Cash value taxable?

[mickeyd]

Gumby,

universal life policy, which I plan to cash out when it is paid up,

I don't believe that a UL policy will ever be paid up . Read the policy.

One thing that you did not mention is whether or not you needed the life insurance protection that this policy provides. If so, consider keeping it. If not, consider dumping it.

 

[Gumby]

I can never keep the terminology straight. On reflection, I think it is properly referred to as interest sensitive whole life, which I think some people call variable whole life. I do know that it will be paid up at the end of the 15 years. The interest rate started at 7.51%, dropped to 7.25% for a few months and has been back up at 7.4% for a couple of years. Because performance was good enough, the death benefit has increased over time as well as the cash value.

 

[Rich_by_the_Bay]

Well, I looked over some old documents and compared annual statements on the policy mentioned in my original post. I did surrender some cash value a few years ago, but that still left just enough for the dividends to pay the premium, so in this case they may be right that the cash basis is quite low.

On the positive side, the cash value increase seems to be about 6-7% per year. So I might as well just let it sit there til I need it and, hopefully, til I am in a lower semi-FIRE tax bracket.

 

[saluki9]

On the positive side, the cash value increase seems to be about 6-7% per year. So I might as well just let it sit there til I need it and, hopefully, til I am in a lower semi-FIRE tax bracket.

That's my point. Despite what you think about insurance companies, NML is a class act. We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run.

I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

 

[brewer12345]

That's my point.  Despite what you think about insurance companies, NML is a class act.  We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run. 

I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

I agree that NWM is a class shop, and it is one of the three companies I would even consider buying something as twitchy as LT disability insurance from. Having said that, Their life insurance policies are expensive, particularly because you (the customer) has to pay their agents a huge commission. If you have already been pounded for the commission, it may indeed be worth keeping the policy, particularly if you need the mortality coverage. But NWM wouldn't be the first place I would suggest to go price a policy.

 

[Martha]

Course the other strategy is to take the cash value out, and get your accountant to jusfity not paying taxes on the full 1099 amt. Just because the ins company thinks this is taxable (and it's to their advantage to discourage cash-outs), doesn't mean that this is the only or best interpretation.

And even if you take it out as income, you will probably come out ahead by investing these after-tax dollars elsewhere. I don't know -- got some calls to make Monday.

Rich, let us know what you find out.

 

[Rich_by_the_Bay]

This policy had some cash-value surrender activity about 5 years ago. The surrender amount was calculated to leave just enough cash value in the policy to have the dividends cover the premiums.

Since then, the cash value has increased a bit and now the dividends exceed the premiums. The net growth of the remaining money was about 6.3% and 7% over the past two years. At those returns, I decided to let it sit (beats any bond funds I own, by far).

Alas, when we do withdraw, it will be almost all taxable because the cash basis of the policy was neutralized by the cash value surrender. Thus, it will sit at 6-7% return until I am old and decripit, or at least in a lower tax bracket.

 

[2B]

The net growth of the remaining money was about 6.3% and 7% over the past two years. At those returns, I decided to let it sit (beats any bond funds I own, by far).

I find this very hard to believe. My total experience with insurance products is that they pay low interest rates. The rates you quote are safely above government bonds. I can only think that they are quoting a "pre-fee" interest rate. After which you get the normal 3%. The other option is that this policy goes all the way back to the 70's and they screwed up and put in a 6% floor and a high premium over an interest index. Back then, people were convinced that interest rates would never go below 10% again.

 

[saluki9]

I find this very hard to believe. My total experience with insurance products is that they pay low interest rates. The rates you quote are safely above government bonds. I can only think that they are quoting a "pre-fee" interest rate. After which you get the normal 3%. The other option is that this policy goes all the way back to the 70's and they screwed up and put in a 6% floor and a high premium over an interest index. Back then, people were convinced that interest rates would never go below 10% again.

You must not have any experience with NML. The sell very fully priced whole life policies. These policies are well in excess of what their competitors charge for the same coverage.

That being said, they have the highest ratings available from all of the ratings services. Also, through work I have had to analyze many of their existing policies. It is not uncommon at all to see 10+ year old policies that pay dividends of 8%+ AFTER paying all of the premiums with dividends.

Don't forget that they are a mutual company (similar to vanguard) and the profits flow to the policy holders.

