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Old 08-24-2013, 09:28 AM   #1
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Many years ago, with the "guidance" of his "good" friend, the insurance salesman, my father very sweetly and generously (if not terribly smartly) began a whole life policy in each of my children's names to help save for college. My father was and is not aware of 529's. Now of course the insurance guy claims he misunderstood, no no, he never meant it for that purpose. The policy has cash value, maybe two semesters worth of tuition, but I am not sure cashing it makes sense. Of course the cash would be nice, but my son will have to pay taxes on it. Of course in his tax bracket, that may be very little if he can pay in his and not my bracket. The alternative is just let the cash value pay the premiums and then my son is set for some if not many of his insurance needs, without having to get any now or in the future when he "needs" life insurance. Sort of a head start on that front. That is what the insurance guy claims was his sales pitch years ago.
My father is still paying premiums on this. It is a little late to get him up to speed on 529 at this point, one son is a sophomore in college, the other a high school junior.
So what do forum members think and know about this situation?
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Old 08-24-2013, 10:52 AM   #2
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Since the policy has been in force for so long, my guess is that the increase in the value each year exceeds the premiums paid plus perhaps even a reasonable return given the low credit risk. I know my whole life policy does but mine is ~ 35 years old.

Compute the increase in the cash value in excess of the premiums as a rate of return. If it is positive, then the policy is building in value, providing a reasonable return and the insurance is "free". Unless it is a hardship to your father, let him continue to pay the premiums - my guess is that he feels good about it.

If your son someday needs life insurance then it will partly cover that need for almost nothing. If it is providing a reasonable return even ignoring the insurance, I'd keep it and he can always later cash it in or borrow from it when he wants to buy a house and will be forever grateful to grandfather for giving him the head start in his adult financial life.

Edited to add: BTW, if he does cash it in he would only have income to the extent of the cash value in excess of the premiums that have been paid so the tax implications may be better than you feared.
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Old 08-24-2013, 10:53 AM   #3
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If the money is needed to pay for college, then use it for that. If not, how about a 1035 exchange (tax free) for an annuity or something similar. At least they would no longer be paying for an unneeded life insurance policy.
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Old 08-24-2013, 11:19 AM   #4
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The grandkids will pay tax at their parents' rate on unearned income greater than about $1900. Tax Topics - Topic 553 Tax on a Child's Investment Income and also Form 8615.
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Old 08-24-2013, 11:27 AM   #5
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Originally Posted by urn2bfree View Post
Many years ago, my father...began a whole life policy in each of my children's names to help save for college.
The bold part is what scares me the most.

Nearly all whole life policies are/were sold by agents using the "current conditions/assumptions" numbers and interest rates credited to the policies when showing clients what the WL policy premiums are.

And, as we all know, we've been in a giant bull market for bonds for the last 25-30 years.

Many whole life policies sold in the roaring 80s with sky-high interest rates (at that time) were abandoned in the 90s, because the 'current assumptions' interest rates credited to the policies in the 80s (when any and every financial interest rate - including the interest inside whole life policies - was in the mid, or even high, teens) dropped like a stone in the 90s. When the interest rate that your cash balance earns in the policy drops, guess what - you, the lucky policy holder, now has to come up with MORE premiums than originally projected, because the cash balance isn't earning enough interest to pay all of the premiums.

And this continued in the 90s-2000s, as rates continued to gradually drop. If you bought a policy in the 90s, even those rates were significantly higher than what WL policies are currently earning.

Some agents and policyowners may have bought a policy based on premiums to meet the 'guaranteed minimums' (which is the minimum interest rate the policy pays, and the maximum premium charged), and if they did, then they've weathered the interest rate implosion with hardly any notice.

But most policies are/were sold with big circles and highlights on the "current assumptions", with many agents saying "the only time the guaranteed rates would apply would be if the world went to hell in a handbasket, and WW III was about to start".

Well, guess what - the financial equivalent of WWIII has happened to whole life interest rates earned by the policies over the past 5 years.

