What to do? Life insurance policies

[REattempt]

Life partner (LP) (age 54) and I have maintained separate financial lives. All good. We are now, not integrating, but contemplating structure of overall.

I have enough, if I go, to fund LP and DD for life, so LP doesn't need life insurance.

LP has two policies with Northwestern Mutual
1) Variable Life, written 2009, $125K Death Benefit (DB), $1000/yr. 44K cash value, about 20K in gains.
2) Estate CompLife, written 2013, $250K DB, $2700/yr. 19K cash value, negative gains.

It is my intent to surrender these policies. We have an alternate use for the cash value and reduce the 3700/yr spend.

Questions
1) Do you agree that we should, or it is ok, to surrender?
2) At a minimum, taxes will likely be 5K, plus 10% (2K) penalty for before 591/2 cash out. I'm ok paying and getting rid of policies. Do I understand the basics of the tax situation, or are there alternate scenarios?
3) I have to talk the insurance agent with LP, because she doesn't understand anything about life insurance other than "it pays if I die." I don't know anything about life insurance either, really, and I'm sure he has a spiel. Can you help me with what to say to him / counter what he might say?

 

[njhowie]

1) Do you agree that we should, or it is ok, to surrender?
2) At a minimum, taxes will likely be 5K, plus 10% (2K) penalty for before 591/2 cash out. I'm ok paying and getting rid of policies. Do I understand the basics of the tax situation, or are there alternate scenarios?
3) I have to talk the insurance agent with LP, because she doesn't understand anything about life insurance other than "it pays if I die." I don't know anything about life insurance either, really, and I'm sure he has a spiel. Can you help me with what to say to him / counter what he might say?

1) No position. If you believe it makes sense, no longer want to be paying the $3700 in annual premiums, and have better uses for the money, then it's the right choice for you.

2) Don't know. It looks logical.

3) "Thank you for your inputs. However, our financially situation is such that we no longer have the need for the policies as previously, and we have other uses for the premiums and cash out value."

Agent has no business countering or advising what you should do. If he persists, simply ask "Are you a fiduciary"? His answer is no, or else he is lying. End of discussion right there - he does not have your best interests in mind, he's looking after his own.

 

[mrfeh]

I would get rid of both policies simply because anything other than term life is usually only good for one person: the salesman.

 

[COcheesehead]

I had two life policies with LTC riders and bought them when I was younger for a LTC hedge, death benefits and lastly as another way to stash deferred cash. As our assets grew it became evident that we could self insure for LTC. The death benefit was not longer needed and the returns were so negligible that as an investment they sucked. We cashed out of ours and never looked back.

 

[Dash man]

There’s a 10% penalty for cashing out a life insurance policy before 59 1/2? That’s news to me. Were these in an IRA? I’m confused.

 

[VanWinkle]

You should be able to access the cost basis first with no taxes and then access the rest through a loan that you never repay(you have to keep the policy in force). Once you know the cost basis, you will know what the tax consequences of taking out any amount above the cost basis. Permanent life insurance is FIFO(First in, first out) for distributions in most cases so your payments come out first, capital gains last.

"You can usually withdraw part of the cash value in a whole life policy without canceling the coverage. Instead, your heirs will receive a reduced death benefit when you die. Typically you won't owe income tax on withdrawals up to the amount of the premiums you've paid into the policy."

 

[pacergal]

If your partner no longer wants or needs the policies, simply call and cancel over the phone.
That is what we did about 5 years prior to retirement. The person I talked with asked one question why and I simply answered "we no longer need it". End of discussion.
No need to go into explanations, it's none of their business, its your money, your policy.

It did take a while to get the cash out though. We received the checks about a month later. I had to call two weeks after we cancelled, they were in slow motion to disperse.

 

[brett]

I had that conversation years ago with a whole life salesman. My parents gave me a policy.

I called and asked the firm to cancel the policy. Send me the cash value.

They sent along a whole life salesman who told my why I should keep it and why I should buy more. Do you love your children?

After the 20 minute spiel I looked at him and simple said 'please cancel the policy and send me the cash value'.

