FIRE & Whole Life Policy

[Jwolfe10]

Hi All,

First post on the board but I'm trying to work my way into the FIRE community. I began investing when I was 24 (32 now) unfortunately I didn't know much about what I was doing other than placing the money in index funds - not how much to place, not how much I should save, etc.. Anyway, recently learning about FIRE I am systemically making changes to our budget in attempt to escape the world of work earlier than planned. I'll take any and all advice in pursuing FIRE. My current plan is to focus on paying down all debt (aside from mortgage, while I passively look into downsizing) but my particular question right now revolves around what I should do with an old whole life policy my parents invested in since I was a child. I'm attempting to figure out if I should: Cash it out, pursue a life settlement, continue to pay the $13/month. I've included basic numbers below as well as our current budget.

Gross Income: $81,000
Bank Acct: $1,234
Roth 403B: $44,429 (Three-Fund Portfolio)
Vodafone Stock 61 Shares @ 20.33 = $1240.13 (gifted from Grandma)
IPERS:$47,225 (Pension program for Iowa Public Employees)
----------------------
Student Loans: $11,634.63 @ 4.25%
Family Loan: $1,800 @ 0%
Van Loan:$6,522.19 @3.84%
Mortgage: $204,000 @ 4%
----------------------
Term Life Insurance until Age 55: 500k for $31.70 a month
Whole Life Insurance coverage of 46.2k with a cash value of $6,073 - $13/month (I calculated this "investment" making 1.4% annually)
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Monthly Budget
Mortgage 1766 (includes PMI, Homeowners Insurance, and Mortgage)
Internet 40
YouTubeTV 55
Life Insurance 58.43 (Includes both parents)
Auto Insurance 94.05
Van Loan 307.5
Iowa Student Loan 237.1
Child Health Ins. 20
Water (Every 3 months) 33
Trash (Every 3 months) 18

Pet Supplies 55
Planet Fitness 10
Car Gas 100
Electricity 75
Heat 100

Iowa Student Loan Extra Payment 162.9
Tithe or Charity 25
Young Livin' 115
Miscellaneous 90
Emergency Fund/Savings 45
Wolfe Loan 100

Groceries 523.88
Cell Phones 34

Paycheck 4656.58
403B Contribution 200
IPERS (My Cont.) 391.72

Bottom Line is about $600/month are being invested, About $50 going towards our savings acct, and the rest is going towards bills and paying down debt.

Thanks for all help!!

 

[pb4uski]

How did you calculate the 1.4%?

The way I would look at it is for the last policy year, the increase in the cash surrender value for the year plus the value of insurance coverage divided by the beginning of year cash surrender value plus 1/2 of the premiums paid.

The value of the insurance coverage can be estimated based on the term rate that you have... so $46.2k/$500k * $31.70/month * 12 = $35.

Another thing to consider is if you did cash out the whole life policy is that there would be a tax gain of $1,000 or more. I would not do a life settlement since the amount that you would receive each month would be miniscule.... but you might ask about converting the policy to a paid up insurance policy... you would no longer have to pay premiums but the life benefit would be much lower.

I also suggest getting a copy of Quicken if you don't already have it and checking out the Lifetime Planner included in Quicken (Deluxe and higher versions)... then once you have a plan you can use Quicken to monitor your progress.

 

[Big_Hitter]

my paid off whole LI cv increases WAY more than 1.4% per annum

 

[pb4uski]

+1 mine is ~3% and that is attributing $0 value to the life insurance coverage.... that is why I asked the how he calculated the 1.4%. But who knows... he may have a dog.

 

[Jwolfe10]

How did you calculate the 1.4%?

The way I would look at it is for the last policy year, the increase in the cash surrender value for the year plus the value of insurance coverage divided by the beginning of year cash surrender value plus 1/2 of the premiums paid.

The value of the insurance coverage can be estimated based on the term rate that you have... so $46.2k/$500k * $31.70/month * 12 = $35.

Another thing to consider is if you did cash out the whole life policy is that there would be a tax gain of $1,000 or more. I would not do a life settlement since the amount that you would receive each month would be miniscule.... but you might ask about converting the policy to a paid up insurance policy... you would no longer have to pay premiums but the life benefit would be much lower.