My recommendation is to have your father get a CURRENT illustration from the agent, showing what the current interest rate assumptions and premium payments make the policy look like 10, 20, 30, etc. years from now. If he's paying the same premium as when he took out the policy, odds are, it might be projecting to run out of money not too far down the road, since the original estimated interest earnings that should have paid the premiums over the past 5-7 years weren't enough, and had to use up more of the cash balance to pay the premiums.

Once he sees the current illustration, see how long the whole life policy will last based on current premiums. Then compare that to what the annual premiums would earn in a diversified index fund. See if it makes sense to put the premiums in investments, and simply use the cash value of the WL policy to cash out, and just buy a 30 year term life policy for your son and daughter. After 30 years, those premium payments that instead went to investments would possibly be worth more than what the original WL policy was, and when your kids are in their 50s, they won't need insurance after the 30 year term expires, given their investment portfolio balance at that time.
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Old 08-24-2013, 02:41 PM   #6
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What makes you think that the policy was sold as a vanishing premium policy? I don't see anything in the OP that suggests that.

A whole life policy premiums are fixed - the premiums cannot increase. As long as the premiums are paid the insurer will provide the coverage.

While I doubt that the original sale was a vanishing premium based on the OP, even if it was most carriers made enhancements to certain policies in the late 1990s in response to policyholder lawsuits so the situation may not be as dire as you think.

While I agree what is most important is what happens from today onward, I wouldn't ditch the policy without first getting an understanding of its current performance and as you suggest, an updated illustration.
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Old 08-26-2013, 09:09 AM   #7
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It can be assumed that the investment return on the policy is pathetically small and the insurance aspect is incredibly overpriced. The "investment" part of the policy is also probably being hit with significant management fees the kill any possible return. I haven't heard of one person on this forum or anywhere else (other than from insurance sales people) that says these really are worth buying for anyone and especially not for children. The amount of the premium that actually has been going to increasing the principal is probably much smaller than if your father had bought a term policy for his grandchildren and deposited the rest in a 529. Of course, you already know a 529 would have been better for all of his contributions but it's now too late.

You could go through the drill and see what the cash value of the policies are. You could demonstrate to yourself that these have been terrible "investments" for their college funds but why bother. It's time to use the money for its intended purpose. You need to convice your father to cash them out and move the money to a 529 for the junior or just gift it to him. You can also spend it now for the older kids college. I'm assuming that your father is the official owner and not someone else. Don't let good money go down the insurance company drain any longer than necessary.
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Old 08-26-2013, 09:49 AM   #8
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I'm guessing that 2B and MooreBonds do not own a whole life policy.

While I concede that if I knew what I know today I would buy term and invest the difference, the investment performance of my whole life policy totally ignoring the value of any mortality coverage has not been all that bad. For the policy year ended in 2013 and since inception, the IRR implicit in the beginning and ending CSVs and premiums paid were 4.75% and 5.19%, respectively - not too shabby for a fixed income investment with no interest rate risk and minimal credit risk and that is before attributing any value to the mortality coverage. For me, a relatively low risk fixed income investment returning ~4.75% with no interest rate risk and free insurance as a kicker is attractive compared to other fixed income investments currently available.

The decision as to whether or not to buy the policy is a sunk decision at this point. The real decision is whether or not to keep it and in order to make an intelligent decision you need to look at the current return, estimated future returns and other alternatives. In your kid's case, it may be that having the cash value now for education or other purposes is better but I think it would be foolish to just jump to that conclusion without the proper analysis.
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Old 08-26-2013, 07:45 PM   #9
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I'm guessing that 2B and MooreBonds do not own a whole life policy.
I'm the trustee for my parents' irrevocable life insurance trust that was set up to purchase a 2nd-to-die policy (it was my dad's original idea). I was involved in reviewing the life insurance quote with my father back in 2000, and I heard the salesmen's slick pitch. I warned my father (who was making the final call) about the dangers of looking at the projections based on "current assumptions/interest rate", and realizing that things could change (and have in the past), and that looking at the 'guaranteed' column of illustrations showed that far more premiums would have to be paid out just to barely keep the policy in force - much less grow to substantial death benefit levels 30 years hence.

