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whole life insurance
Old 03-06-2007, 05:38 PM   #1
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whole life insurance

Can anyone familiar with how whole life policies work answer a couple of questions for me?

My FIL passed away recently and when going through his financial records we found two whole life policies (on him and my MIL, who is still living). From what we can see, he took loans against them (or the "loan" was generated when he skipped some premium payments) and the loan amount now seems to be higher than the cash value. Is this possible? I thought the policy would just cancel if you got to that point. The policies were taken out around 1970, if that makes any difference.

There is a contact agent on the statement who I'm sure will answer my questions, but I don't want to call him without knowing some of the answers, since I've never dealt with whole life policies.

Second question - in discussing this among family members, my BIL (age 30) mentioned that he has a whole life policy as well, and possibly plans to borrow against it later for his son's (age 3) college, or some such. I was shocked, as DH and I looked into whole life a few years ago and the only people with good things to say about it were the salespeople. I would never buy it. Is it as bad an investment as I thought, or might this work out well for him?
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Re: whole life insurance
Old 03-06-2007, 06:00 PM   #2
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Re: whole life insurance

The advantage of these whole life policies is that you can borrow against the cash value and get "tax-free" income. That's what the agents talk on and on about.

The downside is that the internal fees are usually very very high. usually the high fees and internal expenses wipe out any tax advantages.

As they say buy term and invest the difference.
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Re: whole life insurance
Old 03-06-2007, 07:24 PM   #3
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Re: whole life insurance

From my research years ago I concluded that whole life (and anything but term life) is a 100% total scam.
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Re: whole life insurance
Old 03-06-2007, 07:44 PM   #4
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Re: whole life insurance

Quote:
Originally Posted by WM
My FIL passed away recently and when going through his financial records we found two whole life policies (on him and my MIL, who is still living). From what we can see, he took loans against them (or the "loan" was generated when he skipped some premium payments) and the loan amount now seems to be higher than the cash value. Is this possible? I thought the policy would just cancel if you got to that point. The policies were taken out around 1970, if that makes any difference.
There is a technical, finacial term for your situation. Your have been scr*wed.

The loan must be repaid out of the estate although you can defer all of this until dear mom passes on in every state I've had experience with. Check with a lawyer because I'm not one. Why would they cancel the policy? They are still sucking fees out of it. The best part is that you may be liable for capital gains in the estate over it. What a tax benefit!

Did they sell your father an annuity? If he was scr*wed why didn't they kiss him too?

Quote:
Originally Posted by WM
Second question - in discussing this among family members, my BIL (age 30) mentioned that he has a whole life policy as well, and possibly plans to borrow against it later for his son's (age 3) college, or some such. I was shocked, as DH and I looked into whole life a few years ago and the only people with good things to say about it were the salespeople. I would never buy it. Is it as bad an investment as I thought, or might this work out well for him?
I have some swamp land in Florida that would be a great place for you or your BIL to retire to. Send me $150,000 (a real bargain at that price) and I will send you the deed to the property and I "promise" to let your borrow against the $1MM value of your land in 40 years to fund your retirement.

Did they kiss your BIL?

I owned one for several year. I paid a massive amount over what I could have bought term insurance for. When I finally woke up, it was worth a small fraction of what the original sales info said it would be. We can all be stupid. It's really only a question of how long we are.

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Re: whole life insurance
Old 03-06-2007, 10:49 PM   #5
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Re: whole life insurance

Quote:
Originally Posted by WM
Second question - in discussing this among family members, my BIL (age 30) mentioned that he has a whole life policy as well, and possibly plans to borrow against it later for his son's (age 3) college, or some such. I was shocked, as DH and I looked into whole life a few years ago and the only people with good things to say about it were the salespeople. I would never buy it. Is it as bad an investment as I thought, or might this work out well for him?
You and your wife are right. Whole life is NOT a good investment.
Will it work out for your BIL? Well, it depends on what you consider the alternative to be. If your BIL would not have had the disclipline to save any money except for the "forced" savings he accumulated in the cash value of this policy, then I guess you could say having it was better than nothing if it allows him to have money for his son's college expenses. He could easily have saved much, much more, though, if he'd bought term insurance and invested the difference in low-expense mutual funds held within a state-sanctioned 529 college savings plan. And, he'd pay no taxes on the gain.

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Re: whole life insurance
Old 03-07-2007, 06:58 AM   #6
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Re: whole life insurance

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Originally Posted by samclem
Whole life is NOT a good investment.
Hmmm, ok. Well, we have a good enough relationship that I can ask BIL about his investing strategies and whether he's compared other options like the 529. I think he was equally surprised to learn that we don't have a policy, since he considered it a basic foundation type of investment. But now that he's probably about 10 years into the policy, he's likely to lose a lot of money if he dumps it, right? So I don't really see him doing that. He is excellent at saving, so I'm sure he'll use the policy as planned rather than accidentally letting it lapse, etc., but it is too bad.

