Author Topic: Cash out a whole life insurance policy or not?  (Read 2604 times)

MVal

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Cash out a whole life insurance policy or not?
« on: March 15, 2018, 12:27:22 PM »
So when I was a baby, my parents bought me a whole life insurance policy from State Farm that they paid into until I was old enough to take over the payments myself. I'm now 35 and the policy has a cash value of $2200. I'm not married and don't have kids, so do I really need this? Is there any good reason to keep it? It costs me about $65/yr. I'm thinking if I cashed it out, I could put it in my IRA and probably make better use of the value.

Thoughts?

Rob_bob

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Re: Cash out a whole life insurance policy or not?
« Reply #1 on: March 15, 2018, 12:38:40 PM »
I would cash it out, you don't currently need life insurance and it wouldn't even cover funeral costs.

homestead neohio

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Re: Cash out a whole life insurance policy or not?
« Reply #2 on: March 15, 2018, 01:19:57 PM »
Some things to consider: Who is named as your beneficiary?  Do you have positive or negative net worth?  Who will settle your estate?

If you cannot otherwise max your pre-tax investments (401k or similar and tIRA), it is worth cashing in and fully funding to minimize taxes now (assuming your tIRA contributions lower your tax burden, which does not happen for high income earners).

If you are fully funding a 401k and IRA no matter what, I would get a current account statement.  Sometimes these things pay for themselves in dividends when they are this old.  I have one of these policies and plan to sell it when I no longer need life insurance, but for now I'm keeping it because my wife and kids would benefit.  Were not quite FIREd yet, so every little addition would help them not need to replace income I have been providing.  The cash value for my policy goes up more each year than the premium amount, so it is sort of like I'm paying myself to keep the insurance.  I also have a balance of dividends the policy has earned and I'm using them to pay the premium, so it is not money out of pocket.  If I cashed it out and invested it, the dollar value might go up MORE than it does in the policy due to market gains, but the cash value is less than 1% of my net worth so I'm not sweating it.  I also intend to cash it out in a year I don't have any wage income to minimize taxes.

I would cash it out, you don't currently need life insurance and it wouldn't even cover funeral costs.

Cash value is different than amount insured.  I'm guessing it is a 10k or 20k policy if it has a cash value of $2200.

GOFU

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Re: Cash out a whole life insurance policy or not?
« Reply #3 on: March 15, 2018, 01:48:21 PM »
You don't mention the death benefit amount. But my questions would be: Is there a significant possibility that your circumstances will change any time soon (i.e., marriage and/or dependents)? If circumstances do change, are your assets at such a level that the death benefit would be of substantial value to your dependents in the event of your untimely demise?

$2,200 is probably not life-changing money. $65 a year ($5.42 per month) is not a significant expense. But if it is a useless expense and that is never going to change then there is no reason to keep it up.


Michael in ABQ

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Re: Cash out a whole life insurance policy or not?
« Reply #4 on: March 15, 2018, 02:39:00 PM »
Cash it out and invest it in something worthwhile. You might have some minimal taxes but realistically most of that $2,200 is going to return of premiums not growth.

If you do get married or have kids you can go pickup a term policy that will probably provide about $100,000 - $150,000 for that same annual premium.

GOFU

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Re: Cash out a whole life insurance policy or not?
« Reply #5 on: March 15, 2018, 02:46:48 PM »
If you do get married or have kids you can go pickup a term policy that will probably provide about $100,000 - $150,000 for that same annual premium.
Unless for some reason he can't.

But it doesn't sound like this policy is significant enough to even worry about too much either way.

tomsang

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Re: Cash out a whole life insurance policy or not?
« Reply #6 on: March 15, 2018, 02:52:05 PM »
Everyone hates whole life insurance.  They are a terrible investment to buy....  But, once you or someone bought them, they may be a great investment to keep.  I went to cash out my whole life policy as I had a deal that needed cash.  My agent, did not really care but explained what the dividend yield was.  I was able to pull out the accumulated value, dividends, but keep the policy. The dividend was something like 6%.  He mentioned that if I had excess cash in the future that I could pay it into the policy and get these dividends.  The cash surrender value is almost like having it in your checking or savings account. I received a check on the spot.  So if your agent is open, they can write you a check.  There may be a max that they can write- My amount was like $9k.  It is probably worth asking.