Sure enough, 8 years later, we were transferring the policy to another insurer after rates were smashed. The net result was that there were still additional premiums that had to be paid beyond the original projection year, but it wasn't for as long compared to the original insurer.

Is it projected that the policy will offer reasonable "returns" as a % of the death benefit compared to the premiums? Probably. They might even be substantially higher than your 4.75% return you've experienced on your cash balance.

I'm not debating the value of the OP's childrens' policy to-date, but rather looking at what the future holds from this point on. The OP's policy's return since inception could be -5.3%/year, or it could be +10%/year - what matters is what the projections are based on today's rates and minimums (if it is applicable), and what the alternative investment is. That is what my post tried to focus on (as you also noted that it's all a sunk cost at this point).

I also wanted to point out the issue of possible premium issues based on current interest rates, because you'd be surprised at how many people failed to understand that concept and possible risk of falling rates/higher insurance costs when they signed on the dotted line for whole life policies - and it wouldn't surprise me one bit if it was happening to the policy in question.


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but I think it would be foolish to just jump to that conclusion without the proper analysis.
That's precisely why I suggested asking the salesman for a current illustration showing cash value, and premium projections into the future - we don't know anything about what the policy may or may not be like, since we all know how forthcoming many insurance salespeople are, and how clueless many insurance customers are.
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Old 08-26-2013, 09:04 PM   #10
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I'm the trustee for my parents' irrevocable life insurance trust that was set up to purchase a 2nd-to-die policy (it was my dad's original idea). I was involved in reviewing the life insurance quote with my father back in 2000, and I heard the salesmen's slick pitch. I warned my father (who was making the final call) about the dangers of looking at the projections based on "current assumptions/interest rate", and realizing that things could change (and have in the past), and that looking at the 'guaranteed' column of illustrations showed that far more premiums would have to be paid out just to barely keep the policy in force - much less grow to substantial death benefit levels 30 years hence.....
That is precisely why there are two illustrations - one is what is guaranteed and the other is what is expected when the policy is issued and as you surmised the reality will commonly be somewhere between the two. Though sometimes it is better - like in my case the CSVs are much better than the original policy illustration even though the premiums have been the same but mine is a much older policy.

However, to be fair, no one would have anticipated the interest rate environment of the last 6-5 years in 2000. IIRC where I worked back then we expected a slight decline in rates over time but nothing anywhere near the magnitude that actually occurred.
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Old 08-27-2013, 09:35 AM   #11
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I'm guessing that 2B and MooreBonds do not own a whole life policy.

While I concede that if I knew what I know today I would buy term and invest the difference, the investment performance of my whole life policy totally ignoring the value of any mortality coverage has not been all that bad. For the policy year ended in 2013 and since inception, the IRR implicit in the beginning and ending CSVs and premiums paid were 4.75% and 5.19%, respectively - not too shabby for a fixed income investment with no interest rate risk and minimal credit risk and that is before attributing any value to the mortality coverage. For me, a relatively low risk fixed income investment returning ~4.75% with no interest rate risk and free insurance as a kicker is attractive compared to other fixed income investments currently available.
Very true. I don't own a whole life policy but I once did. I was lured in with the appealing projected return in a "risk free" policy. After 3 years I compared my annual statement with the projection. My account gain was about half of the projection and this was during a period of rising interest rates. I cancelled the policy and switched to term.

As for your personal return, you have numbers that sound good in the current, artifically low interest rate environment; but without knowing the interest rate history, it's not possible to say if you have a "good deal."

Don't bother getting any additional data. I'm not interested in a discussion about whether your policy may be the only one that was better than buying term and investing the rest. You've said you wouldn't buy it again so it's a done discussion in my opinion.