 

[FinanceDude]

That's my point.  Despite what you think about insurance companies, NML is a class act.  We should only wish that the financial institutions we deal with on a daily basis were as well capitalized, and well run. 

I say consider it a bond investment for now, enjoy the 6 or 7% returns, and keep the free insurance.

The "dividend" is a return of principal based on favorable loss experience. The reason NML has had a high dividend rate for many years, is they don't insure anything but healthy people, and rate the heck out of the rest........but the model works for them................

They might have the best actuaries in the US, though..........

No one should think of the dividend rate on a CV policy as a "fixed income" investment..........it is a return of premium..........plain and simple..........

 

[saluki9]

The "dividend" is a return of principal based on favorable loss experience. The reason NML has had a high dividend rate for many years, is they don't insure anything but healthy people, and rate the heck out of the rest........but the model works for them................

They might have the best actuaries in the US, though..........

No one should think of the dividend rate on a CV policy as a "fixed income" investment..........it is a return of premium..........plain and simple..........

Did you read the first 3 pages of this thread?

This isn't a discussion about whether he should buy a new policy. HE ISN'T PAYING ANY PREMIUMS

the policy is running all by itself and on top of paying the entire premium it is also adding 6% to the cash value each year. So, we have a chunk of money that is tax deferred, not fluctuating (downside at least) and kicking out 6%+ per year. From an asset allocation perspective that sounds like a fixed income investment to me

 

[FinanceDude]

the policy is running all by itself and on top of paying the entire premium it is also adding 6% to the cash value each year.  So, we have a chunk of money that is tax deferred, not fluctuating (downside at least) and kicking out 6%+ per year.  From an asset allocation perspective that sounds like a fixed income investment to me

Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........

For purposes of our discussion, that's fine if you want to look at it as a fixed income investment. However, you and I would be subject to losing our licenses if we presented it to a client as such.............. At least, if you believe the NAIC or SEC's thoughts on cash value life insurance..........

 

[saluki9]

Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........

For purposes of our discussion, that's fine if you want to look at it as a fixed income investment. However, you and I would be subject to losing our licenses if we presented it to a client as such.............. At least, if you believe the NAIC or SEC's thoughts on cash value life insurance..........

Too bad NML doesn't sell 10 year old policies

And fear not, I don't have an insurance license

 

[Rich_by_the_Bay]

Yes, I did read the first 3 pages of the discussion........... And I know quite a bit about NML's insurance policies........

I am sketchy on the details since it was a few years ago, but we surrendered some cash value on an NML EOL policy. NML kicked out a 1099 for just about the entire amount of the surrendered cash value. My accountant discussed this with them and advised us that in his opinion NML failed to accurately explain why the cash basis would be nearly 0.

My question: How likely is it that NML's calculations would be wrong or "open to interpretation?" Could it be that my accountant is correct or is interpreting things differently? After all, it is in NML's interests to discourage cash-outs and to play it very safe on the 1099 side.

I'm not asking about my particular situation so much as whether there is some room for differences in opinion, or is it best to assume that NML is virtually always "right in such things?

 

[FinanceDude]

IMy question: How likely is it that NML's calculations would be wrong or "open to interpretation?" Could it be that my accountant is correct or is interpreting things differently? After all, it is in NML's interests to discourage cash-outs and to play it very safe on the 1099 side.

I'm not asking about my particular situation so much as whether there is some room for differences in opinion, or is it best to assume that NML is virtually always "right in such things?

It's a case of "my actuary can beat up your CPA"...............you guys think investing is murky, try reading a life insurance policy........

The IRS and life insurance companies have a symbiotic relationship.............you take care of me, I'll leave you alone.........

If asked to produce documentation, actuaries can scribble down enough algorithms to confuse a mathmatician...............

Sort of like the time I tried to figure out the IRR of ten different cash value life policies.............I kept coming up with 1.5-2.0 %, and then I'd contact the companies, and they would "explain" how it really was 9%, and I wasn't reading it right.........

Want confusion? Ask your agent for a policy illustration........

 

[FinanceDude]

And fear not, I don't have an insurance license

Do you have a securities license? Because that would be at risk too.........

 

[saluki9]

Do you have a securities license? Because that would be at risk too.........

Yeah, but I don't have to worry about selling insurance policies :

 

[FinanceDude]

Yeah, but I don't have to worry about selling insurance policies   :

That's probably a good thing...........