Universal Life insurance

[wrichards58]

We are 58 and have a universal life insurance policy with cash value of 214,000 and insured for 614,000. Premiums are 200.00 a month. We have another term life policy for my husband of 500,000 until age 66 years old. For now we will keep this policy but was wondering if anyone has any advise on this. We have a guarantee of drawing 4% with this policy. This past year it was around 10,000. We are planning retiring in 4 years.
Need some suggestions.

 

[Htown Harry]

If you're looking for general opinions on universal life policies, the naysayers will be here shortly. Term insurance for insurance needs, other vehicles for investments is the preferred route.

There's not enough information given to give specific advice, particularly since you are already in deep on the universal policy. Who is the insured under the universal policy? Financially speaking, why do you need life insurance? what sort of advice / opinions do you seek?

I see your other post with a question on financial advisors hasn't gotten much of response, either.

Perhaps you could tell us a bit more about your circumstances in a "Hi, I am..." post.
http://www.early-retirement.org/forums/f26/read-this-before-you-introduce-yourself-27621.html

 

[urn2bfree]

It depends.
The money you are paying into the Universal policy is buying you term insurance and some is being invested.
1)why do you have the policy? If it is for,investment purposes most feel,there are better ways to,put your money to work.
If it is because you need the insurance (that is it will provide necessary money in case you die that you otherwise won't have) then how much would,a,term policynofthe same size cost you right now? You can find out how much you can save to invest for,yourself,that way, but that raises the next issues
2) If you cash the policy now how much tax (the Gain is taxed as ordinary incom) will,you owe? If,you wait until after you retire and then cash it will,the tax be considerably lower? That must inform your decision as well.

 

[wrichards58]

It depends.
The money you are paying into the Universal policy is buying you term insurance and some is being invested.
1)why do you have the policy? If it is for,investment purposes most feel,there are better ways to,put your money to work.
If it is because you need the insurance (that is it will provide necessary money in case you die that you otherwise won't have) then how much would,a,term policynofthe same size cost you right now? You can find out how much you can save to invest for,yourself,that way, but that raises the next issues
2) If you cash the policy now how much tax (the Gain is taxed as ordinary incom) will,you owe? If,you wait until after you retire and then cash it will,the tax be considerably lower? That must inform your decision as well.

ok. My husbands employer paided all the premiums. When he got down sized back in 1993..it was a way to give him more money, it was only intended for a savings but three years ago they stopped paying. He has a term insurance of 500,000 which i fill is enough. I am pushing him to maybe take the money out to invest better. I believe that our gain on the money is about 60,000. We are in the low tax bracket right now..both of our income is around 110,000.. we are maxing out our 403b to stay in that low bracket.

 

[wrichards58]

If you're looking for general opinions on universal life policies, the naysayers will be here shortly. Term insurance for insurance needs, other vehicles for investments is the preferred route.

There's not enough information given to give specific advice, particularly since you are already in deep on the universal policy. Who is the insured under the universal policy? Financially speaking, why do you need life insurance? what sort of advice / opinions do you seek?

I see your other post with a question on financial advisors hasn't gotten much of response, either.

Perhaps you could tell us a bit more about your circumstances in a "Hi, I am..." post.
http://www.early-retirement.org/forums/f26/read-this-before-you-introduce-yourself-27621.html

will do

 

[pb4uski]

The first question that you need to answer for yourself is whether you need life insurance on your husband. If you didn't have any life insurance and DH passed, could you live off your earnings and existing assets (taxable, tax-deferred, etc.)? If you are FI or RE then generally the answer will be that you don't need life insurance. If DH is still working and you could not survive without his income then the answer would be yes, you need life insurance on DH.

The second question would be if you do need insurance, how much do you need?.

For now, let's assume that you don't need insurance. The next question would be what is the overall return the policy is providing. You can get an idea of this by taking (the cash value at the end of the year divided by the cash value at the beginning of the year plus 1/2 of the premiums paid for the year) -1. If that "return" is pretty good then it might make sense to keep the UL policy, and the insurance is a bonus. This might be the case if it is an older UL policy.

For example, I have an old whole life policy that currently provides a ~5.2% return plus the value of the insurance coverage, so I keep it.

You mention guaranteeing a 4% draw. Usually policies have a guaranteed interest rate. If the policy has a guaranteed interest rate of 4%, it may be worth keeping, particularly if you need the insurance. If you don't need the insurance but can reduce the face amount of the insurance to reduce the cost of insurance it may also be worth keeping.

If you have a need for insurance the UL policy may be your best bet, depending on the crediting rate you are receiving and what they are charging you for insurance (referred to as cost of insurance or COIs) and expenses.

EvaluateLifeInsurance.org will do an unbiased analysis of whether you should keep a life insurance policy for about $90. Depending on your situation, it may be worth the cost.