He started to sputtter. I then told him what term life coverage I had through my employer (7 X salary) and the cost. That was the end of it. He said good night.

Had the cheque two weeks later.

Over the years as our financial situation changed and my compensation increased I gradually reduced the term insurance down to the base company provided amount. No longer need it.

I did have one agent who tried to sell me on the charms of a combined whole life and retirement savings plan rolled into one.

He could not really explain the details that I asked about. Especially the admin fees-hidden or otherwise. I got to the third page of fine print and gave up. It was clear that the benefit was for the insurer, not for me.

I do not understand the issue. Just call and say the words please cancel the policy and send me the cash value. The insurer will either send you the paperwork to sign or send along a new college hire. In either case....just say cancel. It is not difficult.

 

[jazz4cash]

.... she doesn't understand anything about life insurance other than "it pays if I die." I don't know anything about life insurance either, really, and I'm sure he has a spiel. Can you help me with what to say to him / counter what he might say?

If this is life partner's only concern, she has the wrong type of insurance and should consider term instead.

 

[Chuckanut]

Clark Howard has mentioned a service which for a fee of a few hundred dollars will evaluate a life insurance policy you own and give you the details to help make a decision on whether to keep it, cash it in or whatever.

Alas, I can't find the name of the company.

 

[pb4uski]

Life partner (LP) (age 54) and I have maintained separate financial lives. All good. We are now, not integrating, but contemplating structure of overall.

I have enough, if I go, to fund LP and DD for life, so LP doesn't need life insurance.

LP has two policies with Northwestern Mutual
1) Variable Life, written 2009, $125K Death Benefit (DB), $1000/yr. 44K cash value, about 20K in gains.
2) Estate CompLife, written 2013, $250K DB, $2700/yr. 19K cash value, negative gains.

It is my intent to surrender these policies. We have an alternate use for the cash value and reduce the 3700/yr spend.

Questions
1) Do you agree that we should, or it is ok, to surrender?
2) At a minimum, taxes will likely be 5K, plus 10% (2K) penalty for before 591/2 cash out. I'm ok paying and getting rid of policies. Do I understand the basics of the tax situation, or are there alternate scenarios?
3) I have to talk the insurance agent with LP, because she doesn't understand anything about life insurance other than "it pays if I die." I don't know anything about life insurance either, really, and I'm sure he has a spiel. Can you help me with what to say to him / counter what he might say?

1) I definitely would surrender the second one. I would consider keeping the first one. I have an old whole life policy that I keep as a bond substitute simply because it is crediting a competitive rate of interest even though I don't need life insurance any longer.

2) Unless the policies are qualified or in an IRA there should be no 10% penalty. The gain would be taxable income in the year surrendered. You may be able to spread the gain across more than one tax year by doing a partial surrender this year and the remainder next year.

3. I think you can just say that you don't have a need for life insurance anymore.

 

[Koolau]

I wish there were an easy way to evaluate policies and what their advantages and disadvantages are. BUT if you have relatively "old" policies - maybe 15 to 20 years holding them - you have paid all the salesman commissions (probably in the first 3 years) and you probably have cash value which can keep the policies in force even if you decide not to fund them any longer.

If I were advising a young person, I might suggest term insurance for the period of need (like when kids finally graduate from college.) OR what we did for our kids was fund cash-value policies (whole life) because these policies are very flexible and the two kids that have kids NEED insurance and they NEED flexibility.

But if you already own policies, it's tricky. You already see that there are some pitfalls to cashing them out. And there are expenses to keeping them up. Also, unless they are whole life, you may find that what you are paying in premiums will NOT keep them in force beyond a certain age - depending on policy "dividends" etc.

That's why IF you can find an expert that does NOT sell anything, you might be money ahead to get a review. Don't forget that there IS a potential pay off when someone dies! I have a policy that I was strongly considering cashing out. Within two years, I developed two life threatening conditions which make my insurance policies like GOLD. DW will almost certainly collect on them so I'm keeping them up. MUCH better odds than Vegas IMHO.

