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Best strategy for getting rid of old whole life policy
Old 01-09-2016, 11:45 AM   #1
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Best strategy for getting rid of old whole life policy

Hey ya'll. I did a search but didn't see this specific topic.

Like many people, I got sucked into buying a whole life policy when my kids were young. I retired at 63 and am now 66. The death benefit is $225,000. The surrender value is about $115,000 last I checked.

We sold an asset that will pay us almost enough to live on until I'm almost 70 so I'm delaying SS until then. However, its close to the time when I need to either pull money out of the life insurance policy or from our investments.

When I take SS, the SS plus a reasonable 4% withdrawal rate from investments will give support us quite comfortably. My wife is 5 years younger, in great health and we've made the SS decision based on the likelihood that at least one of us will live quite some time.

So what is the best way to get cash out of the whole life policy? I can borrow against it and have no taxable income up to a point, but we're debt free and I would like to avoid paying interest. If I surrender it, some portion of it, and likely a substantial portion, will be taxable. On the third hand, much of non IRA type monies are tax free, so our tax situation will be more favorable perhaps then when I have to start pulling from the IRAs.

Suggestions? Thanks.
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Old 01-09-2016, 12:05 PM   #2
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Originally Posted by 67walkon View Post
Hey ya'll. I did a search but didn't see this specific topic.

Like many people, I got sucked into buying a whole life policy when my kids were young. I retired at 63 and am now 66. The death benefit is $225,000. The surrender value is about $115,000 last I checked.

We sold an asset that will pay us almost enough to live on until I'm almost 70 so I'm delaying SS until then. However, its close to the time when I need to either pull money out of the life insurance policy or from our investments.

When I take SS, the SS plus a reasonable 4% withdrawal rate from investments will give support us quite comfortably. My wife is 5 years younger, in great health and we've made the SS decision based on the likelihood that at least one of us will live quite some time.

So what is the best way to get cash out of the whole life policy? I can borrow against it and have no taxable income up to a point, but we're debt free and I would like to avoid paying interest. If I surrender it, some portion of it, and likely a substantial portion, will be taxable. On the third hand, much of non IRA type monies are tax free, so our tax situation will be more favorable perhaps then when I have to start pulling from the IRAs.

Suggestions? Thanks.
Total up all the premiums you have paid and that gives you the amount you get tax free from the policy surrender.
One other possibility would be to convert to a paid up policy (the policy form or the insurance company should be able to tell you the amount of paid up insurance you could get for the cash value).

Since your wife is 5 years younger than you if you convert to a paid up policy and leave the policy in force for a while, if you die (combine the 5 years age difference with the 3 year gender difference in life expectancy it is likley to happen this way) she gets the value of the paid up insurance income tax free. You can surrender the paid up policy at any time if need be also.
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Old 01-09-2016, 12:48 PM   #3
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Suggestions? Thanks.
Since DB is about $110K more than CV, ask yourself if DW really needs a decreasing amount of life insurance or could you make better long-term use of the $115K CV.

If no kids at home, I would consider canceling the LI.
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Old 01-09-2016, 05:08 PM   #4
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Not a great option but you could transfer the CV to an annuity (either immediate or deferred) and receive regular income from it. You'd pay tax on part of the monthly income. You could opt for joint life payments ( which would be less than single life) but that would provide income for the survivor after the death of the first.


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Old 01-09-2016, 05:19 PM   #5
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Annuity option isn't good. At my age, it would probably be around $400 a month. I think I can do better than that and keep the principal.

I guess I need to find out what amount is taxable and weigh the net benefit against converting to a paid up policy.
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Old 01-11-2016, 07:56 AM   #6
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I canceled both whole life policies when we retired. It was a low income year so tax was minimal.
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Old 01-11-2016, 10:31 AM   #7
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I canceled both whole life policies when we retired. It was a low income year so tax was minimal.
that's probably what I will do

I have a whole life policy with a 1.1M DB and a 225K CV
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Old 01-11-2016, 10:51 AM   #8
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My father-in-law, a widower and still living on his own, basically 'sold' his policy to his brothers for slightly more than the cash value, then changed the beneficiary to their names. This way he got more for the policy than the insurance company would have given him and his brothers will get a nice inheritance when he passes away. My FIL is 84 years old and tapped out all his other sources of income other than SS last year. He was running up about $600 a month in CC debt and this seemed to 'fix' that.