Quote:
Originally Posted by 2B

Did they sell your father an annuity?
Not that we found, but BIL's first suggestion for the insurance money (50K) that my MIL will get was to buy one! His second suggestion was to get her an account with some financial guy he's using, some system I haven't checked out yet but that I fear will involve excessive fees and trying to time the market. He's very pleased with it but I need to ask him if he's calculated his real returns.

Also, I'm kind of afraid to ask, but what about my MIL's policy? She also has a loan for more than the policy, and my FIL was still paying the premiums. Do we cash out of that? Or just stop paying premiums and let it sit till she's gone (she's only 62)?
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Re: whole life insurance
Old 03-07-2007, 10:06 AM   #7
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Re: whole life insurance

Sorry, I don't know about the "sunk cost" question and the least expensive way to get out of these whole life policies. When I dumped my Universal Life policy I ran the numbers and found it was cheapest to just cut my losses by canceling the policy and taking out the (meager) cash value. The cost of the true insurance component of this policy and the expenses on the investment portion were so high that it made no sense to keep paying it, regardless of the money I'd already spent. But, I think other types f insurance have other types of fee schedules. Other folks here have a better understanding of the intricacies of insurance, perhaps they'll chime in.

I agree with your fears--your BIL is likely comfortably surrounded by high-cost investments with folks taking his money and making reassuring noises. Your relationship with him may be great, but don't expect that you'll have an easy time discussing the options with him. As we've discussed here numerous times, it is exceedingly difficult to get people to change their investing ways, esp when a pack of parasites (with framed certificates on the wall, no less!) has latched onto them. Don't sacrifice your relationship with him in order to set him right. Now, your MIL is a different matter--I think you and yor wife should fight tooth and nail to help prevent her from getting sucked into high cost insurance or high cost investments.

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Re: whole life insurance
Old 03-07-2007, 11:04 AM   #8
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Re: whole life insurance

Yes, I will look up a little more general info on whole life policies, then just call the agent. Then I'll come back here to report

Regarding my BIL, I don't expect to "convert" him and won't try. I've read some of those threads. But since we're dealing with MIL's finances, it will be (sort of) straightforward to just compare costs and returns for our various ideas. If he is still excited about his financial guy, then he can bring the real numbers for what he's put in, plus fees, and see what kind of returns that works out to. Then we can compare with index or target retirement funds or such. He is reasonable and intelligent, just never got a lot of financial education. So, if something productive can come out of this for him, great, and if not then ok.

Also, I am the wife . To clarify, BIL is DH's brother, and we're dealing with their mom's finances.
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Re: whole life insurance
Old 03-07-2007, 11:13 AM   #9
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Re: whole life insurance

Quote:
Originally Posted by WM
Also, I am the wife . To clarify, BIL is DH's brother, and we're dealing with their mom's finances.
Sorry for the unwaranted assumption! Still, soon we probably won't be able to assume that just because you are a wife that there's not another wife in the couple. r, maybe the whole "husband/wife" terminology will be abandoned.

Anyway, social commentary aside, good luck! And report back to let us know how it goes.
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Re: whole life insurance
Old 03-07-2007, 11:20 AM   #10
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Re: whole life insurance

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Originally Posted by samclem
Sorry for the unwaranted assumption! Still, soon we probably won't be able to assume that just because you are a wife that there's not another wife in the couple. r, maybe the whole "husband/wife" terminology will be abandoned.
True Although one of my lesbian friends who is married loves that they are both the wife. Fun.

More updates as events warrant...
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Re: whole life insurance
Old 03-07-2007, 11:39 AM   #11
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Re: whole life insurance

Quote:
She also has a loan for more than the policy, and my FIL was still paying the premiums.
It is highly unlikely that the loan value could ever equal, much less exceed, the cash value. LI companies generally grant loans on only a portion of the cash value less the loan interest rate. For example, if the loan interest rate is 5%, they will grant loans for no more that 95% of the CV.