So, if I'm saying anything (certainly nothing profound and certainly not as a professional) it would be: IT'S COMPLICATED. Do NOT listen to us as we don't know your policies as well as you do (and you probably don't have much of a clue.) No insult intended, just sayin'.

Cashing out now could be throwing good money after bad - or not. Get professional help if it is available - and good luck and aloha.

 

[Rainbowdash]

All these life insurance combined with investments whether it’s whole life, variable life or universal life, have something in common: most people end up surrendering it or cashing out at some point, for the ones that never bought these before, it should be a big red flag

 

[big-papa]

All these life insurance combined with investments whether it’s whole life, variable life or universal life, have something in common: most people end up surrendering it or cashing out at some point, for the ones that never bought these before, it should be a big red flag

Yep. I've had a group plan with every employer I've had. I always use the "free" one only that is some multiple of my salary. I've also had a second group life policy through a professional organization I belong to. My wife also has one through them.

For the policy through the professional organization, up to age 60, the rates increase on a regular schedule every 5 years when the second digit of my age was 0 or 5. After age 60, it's every year. Over time, I've reduced my coverage accordingly in order to maintain the same premiums. Kinda makes sense since if I'm doing the right things with my savings, then there should be less need for life insurance over time.

Since I'm retiring this year, and daughter's college is fully funded with her now in her senior year, I see no reason to keep this policy any longer, nor membership in the professional organization I belong to that gives me access to this insurance. Next premium will be due in August this year and that's when it'll get cancelled. Would have done this a couple of years ago, but then Covid hit and I decided to extend just a little longer - just in case.

Cheers
Big-Papa

 

[Montecfo]

I think life insurance can be valuable as a way to fund higher taxes when one spouses passes leaving the other paying taxes at single rates.

That can be a legitimate reason for keeping one or more old policies in force.

I wonder if one or more of the whole life policies can become "paid up" policies using the inside buildup to pay premiums.

Unless it really REALLY is not needed under any circumstances.

 

[Koolau]

I think life insurance can be valuable as a way to fund higher taxes when one spouses passes leaving the other paying taxes at single rates.

That can be a legitimate reason for keeping one or more old policies in force.

I wonder if one or more of the whole life policies can become "paid up" policies using the inside buildup to pay premiums.

Unless it really REALLY is not needed under any circumstances.

Yeah, this is a strategy that I more or less realized by "accident" when I found out that I'm more "terminal" than I thought. - You know. We're all terminal. Some of us are more terminal than others. I got to thinking, when I exit the building, DW will be sitting on the entire "stash" and suddenly she won't be married so her taxes will be much higher. She won't have her SS (just mine) and she'll only "inherit" 25% of my modest pension. I'm not suggesting her life will be bleak without me (well, not financially, anyway) but surviving on lower income with higher taxes on, for instance RMDs could trigger some issues. This is it's whole subject and I just might start it some day. BUT for now, I'm keeping all my dribs and drabs of insurance that I've ended up with. Everyone else should consider this a YMMV subject.

 

[Out of Steam]

Similar questions of when to drop policies also come up for term insurance. My wife and I will be dealing with this in about three years.

 

[Koolau]

Similar questions of when to drop policies also come up for term insurance. My wife and I will be dealing with this in about three years.

Our decision was relatively easy. Our group plan made us eligible for term insurance, but not at the good rates we would have been eligible for - with successful underwriting. We knew going in we wold not meet "standard" rates so we went with the group. So it was kind of expensive. BUT soon as the kids were on their own, we dropped the group term faster than 6th period math! YMMV

 

[Rainbowdash]

I think life insurance can be valuable as a way to fund higher taxes when one spouses passes leaving the other paying taxes at single rates.

That can be a legitimate reason for keeping one or more old policies in force.

I wonder if one or more of the whole life policies can become "paid up" policies using the inside buildup to pay premiums.

Unless it really REALLY is not needed under any circumstances.

Absolutely not, one of the many sales pitches used to instill fear and uncertainty, life insurance combined with investments is total garbage for anybody with basic financial knowledge.

 

[pb4uski]

I think life insurance can be valuable as a way to fund higher taxes when one spouses passes leaving the other paying taxes at single rates.