This policy would have been DW and her sister and brother's inheritance, but the only other option than to cash in the policy would be for us to each make a contribution to cover his debts. We were happy to do that, but he made this decision and acted on it before telling DW and her siblings.
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Old 01-11-2016, 10:53 AM   #9
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My father-in-law basically 'sold' his policy to his brothers for slightly more than the cash value, then changed the beneficiary to their names. This way he got more for the policy than the insurance company would have given him and his brothers will get a nice inheritance when he passes away. My FIL is 84 years old and tapped out all his other sources of income other than SS last year. He was running up about $600 a month in CC debt and this seemed to 'fix' that.
wow great idea - I may do that
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Old 01-12-2016, 10:16 AM   #10
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that's probably what I will do

I have a whole life policy with a 1.1M DB and a 225K CV
Timing is crucial so early is good. Avoiding trading that will generate net CG that year.
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Old 01-12-2016, 10:27 AM   #11
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Timing is crucial so early is good. Avoiding trading that will generate net CG that year.
I've also got an additional paid up rider that I can use on this policy that I've only used modestly in the past (i.e. less than $1K a year).

I'm actually considering putting in a much more significant amount to the policy so that the dividends will pay for the premium.

Anyone familiar with modified endowment contracts and the maximum I can put in through this rider to avoid the policy becoming a MEC?
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Old 01-12-2016, 10:28 AM   #12
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My father-in-law, a widower and still living on his own, basically 'sold' his policy to his brothers for slightly more than the cash value, then changed the beneficiary to their names.
This deserves a sticky because it is such a significant idea. Good on your Dad who never did LBYM so he had to be creative. Much better than taking out a reverse mortgage! My Dad could have done that if only we had thought about it!
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Old 01-12-2016, 01:19 PM   #13
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I'm actually considering putting in a much more significant amount to the policy
so that the dividends will pay for the premium.
Let me guess, this was the idea of the insurance agent, right?
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Old 01-12-2016, 01:56 PM   #14
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Let me guess, this was the idea of the insurance agent, right?
No, I came up with the idea. I actually called the agent.

I just looked and the DB is 1.1M and the CV is 240K.


I had to study various forms of LI and dividend calculation methods (etcetera) about 20 years ago so I'm somewhat familiar with how policies become paid up. I'm not that great at LI taxation though.

NYL is paying decent (6%) dividends annually. This cash is just sitting in a checking account getting nothing. May as well put it to use.
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Old 01-12-2016, 02:10 PM   #15
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Just got an email - NYL said I could put in $35K (about 3 annual premiums) this year without it becoming a MEC. Now I just need to see what the true "net" addition to my DB and CV will be before pulling the trigger.


I'm guessing this will add another $150K to the DB
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Old 01-12-2016, 06:08 PM   #16
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NYL is paying decent (6%) dividends annually.
Keep in mind that LI dividends are generally a return of your overpaid premium and not comparable to other dividends. That's why they are not taxed.
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Old 01-12-2016, 06:24 PM   #17
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Keep in mind that LI dividends are generally a return of your overpaid premium and not comparable to other dividends. That's why they are not taxed.
the only reason the premium is "overpaid" is due to the sales factor - LI is sold, not bought

I've been paying into this policy since 2000 so I'm in. At this point, the option to purchase paid up additions with no evidence of insurability is total gravy, IMO.

Plus NYL is still a true mutual. I'm a stockholder, per se, so I think this makes sense.
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Old 01-12-2016, 06:40 PM   #18
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Keep in mind that LI dividends are generally a return of your overpaid premium and not comparable to other dividends. That's why they are not taxed.
Actually only partly true: Once the dividends paid exceed the premiums paid then they become taxable. If you stay a long time, and buy paid up additional amounts which also pay dividends this happens. In fact you might well end up with higher dividends on the paid up amounts than the original policy.
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