Continue Universal Life Insurance?

[Charlie_Boy]

Perhaps asked before, maybe many ties. In the early 80s, soon after I and my wife were married, I took out a universal life insurance policy through USAA. We both grew up poor but I was in the service and wanted to provide some cash in case something happened to me.

Like most universal policies it pays a death benefit and also builds up a cash value. We never paid too much attention to it as we prospered, we bought term insurance policies over time when we thought we needed them, have always lived below our income even when times were tough, and now in retirement, we still do the same. All of our term policies have ended except for one and that ends early next year, but this policy remains. It guarantees 4.5% interest, and that cash value is now over $45K, so the death benefit is now around $100K. I know, not that large sum of money, and we can continue to ignore it, but the monthly insurance cost of the policy is now almost equal to the monthly interest we earn, and it will soon be downhill from here.

We don't have any long-term insurance so I guess we could consider those funds a small worst-case scenario. Any suggestions appreciated. Should we cash it in and buy CDs or bonds and add to an existing ladder, or buy some type of long term/insurance policy and perhaps add cash to it? I should add I am 77 and in good health, walk a mile every day, my wife is 68, in even better shape, in fact, a health nut, a fanatic hiker who belongs to several hiking clubs and sneers at anything less then five miles, does Yoga, Zomba, Roomba, and everything else with an "a" at the end of it. Mostly looking for suggestions.

 

[teej1985]

I'm assuming you have sufficient assets that the extra $55k on the death benefit isn't going to make a meaningful difference for the survivor. Over time, you're cash value will go down if you have stopped paying premiums. I'd cash it out if there isn't much of a taxable gain, you could also 1035 it to a MYGA or some other type of annuity to further delay taxes.

 

[Kings over Queens]

I know, not that large sum of money, and we can continue to ignore it, but the monthly insurance cost of the policy is now almost equal to the monthly interest we earn, and it will soon be downhill from here.

Through the monthly cost of insurance charges you are essentially paying for $55,000 in coverage, the other $45,000 being the cash value.

Is it currently paying more than 4.5 or is that the guaranteed minimum?

I'll look at it from a different perspective, you can over fund the policy an earn 4.5 or better, tax deferred, and if you die, all of it goes to your beneficiary, tax free.

The rub lies in how much the cost of insurance runs, and administrative fees. If you don't need the death benefit, you could cash it in, pay tax on the gains, and dump it into a high interest savings account (no fees) earning similar interest.

 

[teej1985]

Through the monthly cost of insurance charges you are essentially paying for $55,000 in coverage, the other $45,000 being the cash value.

Is it currently paying more than 4.5 or is that the guaranteed minimum?

I'll look at it from a different perspective, you can over fund the policy an earn 4.5 or better, tax deferred, and if you die, all of it goes to your beneficiary, tax free.

The rub lies in how much the cost of insurance runs, and administrative fees. If you don't need the death benefit, you could cash it in, pay tax on the gains, and dump it into a high interest savings account (no fees) earning similar interest.

You can't really overfund a UL. It quickly becomes a MEC which the insurers don't want to deal with.

I was allowed to put a whopping extra $800 into my universal policy from the 80s. I accidentally put in an additional $200 and they sent me a refund check for it.

 

[Kings over Queens]

I'm aware of the MEC potential exposure but its going to take a lot more than $800.

In any event, A quick call to the customer service line asking for an illustration on how much funding would take before it becomes a Modified Endorsement Contract is easy enough. Assuming the OP, or anyone else interested, is interested in this avenue.

 

[teej1985]

I'm aware of the MEC potential exposure but its going to take a lot more than $800.

In any event, A quick call to the customer service line asking for an illustration on how much funding would take before it becomes a Modified Endorsement Contract is easy enough. Assuming the OP, or anyone else interested, is interested in this avenue.

The most that I could add in was $800 on a UL policy with $50k death benefit, at age 35ish that was purchased when I was a baby. I think it had like $8k cash value at the time.

 

[pb4uski]

I would surrender. You don't need the life insurance and it sounds like you are likely to live long and the monthly mortality charges will end up eating a lot of the account value.

Any idea how much the gain on surrender (surrender value less premiums paid from inception) will be?

 

[Charlie_Boy]

Thank you all for your comments and suggestions. I will likely transfer the cash to avoid taxes, perhaps to a MYGA in the coming months. I should have mentioned that the interest rate is steady at 4.5 % and I get billed once a year, $600, so easy to forget about it. The policy is on me but I transferred ownership decades ago to my wife who was not an American citizen back then. Recommendations on who for the MYGA are appreciated.