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Cashing in life insurance policy
Old 09-28-2010, 11:42 AM   #1
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Cashing in life insurance policy

Hello Everyone,

My wife and and I have 4 life insurance policy we bought when we first got married. They now have a fairly large cash value. I am think of getting rid of the policy.

My wife has been out of work for almost a year now and while are cash saving is no where near zero. I think getting rid of the policy make sense.

I would like to take the money and buy Vandguard Total Bond Index. This would give us a little extra income plus knock $100 off our monthly epenses. I plan to use the income to pay down debt qucker.

My wife has suggested we just use the money to pay down debt directly. I like the idea of this but am affraid that it may take away future flexiblilty.

Which stradgie is better mine or my wife? Alsoare there any reason I should not cash in my policy?

Any suggestion or comments would be greatly appreciated.
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Old 09-28-2010, 12:09 PM   #2
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I would pay down the debt, if you are talking car loans and credit card debt. you can rebuild your cash savings with the extra money you have from your reduced debt payments. If you are talking mortgage debt, then I would go ahead with the bond fund, maybe...If your monthly cash flow is tight because of the mortgage payment, look to paydown mortgage with some of your life insurance proceeds and refi.
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Old 09-28-2010, 12:27 PM   #3
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Let the cash value in the policy pay the premiums until you decide what to do. All it takes is a phone call.

Cash Value policies typically grow very little in the first few years, as dividends go to pay the agent. After 5 years or so, they become very efficient. How much other life insurance do you have??
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Old 09-28-2010, 01:31 PM   #4
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We will still have plenty of term insurance plus what I get at work.

It would be to pay down on the house. I am trying to speed up the process of getting out of debt. So we can get to FI faster. I also want more flexibility.

Thanks
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Old 09-28-2010, 01:40 PM   #5
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If you don't need life ins. and you need the money I'd cash it in.

FD said that after 5 years they become very efficient. I have not found this to be the case. I'm in year 23 with my whole life poilicy and still have to come out of pocket for the premium. Although I was sold the policy under the condition that I'd only have to pay out of pocket for 10 years. It's called a standing dividend order and it will pay most if not all of your payment at some point. If you are still taking money out of pocket and don't need the ins. just cash it in and move on.

You may create a taxable event if you cash it in. You will need to check with your ins company for the amount that is taxable. There are also annuities and other vehicles that will put off and tax do. Not that I'm recommending any of these.
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Old 09-28-2010, 01:49 PM   #6
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We will still have plenty of term insurance plus what I get at work.

It would be to pay down on the house. I am trying to speed up the process of getting out of debt. So we can get to FI faster. I also want more flexibility.

Thanks
Paws
As far as flexibility, cashing in a bond fund is a lot easier than cashing money out of your house (you don't have to refinance, apply for a home equity loan or sell a house). Why not do as you originally planned and put the proceeds in a bond fund or other vehicle? You could pay any dividends toward your mortgage.
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Old 09-28-2010, 02:47 PM   #7
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As far as flexibility, cashing in a bond fund is a lot easier than cashing money out of your house (you don't have to refinance, apply for a home equity loan or sell a house). Why not do as you originally planned and put the proceeds in a bond fund or other vehicle? You could pay any dividends toward your mortgage.

This is my plan to put the money in the bond fund and have monthly dividend sent to me. Use this money put on the mortgage every month.

I would still have the original amount from the bond fund to cah out if I need it for any unknow future expense.

As far as a taxable event I am not to worry about that as my wife has not been working most of the year so our income has been much lower than normal.

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Old 09-28-2010, 03:01 PM   #8
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If you don't need life ins. and you need the money I'd cash it in.

FD said that after 5 years they become very efficient. I have not found this to be the case. I'm in year 23 with my whole life poilicy and still have to come out of pocket for the premium. Although I was sold the policy under the condition that I'd only have to pay out of pocket for 10 years. It's called a standing dividend order and it will pay most if not all of your payment at some point. If you are still taking money out of pocket and don't need the ins. just cash it in and move on.
It depends on the company, places like NML pay good dividends to grow cash value.

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You may create a taxable event if you cash it in. You will need to check with your ins company for the amount that is taxable. There are also annuities and other vehicles that will put off and tax do. Not that I'm recommending any of these.
It probably will create a taxable event. One way to defer taxes is to take out a policy loan on the CV, but that creates in effect another loan to be repaid. Although you have insurance through work, that is not portable to another job..........unlike your individual WL policy.......
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Old 09-28-2010, 06:14 PM   #9
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Which stradgie is better mine or my wife? Alsoare there any reason I should not cash in my policy?

