Author Topic: Keep or cash in inherited life insurance policy?  (Read 5862 times)

Quark

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Keep or cash in inherited life insurance policy?
« on: March 11, 2014, 02:12:58 PM »
I am 27 and my parents just signed over to me a life insurance policy they paid on since I was a baby. It is for ~$60k if I die. It earns ~$350 in dividends each year and costs ~$150 per year. The current cash out value is ~$6000, so that is about a 3%/ yr ROI. Since I am single and no kids I don't care about paying that money to someone when I die, but I am concerned that someday I may get married and have kids and will want life insurance to provide for the kids if I die, but life insurance will cost WAYYYYY more than $150 per year at that point in time. I don't know what the going rate is but the insurance guy told me he pays $250 per month for his life insurance!

So that question is, should I cash out the policy now to pay off debt, keep it as an emergency fund which I am doing now, or leave it for future family?

Gimesalot

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Re: Keep or cash in inherited life insurance policy?
« Reply #1 on: March 11, 2014, 02:51:34 PM »
Does you line of work provide you with life insurance?  Every job I have had, has provided 1 year's pay of life insurance for free.  Ask around and see if your company or potential employers offer this benefit.  If it is offered, I would cash out.  If not, I would keep it as the premium is very low. 

AlanStache

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Re: Keep or cash in inherited life insurance policy?
« Reply #2 on: March 11, 2014, 03:25:56 PM »
Just to be clear you pay 150$/year and the payout on your death goes up 350$/year?

If you are reading mmm then you have to look at what your savings rate will be for the time before there are people who could collect on this policy, ie what might your net worth be when you had your first child and will the SO be employed.  There is little point in a 100k life insurance policy when you have 1 million in the bank or your partner makes 250k/year.  bs numbers but you get the point.

Have you worked out a spread sheet to see the two options 10 year return?

edit: do you have debt that it could be put twords?  be sure to count that interest in the spreadsheet
« Last Edit: March 11, 2014, 03:28:24 PM by AlanStache »

Nords

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Re: Keep or cash in inherited life insurance policy?
« Reply #3 on: March 11, 2014, 07:49:05 PM »
I don't know what the going rate is but the insurance guy told me he pays $250 per month for his life insurance!
So that question is, should I cash out the policy now to pay off debt, keep it as an emergency fund which I am doing now, or leave it for future family?
You're earning 3.3% on your life insurance policy (this year anyway).  What's the interest rate on your debt?

So everything you know about life insurance is being told to you by someone who makes their living selling life insurance?

Cash out, pay off the debt, maybe set aside $500-$1000 for an emergency fund, and get on with your life.  Someday when you actually need life insurance you'll be able to buy a cheap term policy through your employer or an online exchange.

milla

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Re: Keep or cash in inherited life insurance policy?
« Reply #4 on: March 11, 2014, 09:48:56 PM »
I pay $23 a month for a 500k life insurance policy on myself. $26 for my husband. Your insurance guy is either 200 yrs old, 600 lbs (or both) or got scammed into buying a boatload of whole life/universal insurance he doesn't need. Shop for term insurance, don't sign up if you don't want to, just shop. You should be pleasantly surprised.

garrettld

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Re: Keep or cash in inherited life insurance policy?
« Reply #5 on: March 12, 2014, 06:22:28 AM »
If you cash it out will it be taxed as income? I don't know.

If not, I'd cash it out and invest it elsewhere or pay off your debt, depending on the interest rate on your debt. That $250/month is probably for a ridiculous amount of whole life insurance. Term life insurance is much more reasonable, like milla said.

MDM

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Re: Keep or cash in inherited life insurance policy?
« Reply #6 on: March 12, 2014, 10:12:57 AM »
Yes, any accrued interest will be taxed as ordinary income.

Despite that, Nords' advice above seems correct:
Quote
Cash out, pay off the debt, maybe set aside $500-$1000 for an emergency fund, and get on with your life.  Someday when you actually need life insurance you'll be able to buy a cheap term policy through your employer or an online exchange.

Quark

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Re: Keep or cash in inherited life insurance policy?
« Reply #7 on: March 13, 2014, 12:42:30 PM »
The insurance guy does not gain anything from me keeping the policy. I'm pretty sure he was being truthful about his own policy.

My student loans only cost me 2% interest.

When I have kids I will probably be semi-retired so I don't think I'd be able to buy a cheap policy through an employer. I don't have a SO right now so I don't know how much he will bring to the table. Let's say 50k/year or something just to be average.

To clarify AlanStache, it is a 60k insurance policy, which pays $350/year in dividends and costs $150/yr to maintain. I guess that means it is a whole life policy but I don't know what that even means. I'm not sure about the whole 10 year return thing. It gets 3% a year in dividends which accumulate and if I cashed it out I would just use it to pay off some of my student debt.

Frankies Girl

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Re: Keep or cash in inherited life insurance policy?
« Reply #8 on: March 13, 2014, 01:15:39 PM »
It does sound like a whole life policy, and your parents would have been better served just investing the $150 a year (if that is what they paid since the beginning). If they'd gotten an average of 7% plus compounding over 27 years, it would be worth well over 11K.

