Cancelling a small whole life policy

[momoney]

I've had a $50,000 whole life policy for about 30 years. I pay $600 a year (Auto pay and forgot about it) and have a $34,000 cash value. Cash value increased about $2000 last year. I don't see any need to keep this going as I can probably get the same term policy for a 1/3 of the cost.

I'll be taxed on the difference in contributions. $34,000 minus the $18,000 in contributions?

I'm thinking my income will be low enough this year to take this on without a problem.

Anything I'm missing here?

 

[OldShooter]

... I can probably get the same term policy for a 1/3 of the cost ... Anything I'm missing here?

Do you need insurance at all? I had term insurance until the kiddos were on their own and DW had her own career with a good salary and benefits. From that point there was no need for additional protection. I think I was done with life insurance in my early 40s.

 

[CardsFan]

DW and I have similar policies. Not a great investment, but not a terrible one either. I did the math a few years ago and the return if I cashed it out would have been around 4%. At that time (5-6 years ago?) we just put them on automatic with the dividends paying the policy, so no more out of pocket costs for us. And the death benefits have increased to around $75k.

We have considered just cashing them out, but we don't need the money, so we will let them ride for now.

 

[pacergal]

Have you investigated what a term policy would actually be?
And do you really need life insurance now? You don't state your age or if you have younger kids/spouse who would need income if you passed.

Like OldShooter, we cashed in our life insurance and cancelled disability insurance when we were mid fifty's, kids out of the house, and pension plus investments would cover our budget if needed.

 

[friar1610]

Yet another similar situation here, albeit with different face amounts. We, too, let the dividends pay the premiums. Our kids can use the proceeds pay for funeral expenses and a nice Irish wake with ample amounts of Guinness. They can do as they wish with anything that’s left over.

 

[MarieIG]

One thing to keep in mind is that term life becomes much more expensive as one ages. I cancelled DH's term about a year ago as the premiums increased by a factor of ten.

See also, #3 above.

 

[momoney]

DW and I have similar policies. Not a great investment, but not a terrible one either. I did the math a few years ago and the return if I cashed it out would have been around 4%. At that time (5-6 years ago?) we just put them on automatic with the dividends paying the policy, so no more out of pocket costs for us. And the death benefits have increased to around $75k.

We have considered just cashing them out, but we don't need the money, so we will let them ride for now.

I didn't consider letting the dividends pay the policy. Is this what would happen by default if you stopped paying into it?

I'll look into this and see what my tax situation is at the end of the year.

 

[CardsFan]

I didn't consider letting the dividends pay the policy. Is this what would happen by default if you stopped paying into it?

I'll look into this and see what my tax situation is at the end of the year.

I just called them, and they changed it over. I would NOT just stop paying, you could lose everything.

What happened to us is the dividends more than cover the cost, so the death benefit continues to grow, but slower than before.

 

[Koolau]

I just called them, and they changed it over. I would NOT just stop paying, you could lose everything.

What happened to us is the dividends more than cover the cost, so the death benefit continues to grow, but slower than before.

Eventually, the insurance costs will exceed the "dividends" and I assume you'll cut into cash value. YMMV

 

[Badger]

I have a couple of small policies my father took out on me 60+ years ago. I took over the premiums once I started working. Then about 25 years ago the dividends were paying the premiums and I put it all on autopilot with the excess of the dividends buying additional free coverage. Since it isn't needed but doesn't cost us anything anymore it should pay for all funeral expenses plus pipers and make for a heck of a party that I'm going to miss.

 

[street]

My wife has a 75K LIP also. Pay 25 a month and have looked into cashing it out but still worth keeping it for now. We still are ahead of the game with that policy. It will be a tax-free gift for the kids at some time.
Always a gamble with any insurance you buy.

 

[CardsFan]

Eventually, the insurance costs will exceed the "dividends" and I assume you'll cut into cash value. YMMV

Yeah, I have considered that, and at some point we may just cash out the policies. But right now we are both worth more dead than alive

 

[dknighd]

If I had whole life insurance policies, which I do not, I'd probably let them ride. Unless you need the money now. Life insurance proceeds are tax free to beneficiaries. Which could be a benefit. Obviously the details matter . . .

We cancelled our term policies about a year before we retired. We no longer needed life insurance.
But whole life is a completely different animal. It might be worth keeping it active for other reasons, especially if you were lucky enough to have purchased a good policy. . .

 

[badatmath]

I cancelled mine when the dividends quit covering the premiums but I have no kids.

My estate can cover any death costs. I don't want a funeral.

 

[dknighd]

I cancelled mine when the dividends quit covering the premiums but I have no kids.

My estate can cover any death costs. I don't want a funeral.

I do not want a funeral either.

 

[Gumby]

The funeral is for the survivors, not the deceased. The young wife knows that my preference is just to be pushed to the side of the road so I don't block traffic, but she is free to do as she pleases (and there will be sufficient funds to allow that). I won't be in a position to care either way.

 

[CRLLS]

My MetLife whole life policy had a guaranteed annuitization clause among others. When I turned 65, I tried to enact that option as it fit my needs/desires. I had trouble getting anyone to understand the policy as they aren't common in newer policies. All the people that I talked to told me I had to cash out the policy and then buy a separate annuity. Cash-out was only one of several options in my policy. It took me a few months of running up and down the corporate ladder but finally found someone to find and then read my policy. I selected a life with 10 yr. certain annuitization. I now get a small check from them each month, larger than what would have been if I cashed it out and bought an annuity. I pay taxes on the appreciated value but not on the premium part. Spreading out the payout helps to level out the tax burden.