That can be a legitimate reason for keeping one or more old policies in force.

I wonder if one or more of the whole life policies can become "paid up" policies using the inside buildup to pay premiums.

Unless it really REALLY is not needed under any circumstances.

Some old whole life policies may have an annual dividend that exceeds the annual premium and you can just ask that the dividend be used to pay the premium rather than buy paid-up additions. Or one can use a combination of dividends and policy loans to pay the premium and the cash value will still grow.

I have an old whole life policy that I keep because even ignoring the life insurance benefits the cash value is growing each year for my total premiums paid + 2.5%... so to me it like 2.5%, low credit-risk, no interest rate risk tax-deferred bond. I don't at all mind adding $19/month to my 2.5% "bond".

But either DW or my kids will get a nice kicker when I die (the life benefit).

 

[Koolau]

Absolutely not, one of the many sales pitches used to instill fear and uncertainty, life insurance combined with investments is total garbage for anybody with basic financial knowledge.

Just because something is used as a sales pitch doesn't make it untrue. "You never have to put $6/gallon gas in a Tesla." Great pitch - and it's true.

I think I have basic financial knowledge (absolutely no expert however!) So you are welcome to your opinion about insurance, but some folks see it differently. I don't "recommend" insurance but I find it useful to meet my goals. I especially think there MAY be reasons to KEEP insurance that was purchased many years ago - even if it was ill advised at the time it was purchased. We would all be much better investors if we could take mulligans on our investments. YMMV

 

[ncbill]

Some old whole life policies may have an annual dividend that exceeds the annual premium and you can just ask that the dividend be used to pay the premium rather than buy paid-up additions. Or one can use a combination of dividends and policy loans to pay the premium and the cash value will still grow.

I have an old whole life policy that I keep because even ignoring the life insurance benefits the cash value is growing each year for my total premiums paid + 2.5%... so to me it like 2.5%, low credit-risk, no interest rate risk tax-deferred bond. I don't at all mind adding $19/month to my 2.5% "bond".

But either DW or my kids will get a nice kicker when I die (the life benefit).

My plain-vanilla whole life policy (nearly 40 years old) generates all of $50/year in dividends...annual premium is over $1000, and since the dividend has been applied to the premium since the beginning death benefit has increased less than 10%.

So I'll never believe the claim "dividends can pay policy premiums."

Still plan on keeping it since my hefty term policy expires next year.

 

[CardsFan]

My plain-vanilla whole life policy (nearly 40 years old) generates all of $50/year in dividends...annual premium is over $1000, and since the dividend has been applied to the premium since the beginning death benefit has increased less than 10%.

So I'll never believe the claim "dividends can pay policy premiums."

Still plan on keeping it since my hefty term policy expires next year.

Well, we have the same situation as pb4uski. Two, 33 year old policies (original death benefit $50k each) with dividends that now exceed the premiums. About 4 years ago we started applying the dividends to the premium. Total invested over 30 years was about $31k.

So now we each have a policy with a cash value of about $30k and a death benefit of about $70k, with no future premiums.

Not a great investment, but also not a very poor investment.

 

[Act2]

When my Dad passed, there was one big upside to the life insurance (old whole life policies, dividends did pay for premiums on one but he paid small premiums on another). The upside was that the insurance paid off quickly. It was easy and fast to access those funds, more so than much of the estate since all the named beneficiaries needed was the death certificate, not probate court authority.

 

[Montecfo]

Well, we have the same situation as pb4uski. Two, 33 year old policies (original death benefit $50k each) with dividends that now exceed the premiums. About 4 years ago we started applying the dividends to the premium. Total invested over 30 years was about $31k.

So now we each have a policy with a cash value of about $30k and a death benefit of about $70k, with no future premiums.

Not a great investment, but also not a very poor investment.

This is exactly what I'm talking about. You have to run the numbers for your individual case.

I have never owned a whole life policy, and I have cancelled my term policies, except one.

Another intriguing use of life insurance (discussed in other threads) is to replenish funds used for LTC.

I think the idea that life insurance is to be avoided is another one of those myths or truisms we routinely slay around here.

It just depends on your personal situation and goals.