Any suggestion or comments would be greatly appreciated.
Your wife's, unless you only have low interest mortgage debt. The interest rates on your non-mortgage debt will be higher than bond interest, some of it will be non-deductible, and as you pay it off your balance sheet should be permanently better.

On the other hand, the bond investment might lose some of your money. As to whether you should cash or not, I don't know enough to say. It can be a fairly technical question. It appears that partly you may intend to use the bond investment as emergency cash. If so, keep it very short term.

You might ask your agent for reasons why you should not cash. Then run what he says by the board. There are some insurance professionals such as FD who can guide you.

Ha
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Old 09-28-2010, 06:27 PM   #10
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I'm no expert but I think if you ask your agent for advise he/she will tell you the following. If they are still getting a commission from your policy they will tell you to keep it. If not they will tell you to cash it in and buy an annuity with the proceeds so they can put their hands in your pocket again. JMHO
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Old 09-28-2010, 09:33 PM   #11
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The bulk of our debt is mortgage debt except for a car loan but it is 0% rate so I am in no hurry to pay it off. I understand the bond fund will have some market risk. The fund will not be our emergency fund. It would be an investment used to generate some income. That income would be used to pay down extra prinicipal on our house. After my wife fines a more permant job we may then use the bond fund to pay more mortgage debt. Right now all she is find is temp work.
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Old 09-28-2010, 09:46 PM   #12
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I'm no expert but I think if you ask your agent for advise he/she will tell you the following. If they are still getting a commission from your policy they will tell you to keep it. If not they will tell you to cash it in and buy an annuity with the proceeds so they can put their hands in your pocket again. JMHO
Agents, whether they keep car insurance or life insurance in place, get retention bonuses each year the policy stays in place. The typical bonus the insurer pays the agent is 4-6%, but sometimes up to 9% is paid. The percentage is of the yearly premium.
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Old 09-28-2010, 09:50 PM   #13
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FD, are you trying to make me feel better about my whole life policy?
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Old 09-28-2010, 09:52 PM   #14
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FD, are you trying to make me feel better about my whole life policy?
I provide the inside "scoop" on financial things, your feelings about that I cannot control........
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Old 09-28-2010, 10:01 PM   #15
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I provide the inside "scoop" on financial things, your feelings about that I cannot control........
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Old 09-28-2010, 10:09 PM   #16
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I think I am one of those "balance point" people, I bring reality to situations that require it.........
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Old 09-28-2010, 10:11 PM   #17
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Old 09-29-2010, 11:23 PM   #18
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Agents, whether they keep car insurance or life insurance in place, get retention bonuses each year the policy stays in place. The typical bonus the insurer pays the agent is 4-6%, but sometimes up to 9% is paid. The percentage is of the yearly premium.
If the policy is more than 10 years old, which it sounds like it is, there are probably no commissions still being paid on it. Most trail commissions only go to year 10....if there is any trail commission left, it is probably something minor like 1%. Any agent worth their salt would give him honest advice, but there are plenty of agents out there who don't know much either...
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Old 09-30-2010, 10:08 AM   #19
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Talk to the agent and find out what your basis is in the policy so you can determine the tax consequence if you cash it in. The increase over the basis will be treated as ordinary income. If you will not have a large tax consequence I am with Ha, I would use the money to pay down debt.

Someone suggested the possibility of taking out a policy loan which is not a taxable event. The issue come from how the loan will be repaid. If the loan is repaid through dividends at some point those dividends may be taxed. IIRC, once the amount of dividends you have used to pay the loan exceed your basis in the policy, the future dividends used to pay on the loan will be taxable to you. Alternatively, it may be possible to simply let the interest on the loan capitalize and never pay down the loan. It depends on whether the policy growth will keep up with the loan growth. If not, you could end up in the situation of having the policy forfeit if the loan balance exceeds the cash value and then you would have a taxable event. Some years ago this almost happened to us. My spouse had a very small whole life policy purchased by his dad. My spouse took a loan on it for college. And then forgot about it. Many years later we got a letter that the policy may forfeit creating a taxable event because the loan balance was approaching the cash value. Needless to say, we were kind of po'd. Anyway, for several years I paid the interest on the loan out of pocket. Now the cash value has shot up far past the loan amount so I haven't paid any interest on the loan for several years. Go figure. There is no sense in us cashing it in as the basis is so low and the cash value would be used up in paying income taxes on the money that was borrowed way back in 1970.

I would talk over all the possibilities with the insurance agent, keeping in mind possible conflicts of interest people have pointed out in this thread. The agent should give you a print out showing the basis and dividend rate for each year, and the cash value.

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