I also had a good view of my FILs whole life policy that he purchased at age 65 (no telling why he bought it). Around the end, the amount of his premium was almost totally consumed by his insurance cost and the policy was paying pennies per month on a $17,000 cash balance. I didn't cancel it because he was "close to death" and it was a $25,000 policy.
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Old 08-27-2013, 10:43 AM   #12
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(In a vacuum) I would advise against buying whole life policies. However, that is after having done so 10+ years back for our kids. NOW that I have the policies, it isn't (IMO) a slam-dunk to cash in the policies. There are several reasons for this. One reason is that the biggest single policy "cost" has already been paid (the agent's cut - usually equivalent to about the first 3 years' premiums, though it varies). Cash value actually begins to accrue after the agent gets his/hers. Trying to "replace" the policy with any other insurance product will likely subject you to another agent's "cut" (though that is considerably less with term which is why they try not to sell it.)

Reason 2 for keeping a less than perfect policy is underwriting. If you DO need insurance you must go through underwriting again (at current age AND with any current medical issues accrued). A previously undiscovered heart murmur can cause premiums to go up a lot.

Reason 3 is that "kids" don't think they need insurance. We plan to give the policies to our kids at some point, but I'm guessing right now they would grab the cash value and say "thanks!" (or not) They are probably right about not actually needing insurance until they start a family. THEN, when they realize they need it, they may not be eligible for the lowest cost insurance due to "issues". Since policies are already in force at standard rates, they have them (even though maybe it wasn't a great idea when they were taken out.)

So, what I'm saying is: Buying whole life policies for your kids is probably a "bad" idea. "Dumping" such policies that you've been paying on for 10 years MAY also be a bad idea. I don't think it is a "given" in any case. More (careful) research should be done. In any case, I would be certain they can (and WILL) replace the policies with some other insurance (hopefully, term) BEFORE dumping the original policies. It's my opinion that MOST people DO need life insurance when they are relatively young. Obviously, there are exceptions.

Not an insurance person and I've probably made more financial mistakes than most, so use your own judgement. Just suggesting that not everything about whole life policies (currently owned) is black and white. You need to figure out how much gray you want to live with as YMMV.
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Old 08-27-2013, 01:18 PM   #13
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I would think the primary people who need life insurance are people with children.

If you don't have anyone else depending on your income, why would you insure it?

I would think most young people without kids would need disability insurance, but probably not life insurance.

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It's my opinion that MOST people DO need life insurance when they are relatively young. Obviously, there are exceptions.
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Old 08-27-2013, 01:55 PM   #14
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I would think the primary people who need life insurance are people with children.

If you don't have anyone else depending on your income, why would you insure it?

I would think most young people without kids would need disability insurance, but probably not life insurance.
In theory, I believe you are correct. People with children would be the most likely to need (purchase) life insurance. However, in addition, there are many young people without children who plan to have children at some point (most of them, in fact). Those folks may choose to begin life insurance coverage before they get older (higher premiums) and possibly be less insurable (potentially MUCH higher premiums). Obviously, as stated before, this isn't universal, but it is pretty typical to begin life insurance before kids come along. Personally, I had insurance for a long time JUST to provide for DW who never made the kind of salary I made (though she worked just as hard). When kids suddenly came along, I was covered at no extra premium (even though I would have been rated due to health issues).

I agree that disability insurance is very important for many people. It is, however, a separate issue since it insures primarily a different risk. Obviously, YMMV.
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UPDATE (with some numbers)
Old 08-29-2013, 12:31 PM   #15
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UPDATE (with some numbers)

