Whole Life - cash in or hold?

[CardsFan]

DW and I bought policies in 1989. $50k each, with the purpose being to pay off the mortgage if one of us passed. I realize now that term life is the better way to go for insurance, but over the years we have maintained the policies.

Fast forward to today:
We are now retired (effective February this year) and my first thought was to cash in the policies, pay the taxes on the taxable portion at low rates, and move on. But as I reviewed the last several years of statements, the cash value is increasing at a little over 5% per year (after subtracting out that years payments). Since we do not need the cash (and probably have more in cash than we should), I am now think we should keep and maintain the policies as part of "cash" holdings. 5% is far better than we could get with a CD.

A few more pieces of data:
- Ages are 60/61
- as an "investment" I calculate we have received about a 4% ROR per year, which was better than I thought it would be.
- Insurance values of the policies have increased to about $70k each
- We have no other life insurance, and don't think we really need it.
- cash values are $29k and $23k (higher for me because I pay a higher premium as a male)
- premiums are about $1k per year total for the two. Planned WR is about 3.2% and this cost is included in our budget.
- current AA is about 65/25/10. I intend to lower the equity portion, so if we cashed out and re-invested it would go into bonds

Any thoughts on this? Is my logic flawed?

Thanks in advance for your insight.

 

[RobbieB]

You should be at the point where you don't have to pay premium anymore if you don't want and still be stacking cash.

But if you are making 5% that's a good return. Pop's had a couple of policies that paid into an account that I can write checks on to get the dough. That account is paying 2.5%. The dough is still there -

 

[wmc1000]

About 4 years ago I eliminated annual payments and use cash value and dividend increases to pay for the polices. Last years cash value increase after all costs was close to 5%.

 

[CardsFan]

RobbieB and wmc1000 thanks for the quick responses. Looking at the policy statements, the annual dividend is a little more than the annual premiums, so that could work, though I think the returns will be closer to 3% without them. Either way, it does not seem to make sense to cash out until short term CD returns exceed 3% at least. I will probably let it roll for another year and re-evaluate.

 

[pb4uski]

Similar situation here... since I don't "need" the insurance but they return ~4% I keep mine as a bond//CD substitute as part of my fixed income portfolio.. good interest rate, no interest rate risk, minimal credit risk...much better than a long term treasury... plus if I keep them until I die the death benefit is tax free. My premium is ~$21/month and has been on autopay for over 20 years... out of sight... out of mind other than when I get my annual policy statement.

 

[Sunset]

You should be at the point where you don't have to pay premium anymore if you don't want and still be stacking cash....

+1
I had a policy and did this, the divs paid the premium so I reduced my expenses, I kept it for years like this, no cost insurance with value.

Later the company went public, and as a whole life owner, I got shares in the company (weird right!) , I ignored them for a year and they had doubled in value, so I sold them.
I was pretty pleased with it all.

 

[DrRoy]

5% is great. If that is real then hang on to it.

 

[pb4uski]

Similar situation here... since I don't "need" the insurance but they return ~4% I keep mine as a bond//CD substitute as part of my fixed income portfolio.. good interest rate, no interest rate risk, minimal credit risk...much better than a long term treasury... plus if I keep them until I die the death benefit is tax free. My premium is ~$21/month and has been on autopay for over 20 years... out of sight... out of mind other than when I get my annual policy statement.

Just took a closer look at my whole life policy. After factoring in premiums but giving no value to the value of insurance coverage, the cash value grew 4.05% in 2016 and 4.95% since I purchased it in 1977. If I cashed out today and paid the taxes at 15%, my after tax return would be 4.53% ignoring any value of life insurance coverage. If I die and my beneficiaries get the death benefit tax-free, the after-tax return is 7.55%.

 

[CardsFan]

Just took a closer look at my whole life policy. After factoring in premiums but giving no value to the value of insurance coverage, the cash value grew 4.05% in 2016 and 4.95% since I purchased it in 1977. If I cashed out today and paid the taxes at 15%, my after tax return would be 4.53% ignoring any value of life insurance coverage. If I die and my beneficiaries get the death benefit tax-free, the after-tax return is 7.55%.

I didn't think about calculating the return on the life insurance. With the additional paid-up insurance it calculates to 9.9% per year! And the insurance value is growing at 2.5% per year.

So, while not a real smart move to buy this 27 years ago, it seems like its worth keeping now.

 

[UpAnchor]

I have one of those old whole life policies as well and haven't paid premiums out-of-pocket for 7 or 8 years. A few years ago the agent-with whom I have only this one policy-started contacting me to convince me that he had some "attractive alternatives" to this policy. I told him to send me the pertinent details.

He sent me a couple of pages with certain columns redacted such that I really couldn't draw any meaningful comparison. After my prodding he provided more info but still not enough. On the third try he sent me something slightly better which I took to my main agent with whom I've had auto, term, umbrella, etc. for over 30 years and whom I highly trust.

He and an associate looked over my existing policy along with what I had for the "attractive alternatives" and-looking over his glasses-said, "You may want to hold onto this one. There's no way we could write anything close to this today!" He then went so far as to offer, "If he's trying so hard to provide you with an attractive alternative, you have a right to wonder why he's trying to get you out of your existing one."

Now the agent for the whole life policy is someone I've never met and whom I wound up with after two or three mergers/acquisitions. But I don't guess I care at this point. Years can go by without hearing a peep from him so I just check my death benefit and growth of cash value each year at statement time and file it away. I'm old enough now that I see no reason not to hold onto it the rest of the journey or until I can get a meaningfully better return on my fixed income, whichever comes first.

 

[pb4uski]

I didn't think about calculating the return on the life insurance. With the additional paid-up insurance it calculates to 9.9% per year! And the insurance value is growing at 2.5% per year.

So, while not a real smart move to buy this 27 years ago, it seems like its worth keeping now.

That is exactly where I'm at... I'm not sure it was the best thing to do in 1977 and I would recommend to others to buy term and invest the difference (if they have the discipline to do so) but in retrospect it wasn't a huge mistake.

 

[Independent]

Similar situation here... since I don't "need" the insurance but they return ~4% I keep mine as a bond//CD substitute as part of my fixed income portfolio.. good interest rate, no interest rate risk, minimal credit risk...much better than a long term treasury... plus if I keep them until I die the death benefit is tax free. My premium is ~$21/month and has been on autopay for over 20 years... out of sight... out of mind other than when I get my annual policy statement.

+1

If I surrender now, I pay taxes on the gain. If I keep it until I die, my wife or children will get the death benefit tax free.

When I look at the annual increase in CV and death benefit, the rates look okay.