When should Whole Life Policies Be Cashed In

[nwsteve]

My DW and I have 3 small whole life policies (total face value is 35k). I am looking at things I can do to simplify our estate and these policies popped up. The death benefit amounts to a tiny amount of our estate. Premiums are paid by policies and dividends buy paid up life.
I did a search of the ER site and the last discussion I found came from 2013 when low interest rates and Fed estate deductions suggested some value.
All three policies were issued by Prudential.
Anyone have any tools or insight why these policies are worth keeping in place?
Thanks in advance

 

[jazz4cash]

My DW and I have 3 small whole life policies (total face value is 35k). I am looking at things I can do to simplify our estate and these policies popped up. The death benefit amounts to a tiny amount of our estate. Premiums are paid by policies and dividends buy paid up life.
I did a search of the ER site and the last discussion I found came from 2013 when low interest rates and Fed estate deductions suggested some value.
All three policies were issued by Prudential.
Anyone have any tools or insight why these policies are worth keeping in place?
Thanks in advance

Do you need life insurance?

 

[nwsteve]

OP here, I neglected to include, we have no need for life insurance.

 

[jazz4cash]

I would cash them out if they’re not needed. Isn’t the cash value being eroded by using dividends to maintain the policy?

I keep hearing about strategies to generate tax free income (e.g. loans)using WL policies. It always seemed like a lousy reason to buy a policy but if it’s already in place I guess it could be an alternative to cashing out.

 

[street]

My DW and I have 3 small whole life policies (total face value is 35k). I am looking at things I can do to simplify our estate and these policies popped up. The death benefit amounts to a tiny amount of our estate. Premiums are paid by policies and dividends buy paid up life.
I did a search of the ER site and the last discussion I found came from 2013 when low interest rates and Fed estate deductions suggested some value.
All three policies were issued by Prudential.
Anyone have any tools or insight why these policies are worth keeping in place?
Thanks in advance

Something you can look into is changing the ownership of the LI policy to someone else besides you. If there is someone you want to leave something too, it may be an option for someone to get tax free money when you pass on.

 

[savory]

I’m in the same boat. And have asked myself the same question.

What I like about the policies, but am not sure it is the best financial approach, is the insurance will be tax free as an inheritance and will be available to pay any inheritance taxes.

In the meantime, the dividends pay the policy and my lifestyle stays the same. I have been allowing the dividends pay for many years. Having said this and knowing what I know now, I think I would have purchased term and canceled many years ago.

 

[rk911]

the primary purpose of life insurance is to offset risk. cash them when the protection they provide is no longer needed or wanted. we dropped our whole life policy many years ago (in retrospect we should've bought term insurance) when our net worth made insurance unnecessary.

 

[JoeWras]

Add me to the list. My parents got me 3 small policies when I was a child. They are all weird whole life, seems like the industry was coming up with gimmicks.

I just cashed two of them, only a few thousand, and put the proceeds into a T-bill. Just simplifying. DW didn't we want to deal with them if I kicked off. Don't blame her.

The third one is some weird policy that the CSRs at AIG couldn't understand. They sent me one correspondence that was confusing. Called, and the rep was confused too . She opened a ticket for a comprehensive illustration so maybe I can figure it out. So, still working on the decision.

 

[JoeWras]

One more thing that makes these confusing for the heirs: name changes. My mystery policy was originally Franklin, bought by American General, fell under the umbrella of AIG, and just recently got spun out as Corebridge .

 

[COcheesehead]

Something you can look into is changing the ownership of the LI policy to someone else besides you. If there is someone you want to leave something too, it may be an option for someone to get tax free money when you pass on.

Why wouldn’t you just change the beneficiary?

 

[JoeWras]

I can't speak for street, but in my case, ownership change was the way to go.

The original policy was on my life, owned by my dad, benefiting him . Dad paid tax on it yearly for 40 years.

Before dad passed, I became owner with DW being beneficiary. So it was a change in both. Dad being owner all those years was a gift since he took most of the tax hit .

 

[street]

Why wouldn’t you just change the beneficiary?

I guess if you change ownership there would be no look back for Medicaid. Of course, you would need to do it 5 years prior. I also would say, it would be a clean break from the you to whomever you left this gift too if you changed ownership and put you as beneficiary.

Just my view (2¢) on the topic and that is what I would do.

A lot of people are worth more dead than alive. Just from LI policies.

 

[TrvlBug]

DH's mom got him 2 $20K policies when he was young. Cashed them in 2 years ago to simplify things. ~$25K cash value IIRC. One of the policies was with Prudential and he still has ~$7K of stock from the policy. Need to decide what to do with that as well as a few shares resulting from a small policy his mom had that he inherited.

 

[CRLLS]

I had a policy that I annuitized about 5 years ago. I read the policy and went thru a fair amount of effort to exercise that guaranteed monthly amount. The agents wanted to cash in the policy and then take out an annuity. Their option netted about 20% less than I ended up with. If I didn't push my position, that money would have been theirs. This was not a fly by night insurance company. The agents didn't know older policies and could not see my policy benefit options. Know what your policy says.

 

[COcheesehead]

I guess if you change ownership there would be no look back for Medicaid. Of course, you would need to do it 5 years prior. I also would guess say it would be a clean break from the you to whomever you left this gift too.

Just my view (2¢) on the topic and that is what I would do.

A lot of people are worth more dead than alive. Just from LI policies.

There is value in the policy. People sell policies all the time. Why give it away so you qualify for Medicaid - the bottom of HC food chain. Not many on here steer around that obstacle.

 

[street]

There is value in the policy. People sell policies all the time. Why give it away so you qualify for Medicaid - the bottom of HC food chain. Not many on here steer around that obstacle.