The policy is under MY CONTROL. The premiums are coming out of the policy. My father no longer is paying nor will any premiums supposedly ever be due based on current value and assumptions. The sales guy said he could not give me any interest rate assumptions or even the current return rate because "that is not how this policy works:
This policy does not pay "interest" it pays "dividends" Currently the policy has a cash value and a dividend account value. The most recent "dividend" covered about half the premium and the other half came out of these built up values in the policy. The "dividend" looks like it was about 2.76% of the total value based on the total cash out values of the two parts (cash + dividends)...
he could not tell me what if any taxes are owed if I cash out, because he did not have the total premiums paid vs current values...but by my estimate it looks to me like there is a little gain But he is supposed to get back to me with those numbers....So the question and problem is what to do?
If I cash out, I must pay the taxes and do so at my high income tax rate--....I will then have access to about 1 year's worth of tuition of money. I could park that in something...either taxable in my name as it is owned by me---and the funds are mine to do with as I please going forward- or I can I put all or part of of it into the 529 thus designating the $$ strictly for education (theirs probably- but I guess grandchildren or other relatives or even me are possible if there is a surplus above my kids needs) ... I suspect I will not need to touch this amount for their education expenses for about 4 years in one son's case (I think) and maybe 6-8 years for the other one. And that is less money that I have to come up with for their education expenses. Or as I said just keep it in my accounts and look at that as money that I already had put into the 529 earlier that I did not have to and this is a way to "repay" me for that, reserving the right to direct it to the kids for other purposes as I see fit.
On the other hand...if I leave it alone... both have life insurance for a goodly amount for the rest of their lives... and that is granpa's gift to them. This is NOT what Grandpa thought he was buying no matter that the sales guy claims he has "NO IDEA" where my father thought this was any kind of investment vehicle to save for college tuition...yeah, right.
The sales guy also suggested the possibility of taking out a loan against the policies if needed for tuition and letting the death benefit pay the loan off. That sounded especially suspicious to me.
I defer to the many wiser and studied brains on this forum for any thoughts you may have to share given these added facts.
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Old 08-29-2013, 12:41 PM   #16
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The policy is under MY CONTROL. The premiums are coming out of the policy. My father no longer is paying nor will any premiums supposedly ever be due based on current value and assumptions. The sales guy said he could not give me any interest rate assumptions or even the current return rate because "that is not how this policy works:
This policy does not pay "interest" it pays "dividends" Currently the policy has a cash value and a dividend account value. The most recent "dividend" covered about half the premium and the other half came out of these built up values in the policy. The "dividend" looks like it was about 2.76% of the total value based on the total cash out values of the two parts (cash + dividends)...
he could not tell me what if any taxes are owed if I cash out, because he did not have the total premiums paid vs current values...but by my estimate it looks to me like there is a little gain But he is supposed to get back to me with those numbers....So the question and problem is what to do?
If I cash out, I must pay the taxes and do so at my high income tax rate--....I will then have access to about 1 year's worth of tuition of money. I could park that in something...either taxable in my name as it is owned by me---and the funds are mine to do with as I please going forward- or I can I put all or part of of it into the 529 thus designating the $$ strictly for education (theirs probably- but I guess grandchildren or other relatives or even me are possible if there is a surplus above my kids needs) ... I suspect I will not need to touch this amount for their education expenses for about 4 years in one son's case (I think) and maybe 6-8 years for the other one. And that is less money that I have to come up with for their education expenses. Or as I said just keep it in my accounts and look at that as money that I already had put into the 529 earlier that I did not have to and this is a way to "repay" me for that, reserving the right to direct it to the kids for other purposes as I see fit.
On the other hand...if I leave it alone... both have life insurance for a goodly amount for the rest of their lives... and that is granpa's gift to them. This is NOT what Grandpa thought he was buying no matter that the sales guy claims he has "NO IDEA" where my father thought this was any kind of investment vehicle to save for college tuition...yeah, right.
The sales guy also suggested the possibility of taking out a loan against the policies if needed for tuition and letting the death benefit pay the loan off. That sounded especially suspicious to me.
I defer to the many wiser and studied brains on this forum for any thoughts you may have to share given these added facts.

As you note the taxes would be on the net gains, so if they are small it would not be a large amount that is taxable. So the tax issue alone might no make much difference.
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Old 08-29-2013, 05:33 PM   #17
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Ok, so there are no premiums being paid. So for the last policy year, did the surrender value (cash you would receive on surrender before considering any taxes that might be due) increase or decrease? If it increased, by how much as a percent?

If the CSV decreased, I would probably be inclined to surrender it since it will just decay away over time unless the insured live has any potential medical issues that might cause them to not be able to pass underwriting in the future. If the CSV increases by a reasonable about, it is a closer call but would depend on alternative uses that you have for the funds.
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Old 08-29-2013, 10:00 PM   #18
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Ok, so there are no premiums being paid. So for the last policy year, did the surrender value (cash you would receive on surrender before considering any taxes that might be due) increase or decrease? If it increased, by how much as a percent?