I would try to bypass the agent and call the Home Office directly at the toll free number. If the agent gets involved, two bad things can happen, 1) he/she could give you incorrect advice and 2) they definitely try to sell you some new insurance. Make sure that you note the name of the CS rep that you speak to and let him/her know that you are noting their name in case there is a "misunderstanding" in the future. This will help insure that the CS rep will give you accurate information.
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Re: whole life insurance
Old 03-07-2007, 11:42 AM   #12
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Re: whole life insurance

Quote:
Originally Posted by WM
True Although one of my lesbian friends who is married loves that they are both the wife.
But without a husband, who is around to be wrong all the time?
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Re: whole life insurance
Old 03-07-2007, 11:45 AM   #13
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Re: whole life insurance

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Originally Posted by WM
True Although one of my lesbian friends who is married loves that they are both the wife. Fun.
Interesting.............however I have found there's a definite DH and DW in those relationships, also having some friends that are lesbians.........
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Re: whole life insurance
Old 03-07-2007, 12:00 PM   #14
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Re: whole life insurance

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The loan must be repaid out of the estate although you can defer all of this until dear mom passes on in every state I've had experience with.
I don't think this is absolutely correct 2B.

The LI company will only loan a part of the CV to the policy owner and, upon the death of the insured, the outstanding loan, plus any accrued loan interest, will be deducted for the death proceeds that would be payable to the beneficiary.
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Re: whole life insurance
Old 03-07-2007, 01:14 PM   #15
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Re: whole life insurance

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Originally Posted by mickeyd
The LI company will only loan a part of the CV to the policy owner and, upon the death of the insured, the outstanding loan, plus any accrued loan interest, will be deducted for the death proceeds that would be payable to the beneficiary.
Give that man a gold star! You are correct, sir. (Not that I worked at a large insurance company or anything) : : :
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Re: whole life insurance
Old 03-07-2007, 02:59 PM   #16
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Re: whole life insurance

Quote:
Originally Posted by mickeyd
It is highly unlikely that the loan value could ever equal, much less exceed, the cash value. LI companies generally grant loans on only a portion of the cash value less the loan interest rate. For example, if the loan interest rate is 5%, they will grant loans for no more that 95% of the CV.
Well, that's kind of what I thought, so perhaps I am misreading the statement somehow. The policy is only worth 5K, taken out in 1969. The original loan was only 1K, taken out in '73. So with interest, or whatever, the loan balance now shows 6K+, and the "paid-up insurance" is also 6K, since dividends are apparently now being reinvested to buy additional coverage?

Anyway, I realize I need to call the company and just find out what the deal is. Thanks very much for the suggestions.
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Re: whole life insurance
Old 03-07-2007, 03:00 PM   #17
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Re: whole life insurance

If MIL has a loan on the policy - and you cancel it - then she will likely have to *pay the loan back in full and *perhaps pay taxes on it...(same thing happens if her policy goes south and needs to increase premiums to float it - whatever loans she has would have to be repaid if she didn't/couldn't pay new higher premiums)...

it's only tax-free if you keep the policy...

i have "heard" that if you take out the loans and want to do it w/out paying it back - you take out a loan (leave a small percent in) - then the death benefit will pay back the loan for you...

see what you learn hanging around slimy sales people? :P oh, i'm going to take a shower now...
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Re: whole life insurance
Old 03-07-2007, 05:49 PM   #18
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Re: whole life insurance

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Originally Posted by FinanceDude
Give that man a gold star! You are correct, sir. (Not that I worked at a large insurance company or anything) : : :
We made a major advance in my in-laws finances today if everything goes as expected. My DW's next assignment is to figure out if a pair of whole life insurance policies my FIL bought on himself and his wife about the time they were 65 are worth keeping or if they should be cashed out. I will attempt to get the details and post a question for your analysis.

The face value of his policy (from memory) is $25K and hers is $10K. There are small amounts of money being deducted from their checking account to pay for them. They both have some cash value but in the grand scheme of things they were way down the list.

Out of all of my FIL's purchases I've discovered, I wonder if he missed anything. He has or had whole life, variable annuities, fixed annuities, load mutual funds, high cost financial advisor..... Yep, he's pretty much hit everything.

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Re: whole life insurance
Old 03-19-2007, 08:35 PM   #19
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Re: whole life insurance

Ok, I got some more info from the insurance company, and here's what they said:

1 - There was no actual loan taken out against the policies, my FIL just stopped paying the premiums. Conveniently, this generated a "loan" against the policy. Meanwhile, the dividends he was getting were paying to increase his coverage, rather than pay the premiuims and/or repay the loan :

2 - Both policies were still worth more than the loans. So FIL's policy will pay a death benefit, albeit lower than it "should" be because some of the benefit has to pay back the loan.

3 - Choices for MIL's policy at this point are to: (a) let it continue on as is, not paying premiums, which will eventually cancel it when the loan equals the death benefit, then she'd owe tax on the 11K loan; (b) shuffle things around now to pay the loan and eliminate dividends and premiums, leaving a death benefit of $500 and taxes on 4K loan; or (c) keep the policy and change the dividends to start paying the premiums and part of the loan.

I want to confirm these options with the local agent, and then we will make a decision. MIL wants to just be rid of them, so that will probably factor in...
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