Okay.

I don't think you understood the part about look back with Medicare and I won't explain it here. The law in look back is nothing sinister.

I just gave my view on what I have learned, and many have gone that route. If you don't need the LI there are many options for you to take the one I gave is just one of them.

 

[COcheesehead]

Okay.

I don't think you understood the part about look back with Medicare and I won't explain it here. The law in look back is nothing sinister.

I just gave my view on what I have learned, and many have gone that route. If you don't need the LI there are many options for you to take the one I gave is just one of them.

I understand look back. I just thought your post was a bit of a reach for most on here.

 

[Brett_Cameron]

My DW and I have 3 small whole life policies (total face value is 35k). I am looking at things I can do to simplify our estate and these policies popped up. The death benefit amounts to a tiny amount of our estate. Premiums are paid by policies and dividends buy paid up life.
I did a search of the ER site and the last discussion I found came from 2013 when low interest rates and Fed estate deductions suggested some value.
All three policies were issued by Prudential.
Anyone have any tools or insight why these policies are worth keeping in place?
Thanks in advance

I cashed mine in when the cost of insurance started rising exponentially. The cost of insurance was deducted from the cash value an was rapidly depleting in. Also once the need for or desire for life insurance is gone.

 

[JoeWras]

I had a policy that I annuitized about 5 years ago. I read the policy and went thru a fair amount of effort to exercise that guaranteed monthly amount. The agents wanted to cash in the policy and then take out an annuity. Their option netted about 20% less than I ended up with. If I didn't push my position, that money would have been theirs. This was not a fly by night insurance company. The agents didn't know older policies and could not see my policy benefit options. Know what your policy says.

This is where the Corebridge customer service agent threw up her hands and sent it to "the back office" with a ticket. Yes, the back office, her words.

I'm no fan of annuities, and this gift my parents gave me has cost about $2,500 over the years, but from my reading of this very complex policy, there is an annuity option which my parents put in place after they paid the initial 20 years.

I *think* is going to be something like $100 a month if I were to wait 4 more years to annuitize it. I'll probably roll that dice for what was originally a $1,000 face value baby policy.

My mom and dad always had the long game in mind and got these ultimately with me and my sibling's late life in mind. They were suckers for insurance salesmen. But it is what it is.

Once IRAs came around, they became big self-manage fans.

 

[Badger]

I have a couple of life insurance policies similar to the OP. They started a few years after I was born (about 1950). They have been helpful with some college expenses and later as partial payment to buy out my half of the house during a divorce. The money borrowed as been replaced and for the past two decades the dividends have been taking care of the premiums with some left over for additional insurance. So it doesn't cost me anything at this time to keep it.
I have no need for it anymore but my wife is the beneficiary so I am expecting it will be used for funeral expenses and a party.

Cheers!

 

[pb4uski]

My DW and I have 3 small whole life policies (total face value is 35k). I am looking at things I can do to simplify our estate and these policies popped up. The death benefit amounts to a tiny amount of our estate. Premiums are paid by policies and dividends buy paid up life.
I did a search of the ER site and the last discussion I found came from 2013 when low interest rates and Fed estate deductions suggested some value.
All three policies were issued by Prudential.
Anyone have any tools or insight why these policies are worth keeping in place?
Thanks in advance

In my experience, they are probably worth keeping in place since they are self funding. If you surrender, it is likely that the cash surrender value exceeds the premiums paid and that would result in a taxable gain whereas if you just keep them in place the death benefits would be tax free.

For example, I have a whole life policy issued when I graduated college in 1977. If I cash it in about 1/3 of the cash value will be taxable gain. OTOH, the death benefit is 170% of the cash surrender value. It grew 2.26% last year which was pretty decent at the time... I suspect it will be higher this year.

You might chat with Prudential whether the 3 policies can somehow be combined into 1 policy but I'm not sure if it is worth the effort.

I would think if you write a memo to the file on these alng with copies of the mot recent annual policy statement for each policy and have that in the file with your will and other estate plan papers then that should be good enough.

 

[pb4uski]

I’m in the same boat. And have asked myself the same question.

What I like about the policies, but am not sure it is the best financial approach, is the insurance will be tax free as an inheritance and will be available to pay any inheritance taxes.

In the meantime, the dividends pay the policy and my lifestyle stays the same. I have been allowing the dividends pay for many years. Having said this and knowing what I know now, I think I would have purchased term and canceled many years ago.

What inheritance taxes? Inheritance taxes are very rare these days.

Only six U.S. states levy an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

 

[pb4uski]

Something you can look into is changing the ownership of the LI policy to someone else besides you. If there is someone you want to leave something too, it may be an option for someone to get tax free money when you pass on.

The death benefit will be tax-free to the beneficiary no matter who the owner of the policy is so I'm not sure what changing the ownership of the policy accomplishes.

That and it would be a gift to the new owner in excess of the annual gift exclusion so would require reporting to the IRS.

 

[pb4uski]

I can't speak for street, but in my case, ownership change was the way to go.

The original policy was on my life, owned by my dad, benefiting him . Dad paid tax on it yearly for 40 years.

Before dad passed, I became owner with DW being beneficiary. So it was a change in both. Dad being owner all those years was a gift since he took most of the tax hit .

Huh? You don't pay tax on insurance premiums so what are you talking about. Do you mean to say that your Dad paid the premiums for mearly 40 years?

 

[pb4uski]

I understand look back. I just thought your post was a bit of a reach for most on here.

+1 look back applies to a small minority here and if $35k is a small part of the OPs estate it probably would never apply to the OP... so a nothingburger.