And to point out the not-so-obvious, if you're to the point of having enough assets to be semi or fully retired, you don't really need any life insurance because you have money and investments to sustain any dependents - you're "self insured" at that point. If you died, they'd still be okay.

Term life insurance is what you should get when you have dependents that need your income - usually you get it for a certain amount of coverage that will give your spouse/kids a chance to get up to speed and able to stand on their own. You buy it for a period of 10 or whatever years, and pay VERY reasonable rates to get a large amount of coverage that would make it possible to pay off a house and debts, provide for college funds and allow spouse to survive comfortably without you. It's comparible to car insurance - you buy coverage for when you're driving the car (needing to cover dependents) but if you sell the car (end policy) then you both walk away. You get MUCH higher coverage for less of a payment than if you tried to get that same amount through whole life; see milla's 23/mo = $276/year for 500K coverage for the term, as opposed to your whole life policy 150/year for 60K. BIG difference there. She's paying a bit less than your policy, for over 5 times the coverage, and she'll only need it until the kids are grown and/or they are FI.

Whole life insurance is basically pay until death to get a small amount at the time of death, but if you added up all the money that was paid out for the policy, you'd have definitely been MUCH better off just taking it and investing it on your own. So basically, they're taking a chunk of your money to manage your funds and they're investing it and making a substantial profit off of it, while giving you a very small return.

« Last Edit: March 13, 2014, 01:22:16 PM by Frankies Girl »

Nords

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Re: Keep or cash in inherited life insurance policy?
« Reply #9 on: March 16, 2014, 03:24:51 PM »
The insurance guy does not gain anything from me keeping the policy. I'm pretty sure he was being truthful about his own policy.
Oh dear.

When I have kids I will probably be semi-retired so I don't think I'd be able to buy a cheap policy through an employer.
Then you'll do what most people do:  you'll buy an insurance policy from a website exchange. 

The point is that you should not have insurance today just because you might someday need insurance for something.  You cancel the insurance, take the cash, and invest it in something that will grow faster than the value of your insurance policy.  You can accelerate that growth by investing the premiums that you'd be paying for that policy over the coming years.

Then, someday when you have a beneficiary, you go out and buy a cheap term policy for only as long as you need the beneficiary to have your benefit.

If you depend on insurance agents to explain insurance policies to you, then it'll eventually be a very expensive tuition payment.

Cpa Cat

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Re: Keep or cash in inherited life insurance policy?
« Reply #10 on: March 16, 2014, 04:28:57 PM »
I just want to point out that I have a 1M term life policy that costs only $375 a year as a 31 year old.

Without knowing the specifics of your policy, I would advise cashing it out.

1) You don't need life insurance.
2) Whole life insurance is generally a rip off.
3) When you do need life insurance, $65,000 is a uselessly low amount.
4) Contrary to what you believe, $150 per year is really quite expensive for $60k of life insurance... (see #2).
5) Find out what the basis in the policy is - you inherited your parents' tax basis when you received the gift. If the basis is more than $6000 - and it probably is (see #2) - then there's no taxable gain.

Cheddar Stacker

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Re: Keep or cash in inherited life insurance policy?
« Reply #11 on: March 17, 2014, 01:23:27 PM »
When I have kids I will probably be semi-retired so I don't think I'd be able to buy a cheap policy through an employer.
Then you'll do what most people do:  you'll buy an insurance policy from a website exchange. 

Or don't buy life insurance. If you will be semi-retired you will likely be sitting on a nice stash. The point of life insurance is to provide for those you leave behind that were depending on you to support them. If you have substantial savings before you have kids, you have no need for life insurance since your savings will support them.

Cash it out but rather than pay off SL debt with a 2% interest rate consider investing the money in something that will earn you a better return than 3%.

nereo

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Re: Keep or cash in inherited life insurance policy?
« Reply #12 on: March 17, 2014, 02:20:52 PM »
I just want to point out that I have a 1M term life policy that costs only $375 a year as a 31 year old.

Without knowing the specifics of your policy, I would advise cashing it out.

1) You don't need life insurance.
2) Whole life insurance is generally a rip off.
3) When you do need life insurance, $65,000 is a uselessly low amount.
4) Contrary to what you believe, $150 per year is really quite expensive for $60k of life insurance... (see #2).
5) Find out what the basis in the policy is - you inherited your parents' tax basis when you received the gift. If the basis is more than $6000 - and it probably is (see #2) - then there's no taxable gain.
+1.  I would add that as a 33 year old, I have a 10 year term, 500k life insurance policy that is $252/year, which expires when I am 41.  Long before that 10 years is up I expect to have at least $500,000 in assets that my dependents will get in the event of my untimely death. 
Unless you are obese, smoke heavily or have chronic health-care problems than this policy is a ripoff. The best strategy is simply to invest all you can right now, and become "self-insured" for when/if you have a family.

Prairie Stash

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Re: Keep or cash in inherited life insurance policy?
« Reply #13 on: March 17, 2014, 04:46:02 PM »
The current cash out is $6000.  What will it be next year, 5 and 10 years? At what rate does the dividend change?

Forget the fact its insurance (I'll agree not very good insurance, but that's irrelevant).  It also doesn't matter what the "sunk costs" are. I don't care who bought it or when.

This sounds like a dividend stock to me, with unnecessary extra details for your estate. Let's analyze this like any other stock investment.