what to do with universal life insurance policy?

[23window]

My DW has had a flexible universal life insurance policy since 1988. We’ve been making automatic monthly payments of $25 for years. I’ve pretty much ignored the policy but just now looked at it. It has a guaranteed interest rate of 4.5%, which seems great now, but the prime rate was 10% when the policy was issued. The policy fee is only $73 per year and the life insurance component is less than $500 per year. It is a $100,000 policy and the current surrender value is about $7,000. I can add up to $17,500 this year and still have it considered to be life insurance, and therefore, not taxable upon surrender. We don’t really need the life insurance but the 4.5% rate is enticing. What should we do with this policy? Cash it in? Should I take advantage of the 4.5% tax-free return and add $17,500 to it? I suppose the actual rate of return would be closer to 4.2% or 4.3% after taking the fees and insurance cost into effect. Would you continue to keep the policy so long as interest rates stay low? I'd appreciate any comments or advice.

 

[JRon]

If you’ve made $25 monthly payments since 1988, you’ve paid between $9k and $10k. If the surrender is only $7k and you don’t need the insurance why would you keep it?

 

[timbervest]

I had a universal whole life policy with a big cash value that I could have cashed out and paid the taxes on but chose rather to convert it to no premium coverage, turning out to be a higher DB, without any more premium payments. I don't really need the policy but now I have the permanent coverage and don't have to worry about premiums. Something to think about.

I would not add additional money to whole life as an investment. Better places to put your money.

 

[pb4uski]

I have some friends who have a similar 4.5% minimum crediting rate UL policy.

One thing to find out is if it is a Option A or Option B policy:

Option A provides the face amount of the policy when the insured dies. The contract can still accumulate cash value, but if the policyholder dies, the beneficiary receives only the death benefit, not the cash value. Option B provides the beneficiary with the death benefit plus any cash value.

If it is Option A, then the impact of your dump-ins will be to reduce the net amount at risk and in turn, the amount of mortality charges. If it is Option B then any dump-in will just accumulate at 4.5% interest. Both are attractive... just different.

They should be able to run an inforce illustration showing projected account values and death benefit under scenarios like dumping in as much as possible while keeping the contract life insurance, paying as little premium as possible and something in between. Then look at the IRR of each scenario.

I have an older 1977 whole life policy that I keep even though I don't need the life insurance anymore. The premium is $20/month. Compared to cashing it in now vs keeping it, it is attractive to keep it for my heirs... but even just looking at the cash value it is yielding about 3% with no interest rate risk. If I ever needed the money, I can just cash it in but as ballast this money is near the bottom of the keel.

 

[jldavid47]

I have a similar policy and have been considering converting the cash value into an annuity. The conversion would be tax-free, the payments from the annuity would be taxable. I'm not sure that's the right choice either so I'm going to sit on it for at least another year.

 

[pb4uski]

.... I would not add additional money to whole life as an investment. Better places to put your money.

This response seems to be in the "Ready, Fire, Aim" category. And its UL not whole life but that's a nit.

Where can you get a guaranteed minimum of 4.5% with no interest rate risk and negligible credit risk?