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Does WHOLE Life Insurance make sense in this particular case?
Old 10-04-2014, 11:43 AM   #1
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Does WHOLE Life Insurance make sense in this particular case?

Before you panic, please know that I'm with you: I do not like Whole Life Insurance and would never purchase such a policy on my own.

However, here's my situation:

In short, my parents in law had purchased a Whole Life "50" policy through AXA, many years ago, to insure my wife. She was 7 back then, I believe, so the premiums were extremely low. Don't ask me why they decided to do this when she was so young. The policy, along with the requisite bunch of lies and false expectations, was sold to them by somebody who they claim was a "friend of the family".

My mother in law recently decided to transfer the ownership of the policy to me. I am now the owner and beneficiary of the policy, and here are the numbers as they stand now:

- Face Amount was $100K
- Current Death Benefit is at $250K
- Current Cash Value / Net Cash Surrender Value is only $35K
- Current yearly dividends are about $500 a year.
- Premium cost is roughly $600 a year.

The first thing I did after becoming the owner of the policy was to change the dividend re-investment option so that they can pay for the policy's premium. In other words, the policy is basically costing me a little less than $100 (one HUNDRED dollars) a year.

The way I see it, in this specific situation somebody else did the heavy lifting for me throughout the last 30 years or so, (my poor parents in law, in this case) and now the policy is set on "auto-pilot" and costing me almost nothing. If I cancel it, we would only get $35K, and the real benefits would only kick in only after death, so obviously that's not something I am even contemplating nor looking forward to. Luckily, we do not need the $35K, but I also have no way to have an input on the policy's investment selection.

What would you do in this particular case? Does it make sense to keep the policy, specially since it only costs me $100/year, and probably next to nothing in a few short years?

Your input, ideas and feedback are greatly appreciated.
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Old 10-04-2014, 01:37 PM   #2
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You are right to only look at it prospectively as the past is a sunk cost.

I have an old WL policy as well, but my CSV is much closer to the DB. DB ~ 223% of the CSV. My monthly premiums are ~$21 and it is an auto-pay from my bank account.

I view mine as a fixed income equivalent and look at the annual return/interest rate as follows: [end of policy year CSV/(beginning of policy year CSV + 50% of premiums paid)]-1. The recent interest rate has declined from a little over 5% in 2012 to a little over 4% in 2014 but is still pretty good for a fixed income investment with negligible credit risk, interest rate risk, great liquidity, etc. so I'm keeping it.

You may want to check and see what the implicit interest rate paid on the cash value is.

But for $100 a year I would keep it and you or your heirs or beneficiaries will get a nice benefit when you DW dies. If your DW has a pension, you might consider having her elect the single life option as this policy will provide resources to her heirs.
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Old 10-04-2014, 01:53 PM   #3
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I think the way to evaluate these policies is to add up the value of the various pieces and they see if they are worth more or less than value of the WHOLE policy.

1. How much would it cost you annually to buy a term life policy for your wife with 250K death benefit, and also how much would it cost for another 10 years of coverage. At some you also have to ask why do we need life insurance for her.

2. How much would earn if I just took the $35K and invested it?

3. How much is the saving portion of the policy worth?
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Old 10-13-2014, 07:21 PM   #4
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Thanks for the input, pb4uski and clifp. Anybody else care to chime in?
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Old 10-13-2014, 08:01 PM   #5
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I'd keep it. In a few years the policy will likely be paying you more than the premium as interest rates nudge up a little. Also, I'd check to see if there is a LTC rider available that you might be able to add.
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Old 10-14-2014, 11:07 AM   #6
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No real advice, just my decision on a similar, but smaller, policy: I am keeping it, at least for the time being.

The premiums are not really of consequence. My dividend rate is actually a bit higher than yours; so, even though it is a small amount, the return is not awful. And, I already have too much unallocated cash.

I am not sure whether to think of this as an emergency fund, versifier or something else. Frankly, at its current value, I do not spend much time thinking about it at all.
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Old 10-14-2014, 12:05 PM   #7
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I look at this from the other side. I would never give someone $35,000 forever at essentially no interest or growth to buy a $250,000 life insurance policy even if it cost me nothing in payments.

If you need insurance, price term. I bet if you invested $35,000 you could more than recover that cost - and if you don't need the insurance, do something of value with the 35 grand.
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Old 10-14-2014, 12:49 PM   #8
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I heard a Clark Howard podcast segment that mentioned a fee-based service where you could have an expert look at your policy and tell you what the best thing to do would be (keep paying or bail-out). But I can't find that right now. The closest I got was this: Selling your life insurance policy for quick cash not smart |
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Old 10-14-2014, 04:41 PM   #9
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Twice in my life I have utilized the cash loan value of my whole life policy to create my own short term bridge loan when doing a real estate deal. As PB4USKI noted, could allow you to choose a higher paying single life pension payment. I also view my policy as part of my asset diversification and will not surrender it. The world is full of people (those likely not on this site) that proclaim to buy term and invest the difference - and then they buy term and spend the difference.
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Old 10-14-2014, 04:43 PM   #10
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Oh yeah, forgot to mention, what a wonderful thing her parents did for her and you!
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Old 10-14-2014, 06:05 PM   #11
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Originally Posted by heeyy_joe View Post
Oh yeah, forgot to mention, what a wonderful thing her parents did for her and you!
Well, I'm sure they must have thought they were doing a good thing. But term insurance and even the safest of investents (Series E savings, bonds, etc) would have been much "wonderfuller"--They'd have $60K+ in investments to use as they wish.

Karloff: What's done is done--the sunk costs are irrelevant. If you took the $35K, it would generate about $1700 per year in growth (assuming 5%)--money you could let compound or spend as you wish.

If you keep the policy, you don't get that growth AND you have to pay $100 per year extra (at least for now) from your present portfolio to keep the policy in force.

Unless it is likely this policy will pay off rather soon (if so, accept my condolences and apologies for the brusque wording) AND you have a good use for the money (kids, charities, etc), I'd probably cash it out. Would you pay $150 per month right now to buy an insurance policy on your DW that pays this amount? That's approximately the cost to you guys.

Other things to consider:
-- Will this cause any problems between you and the inlaws? If they think this policy is a treasure and you foolishly cashed it in ("we paid in thousands of our own money . . ."), then it would almost surely be best to thank them profusely and just keep it.
-- Is there a way to at least reduce the costs of keeping it? If you stop making the payments, does it revert to a policy with a decreasing death benefit (whatever the interest on the cash value will support)?

N.B. I am not very knowledgeable about whole life insurance products
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