tax free. It would be a nice inheritance some a loved one.

Correct me if I'm wrong but I do beleive they are tax free upon death??

Like pb4uski said, not all bad if looked at some of the advantageous they can offer.
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Cash Value Life Insurance
Old 08-18-2019, 08:31 AM   #8
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Cash Value Life Insurance

It seems to me your concern is more about not understanding how to use your cash value in retirement. It is very similar to having a Roth IRA - it is a source of tax free income. If you surrender the policy and take the cash value, you will lose the tax free benefit. If you want to learn more read a book called The Power of Zero by David McKnight, or consult a financial professional that you trust. I would suggest you work on being grateful for having lived long enough and being successful enough that you no longer are concerned about needing the Death Benefit in the policy to provide for your family in the event of your death, which I believe it the goal of taking out any insurance policy.
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Old 08-18-2019, 08:46 AM   #9
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Check by chance if the policy has a LTC rider. If that’s the case, a big chunk of the death benefit can be drawn on for LTC care.
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Old 08-18-2019, 09:33 AM   #10
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I would suggest you work on being grateful ..
Is that really necessary? How do you know I'm not grateful? How do you know I don't give thanks daily?

I find this forum tends to draw a lot of snarky comments. Not sure why, but it has happened enough times to turn me off.
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Old 08-18-2019, 10:22 AM   #11
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... Is that really necessary? How do you know I'm not grateful? How do you know I don't give thanks daily?

I find this forum tends to draw a lot of snarky comments. Not sure why, but it has happened enough times to turn me off.
NJ, give'em a break.... s/he's a newbie... first post. IIRC my first post irritated someone.
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Old 08-18-2019, 10:30 AM   #12
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Quote:
Originally Posted by NJSail View Post
Is that really necessary? How do you know I'm not grateful? How do you know I don't give thanks daily?

I find this forum tends to draw a lot of snarky comments. Not sure why, but it has happened enough times to turn me off.
You also got many helpful responses. Why not focus on those?
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Old 08-18-2019, 11:38 AM   #13
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Yes, thank you all for the helpful replies.
We are in the midst of an early downsizing move , and probably a bit testy.

I guess a good way to look at the Life ins. policy as suggested above, is like a Roth in that it is tax free income, and as a portion of my bond portfolio. Not a great investment, but not bad either.

Thx.
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Old 08-18-2019, 12:57 PM   #14
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Quote:
Originally Posted by NJSail View Post
Is that really necessary? How do you know I'm not grateful? How do you know I don't give thanks daily?

I find this forum tends to draw a lot of snarky comments. Not sure why, but it has happened enough times to turn me off.
I agree. What a jerk of a comment, totally unnecessary and nothing to do with your issue. And for others to even defend him/her...ugh.
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Old 08-19-2019, 05:00 AM   #15
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It was not my intention to be snarky or irritate anyone - my impression of your post but I realize that we don't know each other so my bad. I've been reading this site on and off for years, but this was my first attempt at a reply. Didn't mean to offend.
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Old 08-19-2019, 06:05 AM   #16
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FWIW, I have read a lot worse comments around here.... I didn't think it was that bad.
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Old 08-19-2019, 06:44 AM   #17
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NJSail, I also have a significant amount of cash value in 3 different VUL's. They have all performed very well, 100% invested in diversified equities. They've grown as well or better than my equity investments outside of the VUL's. They don't send me a 1099 every year and I have a large death benefit with very low mortality charges.


All that said, I wouldn't do it again. I no longer need the death benefit and if you look at the mortality charge it increases rapidly in one's later years, to the point that it may take most of the earnings just to cover the internal cost of the policy. This starts around age 70.


I thought of cashing it out, but be prepared, the gain is ordinary income, not LTCG.


I too thought of the 1035 exchange to a low cost annuity. I've also thought of lowering the death benefit every year to reduce the mortality charge expense. It is an efficient asset to be holding when one dies (keep your beneficiary up to date)


My dad had a UL policy he purchased in the 1980's when interest rates were in the teens. He had over $30,000 cash value in a $60,000 policy. As he got older the mortality expense almost ate it up and when he passed at age 90 there was only $1,500 cash value left, and he never missed a $300 monthly premium. If he had lived another 3 months the policy would have collapsed and canceled for non-payment.


My plans are to hold on for now since mortality costs are low and I don't need the money. If I need income in the future I'll visit my tax expert and decide if we should cash them in all at once and bite the tax bullet and reinvest the money, or do a 1035 exchange to an annuity. I don't want to be thinking too hard when I get older and make a mistake that could collapse the policy or end up having to cash in the policy after I've exhausted the tax free withdrawals.


Good luck to you.
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Old 08-19-2019, 11:00 AM   #18
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The one question I would ask is whether your health status has changed since you took out the policy. IOW are you now a significantly poorer risk due to change in health. If so, you might consider keeping the policy as now being a better "bet." I am considering the same thing. I can purchase from my old small business an in-force policy (with cash value) once used to cover a buy-sell agreement. The policy was not rated for health. Now that my health is poorer, the policy is potentially more valuable (to DW, heh, heh.) YMMV
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