You might want to check it that is an option available to you, and if it fits your financial plan.

FWIW, over the years, MetLife had split off parts of their business. They no longer had salespeople, that was done by a different company, they no longer sold annuities, that was done by another company, and the list goes on. It was extremely difficult to find the right people. In the end, I know they handed off my cash value to the annuity company to manage the annuitization. ML had to pay another 15% or so more to meet my policy's guarantee amount. there is some back-office work being done because ML sends me that check every month with their name on it, not the other company (Brighthouse?)

 

[Sunset]

I had a whole life policy, and had them set the dividends to pay the premium, so it was zero cost to me from then on.
Later the insurance company gave me shares when they switched the type of company.
Much later I cashed in the policy as not needed.

 

[badatmath]

The funeral is for the survivors, not the deceased. The young wife knows that my preference is just to be pushed to the side of the road so I don't block traffic, but she is free to do as she pleases (and there will be sufficient funds to allow that). I won't be in a position to care either way.

I won't have surviving relatives to care about it. I just included it in my estate plan so the executor will feel no guilt about not holding one.

 

[pb4uski]

I had a small whole life policy that I was keeping as a bond substitute since the cash value growth was decent. About a year ago I decided to cash it in, in part to have one less thing for DW and DD to have to worry about if I get hit by a beer truck.

 

[Koolau]

Yeah, I have considered that, and at some point we may just cash out the policies. But right now we are both worth more dead than alive

I'm not an expert on insurance, so maybe someone who knows more than I do could comment on all this:

I have a couple of policies (not whole life but one of the "universal" types) which I still fund and they both have cash value in them. But soon, I will need to decide whether to send them extra money to keep the policies in force. So far the cash value has grown and has picked up the difference between insurance cost and premium. That will not last. Insurance cost accelerates as one ages. Cost increases approach exponential since between my age and, say 99, virtually everyone will collect if they own a policy. (Heh, heh, if I'm being too subtle, that means everyone (virtually everyone) will die before 99.)

My thinking has been as follows:

1) Whole life and other types of cash value insurance policies have high costs when you first take them out as (my understanding) the sales person receives most of the excess payment the first, say, three years as payment for their sales efforts. So IF you keep your policy past 3 years, you've pretty much turned a corner on cash value. Dropping the policy after 3 years is not nearly as wise as NOT buying the policy in the first place. BUT once you have it for 3 years, the cash WILL begin to grow and IF your money is treated well (high guaranteed interest like mine - e.g., 5% in my case) it may make more sense to keep the policy in force than drop it. The "up" side of dropping any policy is that you no longer pay the premiums, of course. You can likely still buy term at that point but you'll not have that cash growing at whatever percent. DW put her cash value in her universal policy in the stock market option and the cash exploded over 30 years. She 1035'd the cash into a MYGA HIGHER than the face value of the policy! IOW her 95K policy grew to over $100K cash value after 30 years. NOW, of course, she has the cash in a MYGA but no insurance. (Pay your money and take your choice.)

2) In my situation, I have two life threatening health issues that I didn't have when my policy was taken out. SO, I'm a poor risk to the insurance company meaning (wait for it) my DW has a good chance of collecting on my policy before it gets too expensive to keep up. SO, I have, so far, decided to fund my policies. It's sort of like going to Vegas and playing roulette on a wheel that has no green zeros. Or even better, playing black jack against the house and they let you take all the ties! You gotta stay and you gotta play though YMMV.

 

[Avocadorunner]

I've had a $50,000 whole life policy for about 30 years. I pay $600 a year (Auto pay and forgot about it) and have a $34,000 cash value. Cash value increased about $2000 last year. I don't see any need to keep this going as I can probably get the same term policy for a 1/3 of the cost.

I'll be taxed on the difference in contributions. $34,000 minus the $18,000 in contributions?

I'm thinking my income will be low enough this year to take this on without a problem.

Anything I'm missing here?

You are only buying $16,000 of life insurance coverage because the carrier keeps the cash value at your death. Your $2000 cash value increase last year is less than 6%, much worse than what you would have earned in a total market ETF. I'd cash in that policy ASAP and invest the cash value. Your cash value may not be taxable because it is generally regarded as a return of premium.

 

[imnontrad]

I have a universal life policy - and I have not made a single payment on it in over 20 years. I just let the cash value pay the premium. Yes, I could cash it out. But I would have to live a looong time for the reinvestment of its current value to equal the death benefit.

 

[isisdave]

Don't forget that you can borrow against the cash value of a whole life policy.

My parents bought me a $10,000 policy from MassMutual when I was about 12. The premium is $128 annually, which was a lot of money 62 years ago, but now is dinner for two in a nice restaurant. I had it set to pay the premium from the dividends for a long time, but now I pay it directly.

The dividends have been buying paid-up insurance, which is now up to $75k beyond the $10k, and the cash value is about $65k. Both go up about $2200 a year now. This is a $10k policy, mind, so sounds like a deal to me.

If you have a VERY old policy like this one, it is possible that the returns and the loan interest rate were set to a very low fixed value. I opted to change these to market rates about 25 years ago, but it's possible a policy this old could let you borrow at a very low rate. Check on it!

 

[Koolau]

I have a universal life policy - and I have not made a single payment on it in over 20 years. I just let the cash value pay the premium. Yes, I could cash it out. But I would have to live a looong time for the reinvestment of its current value to equal the death benefit.

Yeah, the problem with Universal is you eventually have the insurance costs eating up the remaining cash value - it accelerates quickly in older age. I had one policy terminated due to lack of cash.