If the CSV decreased, I would probably be inclined to surrender it since it will just decay away over time unless the insured live has any potential medical issues that might cause them to not be able to pass underwriting in the future. If the CSV increases by a reasonable about, it is a closer call but would depend on alternative uses that you have for the funds.
Good question. Hard to see how it could have grown, since the dividend only paid half the premium with the cash value paying the other half. But maybeI do not completely understand how that is calculated. I will ask.
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Old 08-30-2013, 08:28 PM   #19
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The premiums are coming out of the policy. My father no longer is paying nor will any premiums supposedly ever be due based on current value and assumptions.
Hmm....see next comment. Sounds suspicious initially.

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The sales guy said he could not give me any interest rate assumptions or even the current return rate because "that is not how this policy works:
Huh?

Either the policy pays dividends, or it doesn't. If it pays dividends, what was the past 1 or 2 years dividend rate? It's a simple question that can't really get any clearer with this policy. If the agent is giving you this much of a run around on this simple of a truly black-and-white question, I would be worried about other, more complex questions and the agent's ability to give you an honest/competent answer!

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This policy does not pay "interest" it pays "dividends"
Oh, ok. Fine. Someone wants to be ultra technical, eh?

But wait a minute, I just thought he said 5 seconds ago that the policy didn't pay dividends because "that's not how this policy works"



Quote:
Originally Posted by urn2bfree View Post
The most recent "dividend" covered about half the premium and the other half came out of these built up values in the policy. The "dividend" looks like it was about 2.76% of the total value based on the total cash out values of the two parts (cash + dividends)...
Ok, so at least you have some sort of an answer. But I would wonder about this set-up. The agent claims that premiums would never need to be paid again...but apparently, the dividends from the cash value only pay about 1/2 of the premiums, and you have to draw down the cash value to pay 1/2 of the premiums. And that's when your children are in their teens? When they're much older, the premiums charged inside the policy will be much higher.

So even if the dividend rate doubles to 5.52%, it would just barely pay the premiums when they're teens. At age 40, 50, 60, those premiums will be much higher.....and that cash value will go down much more quickly as it pays a larger and larger share of those premiums, since the dividends may not cover a substantial portion of the cost.

Which means the statement of "premiums will never have to be paid" seem possibly quite a stretch. Ask him if he will put it in writing. If he won't/can't, then you have your real answer.

If he tries to hum and haw about "well, I can't say anything in writing to guarantee anything", then ask him "well, I thought you said that this policy doesn't work with dividends/interest - that it works in some other way.....well, what way is that?"


Quote:
Originally Posted by urn2bfree View Post
Currently the policy has a cash value and a dividend account value
This confuses me. Are you saying that there are two "cash value" numbers, one cash value you would get if you closed the policy and withdrew the cash, and another 'cash value' that you are paid dividends upon? What's the difference in number? Is there a surrender charge applied that would reduce the cash value if you closed the policy and withdrew the cash?


Quote:
Originally Posted by urn2bfree View Post
he could not tell me what if any taxes are owed if I cash out, because he did not have the total premiums paid vs current values
Wow - so this same agent originally sold your father the policy, collected a nice commission, and likely never had to do squat for your father since (in terms of time commitment)...and he can't even do a few simple clicks on his computer to either look up or request from the home office what his total premiums paid is?

If I were you I'd call the home office of the company and complain. Tell them this agent isn't giving you straight answers, AND he won't even do so much as look up a simple question of
A) the current dividend rate
B) tell you what your total premiums paid to-date are

Those are pretty simple questions that an agent should be able to answer. Granted, he may not have it at his fingertips in 5 seconds...but at the very least, he should say "I don't have access immediately to that info. but will look it up and get back to you with that information in a few days".

Quote:
Originally Posted by urn2bfree View Post
I defer to the many wiser and studied brains on this forum for any thoughts you may have to share given these added facts.
In my opinion, it's a somewhat 'simple' analysis, but first you need to estimate what your total premiums paid are (does your father by chance have a copy of the annual statements they sent out on the policy? that would show you what the policy earned in dividends each year, what the premiums charged for the insurance policy was, and what total premiums were paid).

