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Trying to make lemonade out of lemon -- what to do with a variable life policy
Old 02-10-2017, 12:41 PM   #1
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Trying to make lemonade out of lemon -- what to do with a variable life policy

Hi all;

First off, if I knew 25 years ago what I know now, I would have never bought a universal-variable life policy. But that's water under the bridge, and I'm trying to decide the best approach for dealing with this turkey. The good news is that I'm well beyond the period of any surrender charges, and the cash value is actually profitable (the underlying separate account is in a Fidelity growth fund). So I'm contemplating a number of possible actions:

(1) Do nothing and let the cash value continue to fund the insurance policy. At present I do still have a need for some life insurance. The face amount is just under $100K, and the cash value is about $29K. Assuming reasonable returns in the future and with continued monitoring, I think this will be enough to keep the policy in force without having to make too many more premium payments, if any.

(2) More actively "leverage" the cash value by taking loans for various purposes. I have this notion of viewing the cash value as an "insurance pot" to pay the premiums on other insurance policies we have -- flood, wife's term life, disability, etc. I envision just continually cycling money in and out as I take and repay the loans. Of course this entails some risk, as it is dependent on my ability to repay the loans. It is also certainly a violation of the KISS principle. Nevertheless I am intrigued by the idea of putting the cash value to greater use.

(3) Rev up the funding of the policy (I don't really make regular premium payments now) with an aim of eventually making 1033 exchanges from the cash value to pay for my LTC policy -- assuming its future premiums don't go through the roof.

I'm just curious if anyone here has found themselves in a similar situation and would like to share their experiences. I'm 57 and had hoped to be retired by now, but uncertainties about health insurance have kept me on the job. Still hope to ease out by 60 or so.

Thanks
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Old 02-10-2017, 01:01 PM   #2
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I've done 1035 exchanges with annuities and am considering doing a 1035 exchange with an old joint life policy to an annuity. Schwab, Vanguard and Fidelity have very low fee annuities where you can just invest the money. I expect we will eventually just take out the value before the annuity starts paying income.

I'm not familiar with a 1033 exchange.

LTC insurance is another topic of its own. I'm looking at creating a self run investment -- identify part of our portfolio to serve as our LTC bucket. If we need LTC early, then we likely loose. If we never need it or not until we are quite a bit older, we should do better than the plans I've seen. YMMV
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Old 02-10-2017, 01:45 PM   #3
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I stand corrected; I meant 1035 exchange.
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Old 02-10-2017, 02:16 PM   #4
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Does the policy allow you to invest in the insurer's general account and if so, what is the general account currently paying for interest? If the insurer's general account is doing well that might be a possibility to explore... you could think of it as a CD-like part of your AA that also provides mortality protection that you need now and you can then surrender it later once you no longer need insurance protection.

If you surrendered it today, how much would the gain be? You might be best to wait until you retire and are in a low tax bracket to surrender.

Is this the form that pays $100k or $129k if you die?
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Old 02-12-2017, 03:06 PM   #5
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Hi GABrewer. I'm in exactly the same spot, with exactly the same numbers. The only thing I can add is that the cash value accrues about 2.5% per year after paying the premium (nominal 4% after fees).

It's protected by state regulations, so it's certain money, like a Treasury.

My plan is to cash out the next time the market crashes and use the cash to buy VOO.

Taking a loan is pretty expensive, so it didn't occur to me. I believe that I will only pay taxes on value increase minus premiums, so the tax hit of cashing out won't be bad.

I'm looking forward to the answers here!
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Old 02-13-2017, 09:55 AM   #6
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Quote:
Originally Posted by pb4uski View Post
Does the policy allow you to invest in the insurer's general account and if so, what is the general account currently paying for interest? If the insurer's general account is doing well that might be a possibility to explore... you could think of it as a CD-like part of your AA that also provides mortality protection that you need now and you can then surrender it later once you no longer need insurance protection.

If you surrendered it today, how much would the gain be? You might be best to wait until you retire and are in a low tax bracket to surrender.

Is this the form that pays $100k or $129k if you die?
pb4uski;
The policy does allow allocation to the general fund but has some quirky rules about it -- can only make transfers once a year and for a certain amount. However I would say I am fairly comfortable staying invested in the growth fund option; it has done well to this point.

If I surrendered today, about $13K of the cash value would be taxable gain. But I as indicated, I do still have a need for life insurance at the moment, so that's not something I'm really considering.

The death benefit would be $100K. I have chosen the "option A" approach available on these types of policies were the death benefit is fixed -- making it essentially a combined increasing cash value and declining amount of actual insurance over time.
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Old 02-13-2017, 10:00 AM   #7
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Originally Posted by respond2u View Post
Hi GABrewer. I'm in exactly the same spot, with exactly the same numbers. The only thing I can add is that the cash value accrues about 2.5% per year after paying the premium (nominal 4% after fees).

It's protected by state regulations, so it's certain money, like a Treasury.

My plan is to cash out the next time the market crashes and use the cash to buy VOO.

Taking a loan is pretty expensive, so it didn't occur to me. I believe that I will only pay taxes on value increase minus premiums, so the tax hit of cashing out won't be bad.

I'm looking forward to the answers here!
respond2u;
I'm not familiar with the term VOO -- is that a type of variable annuity?

The way my policy works is if I take a loan, that amount is moved to the general fund as "collateral." There it earns an interest rate that is typically one percent less than the loan rate -- thus, in theory, making the net loan rate just 1%. So, hypothetically, I can access the cash value -- at least on a short term basis -- in a way that would be more cost effective than making withdrawals or cashing out and having to pay taxes on the gain.
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Old 02-13-2017, 10:15 PM   #8
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VOO is the Vanguard S&p 500 ETF!

Thats a nice loan program--mine costs something like 5% if I recall correctly. Not worth it...
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