I also suggest getting a copy of Quicken if you don't already have it and checking out the Lifetime Planner included in Quicken (Deluxe and higher versions)... then once you have a plan you can use Quicken to monitor your progress.

The way I figured the 1.4% was taking earnings ($87) and dividing it by the cash value. I've included the exact numbers of the policy below:

 

[Jwolfe10]

Not sure why my post or image wouldn't show but here is an image of the exact policy numbers: https://imgur.com/N2DLLrd

 

[pb4uski]

Your calculation isn't property considering "interest" included in the increase in the base policy cash values or the Paid Additional Insurance cash calues.

So it looks like in 2020 the cash value increased from $5,646.42 at the beginning of the year to $6,073.37 at the end of the year.... or by $436.95. The year over year increase is 7.7%.

For that year, you paid $156 in premiums. So your "investment" was $5,646.42 at the beginning of the year and $5,802.42 ($5,646.42 + $156 premiums paid) at the end of the year, so your average investment for the year was $5,724.42.

The $436.95 in relation to an average investment of $5,724.42 is 7.6% before considering any value of insurance conveage.

And if you include the value of $45-46k of life insurance coverage based on what you pay for term that would be worth around $34 ($31.70 * 12/$500*$45). If you add that to the $436.95 and look at it in relation to the $5,724.42 it increases the return from 7.6% to 8.2%.

I'll concede that these returns all sound a bit high, but perhaps not so much since the raw increase in the cash value from year-to-year is 7.7% to begin with.

 

[Jwolfe10]

The way I calculated 1.4% was by taking the interest ($87) / the total $6073. Probably bad math but my thought process was - "If I had that $6000 in VTSAX what would the return be and does the interest gained from this surpass the interest lost through student loans (4.25%).

 

[pb4uski]

It is bad math.

Didn't you also notice that the cash values increased by much more than the premiums that you paid... the remainder of the increase has to be interest.

You're misinterpreting what the $87 is... it isn't interest, it is the terminal dividend that would be paid if the policy were surrendered... it increases from one year to the next because the terminal dividend increases the longer the policy is held.

 

[Jwolfe10]

Ha thanks for your help. I did notice - after I sent the message about how I calculated the interest unfortunately... My daftness aside, I appreciate the formulas and run through you provided. The conversion in comparison to the term policy is especially interesting.

 

[The Cosmic Avenger]

It looks like "Emergency Fund/Savings 45" is a monthly contribution to an emergency fund, but you don't list an emergency fund account. If you are at less than 3 months of income, I would put a little more towards the emergency fund, especially if the income is yours alone. (Two incomes decreases the likelihood that your income will go from current income to zero at any time.)

And while I paid extra to both our mortgage and my student loan in order to pay them off early, looking back I wish I had invested that money rather than paying down debt, as my portfolio over the decades has outperformed the interest rates I paid. (This applies only to longer time periods; over less than 5 years, it's much more of a gamble, one I would not take.) Consider whether you want to invest that money instead of paying extra towards your student loan.

And I would definitely invest the money that is currently going towards the whole life premium, for the same reason; based on historical data, you are almost guaranteed to get a much better return over at least 5-10 years.

 

[Markola]

OP, Are you familiar with the concept of creating a Debt Snowball? You seem like a good candidate for benefiting from one. Basically, what debt among your current payments can you knock out so that you free up a little cash to apply toward knocking out the next debt, then use that additional freed up cash together with he first to knock out the next debt, etc. At the end, after a few years that go by quickly, you have a lot of cash to save and invest and a new attitude about avoiding debt.

For example, you could start with the extra student loan payment each month and instead use it to attack something more immediate that would free up another payment.

How much mortgage equity would you need to accumulate in order to get rid of PMI? If just a little, that might be attack #1.

Does the $1,800 family loan have payments? If so, you might attack that first, then either PMI or commit to slaying the van payments. Once you’ve done that, you have a lot of firepower to overwhelm the student loan in short order.

Good luck!