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Old 12-27-2016, 10:34 AM   #41
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....I've got a small policy from AAL/Thrivent that I bought before I understood anything about life insurance. I don't pay any premiums because the dividend is more than the premium. The total cash surrender value went from $8,377 to $8,746 in the last policy year. That's a 4.4% gain.

If I died tomorrow, the death benefit would be about $3,000 more than the cash value.

If I surrendered today, I'd owe FIT on all the gain in the policy. If I keep it until I die, my wife will get the entire face amount without FIT.

To me, the best decision at this point is to keep the policy.

(Later on, when I learned about life insurance, I bought term. That would be my advice to anybody starting out today.)
4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.
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Old 12-27-2016, 10:38 AM   #42
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The late financial huckster Charles J. Givens sold a lot of snake oil in his time, but there is one thing he advocated which I believe was very true 25 years ago, and is still very true today: Investing and insurance, both necessary components of a sound and secure long-term financial plan, have nothing to do with each other, and one should not be used to substitute for the other.
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Old 12-27-2016, 10:56 AM   #43
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I would say that is true 99.9% of the time. Whole life is a good product in estate planning situations where life insurance is needed for a long time (for example, so the kids are not forced to sell the family farm or business to pay estate taxes and probably a small number of other uses) but those sort of uses would fit in the insurance category better than the investment category.

That said, even though I believe that it is generally better to buy term and invest the difference, my whole life policy has had pretty good returns over the long period that I have owned it so I don't think of it as big of a mistake as I did when I was in my 30s.
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Old 12-27-2016, 06:25 PM   #44
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4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.
This is why it's hard to beat and old TIAA-Traditional account. Mine is paying 4.85% right now and if interest rates go up that will increase.
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Old 12-27-2016, 07:04 PM   #45
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I think that djr may have captured the essence of why at a minimum to convert a old whole life policy to paid up the tax angle, that if you cash it in in particular if it is a participating policy, you would owe a bunch of taxes but if the pays off with death there is no tax due. Also if the polcy is over 20 years old the yearly increase in the cash value tends to be close to the premiums since the sales commission has already been paid,
A paid up policy in essence requires no more premiums for a reduced face amount (essentially you take the cash value and buy a single premium whole life policy with it)
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Old 12-27-2016, 09:59 PM   #46
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4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.
I've never tried to do the math from the issue date. I know that I owned the policy throughout the high interest environment in the 1970's and 80's, so I'd have to devise some way of comparing returns on the WL to what was available on bonds.
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Old 12-27-2016, 10:15 PM   #47
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I think that djr may have captured the essence of why at a minimum to convert a old whole life policy to paid up the tax angle, that if you cash it in in particular if it is a participating policy, you would owe a bunch of taxes but if the pays off with death there is no tax due. Also if the polcy is over 20 years old the yearly increase in the cash value tends to be close to the premiums since the sales commission has already been paid,
A paid up policy in essence requires no more premiums for a reduced face amount (essentially you take the cash value and buy a single premium whole life policy with it)
I'm not sure how big a bunch of taxes is. For mine, the CSV is about 3x the premiums that I have paid so the gain is 2x the premiums paid.

So if someone paid $10k in premiums over the years then the CSV is $30k... then the tax would be about $3k (at 15% of the $20k gain).

My increase in cash value last year was over 5x the premiums paid.
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