Then, figure out what your taxes would be owed (if any), subtracted from the cash-out value of the policy.

You then have your "number" - the after-tax cash in hand of what you can do with it.

Compare that after-tax cash value with your options: invested in a low-cost index fund, and/or pay for tuition.

The third alternate would be to guess how long that policy would last without further premiums paid. This is the big unknown, because you don't know what the insurance premiums will be that the policy is charged, and how long that cash value will last if it's paying half (or more!) of the annual premiums. How long would the cash value last right now before being depleted, with current insurance rates of your children in their teens, and the current dividend rate?

My guess is that the insurance policy won't last their entire lifetime, given the previous paragraph.

But say the dividends and consumed cash value burn rate will last until they're, say, 70. Look at what the cash value (after taxes) will be worth for them at age 70 if you invested it today in a low-cost mutual fund and let it grow for, say, 6% for 50 years.

My guess is that the cash value invested in the index fund will be worth more than the death benefit when they are in their 70s.

While nothing's guaranteed, I would 'trust' a 5%-6% market return over an insurance salesman who isn't giving you any service and is talking out of their nearest bodily orifice just to give you any answer, rather than digging to give you the answers you need.

One last item on the cash-value item: check your state's 529 plans. Some states offer a state income tax deduction for 529 contributions. In MO, with a state income tax rate of 6%, you can contribute up to $8k to a 529 plan and get a 6% guaranteed return off of that money through an income tax deduction. So if your state offers that, it's a quick, easy return if you choose the route of putting the after-tax cash value into a 529 plan (even if you do immediately withdraw it in 6-12 months to pay tuition!). But check your state's regulations.
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Old 08-31-2013, 07:41 AM   #20
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Quote:
Originally Posted by MooreBonds View Post

Hmm....see next comment. Sounds suspicious initially.

Huh?

Either the policy pays dividends, or it doesn't. If it pays dividends, what was the past 1 or 2 years dividend rate? It's a simple question that can't really get any clearer with this policy. If the agent is giving you this much of a run around on this simple of a truly black-and-white question, I would be worried about other, more complex questions and the agent's ability to give you an honest/competent answer!

Oh, ok. Fine. Someone wants to be ultra technical, eh?

But wait a minute, I just thought he said 5 seconds ago that the policy didn't pay dividends because "that's not how this policy works"

Ok, so at least you have some sort of an answer. But I would wonder about this set-up. The agent claims that premiums would never need to be paid again...but apparently, the dividends from the cash value only pay about 1/2 of the premiums, and you have to draw down the cash value to pay 1/2 of the premiums. And that's when your children are in their teens? When they're much older, the premiums charged inside the policy will be much higher.

So even if the dividend rate doubles to 5.52%, it would just barely pay the premiums when they're teens. At age 40, 50, 60, those premiums will be much higher.....and that cash value will go down much more quickly as it pays a larger and larger share of those premiums, since the dividends may not cover a substantial portion of the cost.

Which means the statement of "premiums will never have to be paid" seem possibly quite a stretch. Ask him if he will put it in writing. If he won't/can't, then you have your real answer.

If he tries to hum and haw about "well, I can't say anything in writing to guarantee anything", then ask him "well, I thought you said that this policy doesn't work with dividends/interest - that it works in some other way.....well, what way is that?"

This confuses me. Are you saying that there are two "cash value" numbers, one cash value you would get if you closed the policy and withdrew the cash, and another 'cash value' that you are paid dividends upon? What's the difference in number? Is there a surrender charge applied that would reduce the cash value if you closed the policy and withdrew the cash?

Wow - so this same agent originally sold your father the policy, collected a nice commission, and likely never had to do squat for your father since (in terms of time commitment)...and he can't even do a few simple clicks on his computer to either look up or request from the home office what his total premiums paid is?

