Whole Life Insurance (VUL) Dilemma

[Kiki Gavilan]

After lurking for a long time, I’ve finally decided to ask the question that I need the most help with, even though it may very well qualify me for the Wall of Shame.  I know how whole life insurance policies are seen by, like, everyone...now.  I didn’t...then.  So yeah, let me just get it out of the way and admit - I own a VUL.

There’s so much information everywhere on how to decide whether or not to purchase a VUL, and even a decent amount of advice for people a handful of years in that realize they’ve made a mistake.  But there’s very little if anything for folks like me that are almost 15 years in.  Maybe the advice will be the same (SURRENDER!), but I wanted to see, because my numbers look a lot different to me than the few I’ve seen.  So, key numbers are below and I welcome suggestions on what to do with this VUL!  Let me know if more info is needed.

Purchased: 2004
Death Benefit: $650k
Current premiums: $200/mo.
Minimum premium: $111/mo.
Net premium being invested (net of all expenses, fees, etc.): $167.50/mo (GROAN!)
Invested to-date: approx $48k (I overfunded it more aggressively for a few early years)
Cash value: $84k (surrender value would be about $200-300 lower)

So, with the most common advice to take the money and run, my understanding is that I’d need to pay capital gains taxes on about $36k.  Correct me if I’m wrong!  Expensive mistake, but I could self-flagellate for a while then move on with life.

Alternatively, I could try to keep the policy in force, maybe go down to the minimum premium (and keep paying all those fees and expenses!), and take withdrawals up to my cost basis (I’ll be RE soon, so I could use that no tax, no interest w/d to help bridge me to my tax deferred accounts later in life).  Later in life I’d take the gains out in loans that I’ll never pay back and even, if I understand correctly, maybe stop paying premiums and have it paid for by the face value/cash value of the policy, but monitor it carefully for like 40 years from now until I die, to make sure the policy stays in force (so I don’t screw myself and end up having to pay taxes on it all anyway).  Then, the death benefit will be lower, but I’ll leave behind a little something for my charity of choice after death.

I really hate the thought of this albatross hanging over my head for 40 years of monitoring making sure the policy doesn’t lapse and putting more money into it.  But it is a way to be able to use more of the gains I earned without paying taxes, as it was intended to be when it was sold to me when I was just out of college and thought I was going to become a sophisticated investor with all my extra money from my $30k/yr job.  (Side note:  see, I was always pretty mustachian, having TONS of extra money from just a $30k/yr job, but unfortunately, I was gullible and I still spent it on something stupid, even though I thought I was really setting myself up for success!).

On the other hand, I hate to think about conceding and losing the “benefit” of all those costs and fees I’ve paid over the years just to have to pay taxes on it anyway and not have any death benefit to leave to my charity of choice.

So what considerations am I missing here and what would you do?  I almost really hope you all tell me how it makes so much more sense to surrender it because I don’t think I want this hanging over my head till I die...but I also hate throwing in the towel and letting them keep all the money they made off me!

[Kiki Gavilan]

Yeah, good considerations, thanks.  I am in fact planning to FIRE soon.  Unfortunately, my husband loves his job and is going to keep us in a pretty high tax bracket.  So I won't be able to avoid cap gain unless I wait a long time to surrender, during which time I'll keep paying those high fees (so painful)...but it does sound like keeping the policy in force (maybe with min payments) is a good option for max flexibility, whether I surrender at some future point or not.  Today may not be the day to make that decision!

[Rocketman]

Do you need life insurance?
If so look into getting a xx year term policy ( xx is just after you both fire).
Then you can compare how much the insurance is really costing you.

Eight years ago we dumped our whole life - after getting the 15 year term in place. Took the money and invested it. At the time, we figured we would FIRE in the 15 years. It gives us peace of mind that if something happens to either one of us - FIRE would not be impacted.

[Kiki Gavilan]

Do you need life insurance?

No, the life insurance element of this is probably the lowest priority.  I have no debt, no one that needs my income/assets that would be screwed if I died.  The death benefit is all just gravy, if it happens, and I plan on giving it to charity.

How about this - is this a valid way to look at it?  I've so far perhaps lost $6000-ish on fees, plus the growth on that, had I invested in the stock market instead.  That's a lot, but in the context of my net worth, maybe not so much.  If I surrender and pay cap gains at 15%, that's about $5,400.  If I try to wait for (1) flexibility and a more obvious decision later in life and (2) lower income (husband retires) so I can *maybe* be in 0% tax bracket for cap gains if I need to surrender at that point, I am losing about $450 per year, plus gains, if any, in fees, etc.  So I guess it would take a while for those continued fees to add up to the cap gains tax I would pay now and therefore best to just keep on keepin' on and maintain flexibility just in case, seeing how things develop in my life.  Large assumption is that our income will ever be low enough to be in 0% tax bracket, but does this at least sound like a valid evaluation of my situation/decision?

And really, this all seems like small dollar amounts in the context of the death benefit.  I realize the death benefit will decrease depending on how much I withdraw in later years, but giving $650k to charity on my death would be very rewarding for me, and even a much smaller number would be very satisfying to know I could leave.  So maybe I should care about the death benefit after all!