Author Topic: $12k Equities+ $9k Cash-Value Whole Life - Let Ride vs. pay off Student Loans?  (Read 773 times)

JimmyFry

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  • Age: 34
  • Location: Alpharetta, GA
Hey all, I'm currently wrestling with a financial dilemma and thought I'd see what smarter people than myself might recommend.

The scenario is this: DW of 2 years has about $23k in Student Loans and I can pay them down with some liquid assets or choose not to.  Other than the Mortgage this is our only debt.

I'm currently leaning towards selling non-retirement equities to pay down the higher-rate portion of the loan and focus on paying down the rest with Cash Flow.  I particularly like this since the guaranteed 5.75% return seems "a safe call" compared to a possible correction on equities.  However, there's also a Whole Life policy on me that I can pull cash from if it's smart to be more aggressive.  An additional liquid asset at play are Roth IRA contributions, but the plan is to leave those be.

The tax implications seem to be pretty limited of any plan (details below), so my main focus is on clearing up some minimum payments against my current cash flow + clearing the "dammit we have this debt" clutter from my brain.

Let me know if any relevant details are missing.  TIA!
-JF

DEBT:

Two private student loans totaling ~$23k
- $11.3k @ 5.75%
- $11.8k @ 4%

LIQUID ASSETS:

- Vanguard Taxable Account.  Mix of small cap / intl / emerging index funds
Value: $12.6k; Unrealized Cap Gains: $15 short term (28% Ordinary Income tax rate) / $843 long term (15% Cap Gains Tax Rate).  Avg expense ratio about 0.25%. 

 
- Whole Life Policy.  This was purchased by Grandparents shortly after my birth.  I manage it now but so far I've just left it alone. 
Face value $25k; Current Death Benefit $47k; Cash value $9.4k; "Paid up additions available to withdrawal" $5.1k.  Annual Premium $153; Current Dividend $164

- Roth IRA.  VTSAX.  This is what I consider as an Emergency Fund, but I could still pull $3k and be at 3-4 month emergency fund)
$4k of contributions seasoned >5 years
Another $10k of Contributions <5 years
Currently reading/listening: MoneyBoss, MadFientist, Radical Personal Finance, Financial Mentor, Thus Spake Zarathustra

L.A.S.

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Its nice that the Grandparents got you a whole life policy.  But they are generally poor investments.  To me, yours seems quite expensive.

The actual value of the insurance in the contract is the death benefit minus the cash surrender value, since you (or someone else) will get one or the other but not both.  So the policy is effectively a $37.6K of insurance with an annual premium of $153, plus 9.4K invested at a 1.75% = $164/ year. 

If you have need for insurance now, or know you will need some in the near future, you might price out and see what it would cost for a term policy.  Depending on your health, $153/year would probably by somewhere around 100k-150k, maybe even a bit more, of term coverage for 15-20 years or so.  The 9K could be put towards lowering the high interest debt burden.

JimmyFry

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  • Age: 34
  • Location: Alpharetta, GA
If you have need for insurance now, or know you will need some in the near future, you might price out and see what it would cost for a term policy. 

I'm in good health, plus I have 3x Salary Life Insurance through the employer.  It's not quite term policy since I must continue to be employed, but for the moment it seems like I'm vastly over-insured and can get out of this whole-life policy altogether.  How would one do that... pull the cash value?
Currently reading/listening: MoneyBoss, MadFientist, Radical Personal Finance, Financial Mentor, Thus Spake Zarathustra

LawyertilRetire

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Any chance that you would be able to refinance the student loan debt to a lower interest rate? If you could lower the loan at 5.75%, that might help clear up what approach to take and increase your cash flow.

I refinanced my student loans with SoFi and cut my interest rate by more than 2.5% (effect 6.55% to 3.99%). Here is a referral code that will net you $100 for refinancing with SoFi, if you are interested: sofi.com/share/5838

Accidental Miser

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PAY OFF YOUR (non-mortgage) DEBT LIKE YOUR HAIR IS ON FIRE!

Michael in ABQ

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Cash out your whole life policy as soon as you get term insurance in place. Life insurance is meant to replace your income if you die. If your wife works and you don't have any kids then you probably don't have a huge need. I have 5 kids and am the sole breadwinner in my household so I carry about a million in term life insurance between a few policies (work, military, private). At 32 and in good health I was able to get a 500k policy with a 20-year level term for $249 per year. So that's $4.98 per year per $10,000 of insurance vs. $61.20 for your whole life policy. In 20 years I should have enough assets in place to be self-insured, plus the need to replace my income will be less with most of the kids through college and the house paid off. You will owe taxes on any gains but if you add up all the premiums paid in and deduct it from your cash value you'll find that it won't be much. That's also an indication of how low the returns were. Assuming your policy is 30 years old the total premiums paid were $4,590 and that's only grown to $9,400 over that time. That equates to a return of about 4.5%. Had it been invested in an index fund earning say 10% those annual premiums would have grown to about $25k (a bit less if you account for what $25k worth of term life insurance would have cost per year over that time).

If you cash out the whole life policy and the taxable stocks you could payoff virtually all of your debt immediately. That would save about $1,122 per year in interest, not to mention freeing up probably a few hundred dollars per month in cash flow. I became debt free a few months ago and it feels very nice watching my bank account grow each month instead of seeing payments on various debts deducted.

JimmyFry

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  • Age: 34
  • Location: Alpharetta, GA
Assuming your policy is 30 years old the total premiums paid were $4,590 and that's only grown to $9,400 over that time. That equates to a return of about 4.5%. Had it been invested in an index fund earning say 10% those annual premiums would have grown to about $25k (a bit less if you account for what $25k worth of term life insurance would have cost per year over that time).

If you cash out the whole life policy and the taxable stocks you could payoff virtually all of your debt immediately. That would save about $1,122 per year in interest, not to mention freeing up probably a few hundred dollars per month in cash flow. I became debt free a few months ago and it feels very nice watching my bank account grow each month instead of seeing payments on various debts deducted.

VERY interesting and insightful response.  Many thanks for the reply!
Currently reading/listening: MoneyBoss, MadFientist, Radical Personal Finance, Financial Mentor, Thus Spake Zarathustra