 

[urn2bfree]

Another option is if you decide that you don't want to pay taxes on the gains right now but are willing to at a later date when you are in a lower tax bracket. (I realize you said that you are currently in the low bracket, but maybe you would be in a ZERO bracket when you have no income)
Anyway this other option is to let the policy pay for it's own premiums out of the cash value until you are ready to cash it out.
Also sorry for all the random commas in my earlier post...my iPad seems to do that without me being aware and I can't see a way to edit it now.

 

[wrichards58]

Another option is if you decide that you don't want to pay taxes on the gains right now but are willing to at a later date when you are in a lower tax bracket. (I realize you said that you are currently in the low bracket, but maybe you would be in a ZERO bracket when you have no income)
Anyway this other option is to let the policy pay for it's own premiums out of the cash value until you are ready to cash it out.
Also sorry for all the random commas in my earlier post...my iPad seems to do that without me being aware and I can't see a way to edit it now.

the interest rates credited to the account value is 4.450. Husband buisness got policy for him 1993, we have not paid anything into it. interest credited was 10,371.25 and cost of insurance charges was 2383.46. Total premium paid was 163,416 and our cash value is 217,278... It looks like we would paid on 54,000 on the capitol gains. In th inforce illustration the insurance cost jumps up to 3,000 a year at the age of 63 with projected cash value at 252,408 I do not trust our insurance guy or in fact any insurance person. But when I looked at the inforced illustrated and talked with him about the premium cost that I see down on paper he said that i need to read the annual information they send me every year because they could double the premium costs. For $93. I think I am going to get that evaluator to look at our policy.
So with this policy i would have the cash value plus death benefit. I dont really believe that I need the policy because we have another one for 500,000 but it ends at age of 66. I look at if we keep this policy with my husband pension we would only take out the next step down. OK, this might be a good thing. But the other question is we only have about 5,000 each in our roth. Could I take some money out to put in my roth only about 6,000 is what I am looking at. It will cost us $25.00 plus probably some capitol gains. Just some thoughts...............we have 4 years and just trying to get set for retirement.. Looking forward to your response.

 

[pb4uski]

IMO 4.45% is a pretty reasonable crediting rate. I would like to have access to invest $214k at 4.45% tax-deferred with relatively little credit risk.

How does the $2,400 of COI compare to the amount that you are paying for the $500k term policy? Depending on that comparison, you might be better off to keep the UL policy and the 4.45% crediting rate and lapse the term policy.

Another alternative to explore is how much you could reduce the insurance benefit, which in turn would reduce your COIs and still keep the policy and the 4.45% crediting rate. Even with the insurance you are getting a net yield of 3.38% by my calculations, which is not bad IMO.

 

[wrichards58]

because we got the 500,000 policy at 12 years ago it only costs us 785.00 a year. Looking at this policy we can keep until 100 years old. Looking at the illustration say when we get to be 75 years old the COI is 6,220.00 the interest earned is 17,858 and the cash value is 375,733. Well for only 785 a year I look at the other policy is nothing to pay and with this policy why not keep it. We have a disabled child and if he out lives us, then our other son would have enough...but the government gives us 67,000 a year for his institution care. Let me ask you, it would be nice to just take out 4,000 to put into a Roth.......ok what do you think

 

[pb4uski]

It sounds like the situation with your son is such that you may well need the insurance to help fund his care. Like I said in my first response, your first step is determining how much life insurance you need and then comparing that to your existing coverage.

You could easily take a partial surrender (or a policy loan) to provide the cash flow to put into a Roth if you really want to. You might want to check and see if any withdrawal would be taxable income to you since you didn't pay premiums until recently. Your agent or the insurer should be able to tell you this.

 

[urn2bfree]

Alos, when referring to the insurance increased value above the costs of the insurance- I would not call them capital gains--they won't be taxed as such either...they are taxed as ordinary income even though they really are a gain on investment. Just a quirk of the tax laws...

 

[wrichards58]

Alos, when referring to the insurance increased value above the costs of the insurance- I would not call them capital gains--they won't be taxed as such either...they are taxed as ordinary income even though they really are a gain on investment. Just a quirk of the tax laws...

OK got the evaluation which I am still trying to understand. But this policy when at death does not give you the cash value only the death benefit. I called ING to ask them to give us a figure to what we would be taxed on it we did a partial surrender or total surrender. We learned that the premiums paid were 244,000
but that still does not tell us what the taxes would be and our tax bracket will be the same as at reitirement 15%. The evaluator suggested to see if we could lover the death benefit then the costs of insurance would be lowered to about 200,000..we would use this policy to put in a trust for our son with a disablity. The other thing we are looking at is slowly taking out enough money to put in our Roths and to pay of a loan we have. But working with our tax guy to make sure we stay in the same tax bracket....... thanks for everyones help on this issue...I am still taking suggestions...........our insurance guy still wants to sell us another policy but we figured that we do not need it