If I were you I'd call the home office of the company and complain. Tell them this agent isn't giving you straight answers, AND he won't even do so much as look up a simple question of
A) the current dividend rate
B) tell you what your total premiums paid to-date are

Those are pretty simple questions that an agent should be able to answer. Granted, he may not have it at his fingertips in 5 seconds...but at the very least, he should say "I don't have access immediately to that info. but will look it up and get back to you with that information in a few days".

In my opinion, it's a somewhat 'simple' analysis, but first you need to estimate what your total premiums paid are (does your father by chance have a copy of the annual statements they sent out on the policy? that would show you what the policy earned in dividends each year, what the premiums charged for the insurance policy was, and what total premiums were paid).

Then, figure out what your taxes would be owed (if any), subtracted from the cash-out value of the policy.

You then have your "number" - the after-tax cash in hand of what you can do with it.

Compare that after-tax cash value with your options: invested in a low-cost index fund, and/or pay for tuition.

The third alternate would be to guess how long that policy would last without further premiums paid. This is the big unknown, because you don't know what the insurance premiums will be that the policy is charged, and how long that cash value will last if it's paying half (or more!) of the annual premiums. How long would the cash value last right now before being depleted, with current insurance rates of your children in their teens, and the current dividend rate?

My guess is that the insurance policy won't last their entire lifetime, given the previous paragraph.

But say the dividends and consumed cash value burn rate will last until they're, say, 70. Look at what the cash value (after taxes) will be worth for them at age 70 if you invested it today in a low-cost mutual fund and let it grow for, say, 6% for 50 years.

My guess is that the cash value invested in the index fund will be worth more than the death benefit when they are in their 70s.

While nothing's guaranteed, I would 'trust' a 5%-6% market return over an insurance salesman who isn't giving you any service and is talking out of their nearest bodily orifice just to give you any answer, rather than digging to give you the answers you need.

One last item on the cash-value item: check your state's 529 plans. Some states offer a state income tax deduction for 529 contributions. In MO, with a state income tax rate of 6%, you can contribute up to $8k to a 529 plan and get a 6% guaranteed return off of that money through an income tax deduction. So if your state offers that, it's a quick, easy return if you choose the route of putting the after-tax cash value into a 529 plan (even if you do immediately withdraw it in 6-12 months to pay tuition!). But check your state's regulations.
The agent is an old guy, an independent outfit, and my father's friend, so I am not going to be complaining to any home office about him, no matter how weaselly his behavior. And I agree, he is a total slime ball as far as I can tell in how he has taken advantage of my father. Don't even get me started on the 5 other policies my father holds on his own life that this guy had him buy....that was a whole different mess discovered last year when my father was incapacitated for months after a respiratory arrest and we had to see about getting premiums paid...total rip offs going on, but this is beyond my control or influence. Let's not go there.

To be fair, the agent did promise to get back to me with the tax related info, but obviously was just trying to convince me to leave the policies in place. I think he sincerely believes his BS about whole life insurance (I think it is BS, I could be wrong.). He says that the yearly "dividend" is set by a committee and so it changes and there are no guaranteed rates. The policy has a total cash value made up of what he called the cash value and the dividend account. Both piles of money are mine without penalty except for the taxes if I surrender the policy. The dividend account was almost the same size as the cash value. And the two together currently have enough to pay for about 30 years of premium-it is a fixed amount for premium and will not go up. If in the current low interest rate environment the dividend pays half, then there is enough to pay 60 years before depleting the internal cash and requiring external cash to pay the premium. With a flat premium, in 60 years that will be a tiny amount given inflation.
His big "concern" was that I might cash out and then later when my boys (perfectly healthy now-knock wood) "need" life insurance it could be prohibitively expensive due to unforeseeable changes in their situation. I have to wonder what the odds are of that...I have not priced term insurance on them because I do not believe in it for kids who leave behind no obligations if they die.

Finally I ALREADY max out on the tax deduction into my kids 529 each year. This would be gravy on that amount. I would also add that I may already have ENOUGH for each kid. If neither goes to grad school, I have it covered. If both go beyond 4 years of college, I may be a little short depending on length and cost and aid and stipends, etc.
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