I could see using this as an emergency fund that pays 6% interest.  Very liquid, very safe unless the world comes to an end.

So, I would ask your agent what the dividend yield is, what are the benefits and downside of keeping the policy, how quickly you can pull the cash, etc.  I probably need to go refill my cash surrender value, but I am still paying off some debt.

Don't listen to those that just say, Whole Life Policies suck. Find out the facts and report back.


MVal

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Re: Cash out a whole life insurance policy or not?
« Reply #7 on: March 15, 2018, 03:18:37 PM »
Some things to consider: Who is named as your beneficiary?  Do you have positive or negative net worth?  Who will settle your estate?

If you cannot otherwise max your pre-tax investments (401k or similar and tIRA), it is worth cashing in and fully funding to minimize taxes now (assuming your tIRA contributions lower your tax burden, which does not happen for high income earners).

If you are fully funding a 401k and IRA no matter what, I would get a current account statement.  Sometimes these things pay for themselves in dividends when they are this old.  I have one of these policies and plan to sell it when I no longer need life insurance, but for now I'm keeping it because my wife and kids would benefit.  Were not quite FIREd yet, so every little addition would help them not need to replace income I have been providing.  The cash value for my policy goes up more each year than the premium amount, so it is sort of like I'm paying myself to keep the insurance.  I also have a balance of dividends the policy has earned and I'm using them to pay the premium, so it is not money out of pocket.  If I cashed it out and invested it, the dollar value might go up MORE than it does in the policy due to market gains, but the cash value is less than 1% of my net worth so I'm not sweating it.  I also intend to cash it out in a year I don't have any wage income to minimize taxes.

I would cash it out, you don't currently need life insurance and it wouldn't even cover funeral costs.

Cash value is different than amount insured.  I'm guessing it is a 10k or 20k policy if it has a cash value of $2200.

Yes, the policy would pay out over 20K upon death.

I will not be able to fully fund my tIRA and 401K this year, so these funds would come in handy.

homestead neohio

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Re: Cash out a whole life insurance policy or not?
« Reply #8 on: March 16, 2018, 07:35:49 AM »
tomsang makes a good point about the most expensive costs of whole life being up front.  Once they are 30+ years old, they can be ok to keep.  But since the OP doesn't need life insurance and can use the funds to max tax advantaged space, I would say cash it out. 

Even a 6% dividend on $2200 per year is only $132, minus the $65 premium to keep it going.  If the OP is at a 22% marginal tax rate, that is going to allow for $484 in tax savings this year, plus the money will grow at the market rate, which should be better than than the dividend rate if held for decades.  The OP would also eliminate the $65/yr premium expense.

tomsang

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Re: Cash out a whole life insurance policy or not?
« Reply #9 on: March 16, 2018, 08:28:11 AM »
I would still sit down with the agent. In some cases you can pull out significantly more than the cash surrender value. If you also have the opportunity to write a check for $50k to the insurance company which increases the cash surrender value and get a 6% dividend on this cash like investment. These becomes a great emergency fund. My point is get the facts. Report back as I have already forgotten some of the details. Don't just blindly cancel the policy. Many people do, that is why the dividends are so high.


homestead neohio

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Re: Cash out a whole life insurance policy or not?
« Reply #10 on: March 16, 2018, 09:37:39 AM »
I would still sit down with the agent. In some cases you can pull out significantly more than the cash surrender value. If you also have the opportunity to write a check for $50k to the insurance company which increases the cash surrender value and get a 6% dividend on this cash like investment. These becomes a great emergency fund. My point is get the facts. Report back as I have already forgotten some of the details. Don't just blindly cancel the policy. Many people do, that is why the dividends are so high.

I do appreciate the different perspective tomsang provides.  To me it seems like a waste of time to sit with the agent who will try to sell you on what a great investment this is and why you should buy an even bigger policy.  The agent is motivated sell new policies because that is how they get paid.  OP can do what they want, but if OP is not maxing tax advantaged investments already, probably unlikely to have the chance to write that 50k check anytime soon.  Is it worth forgoing the tax advantage and paying the premium to have the chance to maybe someday write it?

Whole life policies are complicated beasts, not super easy to understand.  I don't like putting large chunks of cash into investments I don't understand, especially when the "investment" is also trying to be an insurance policy.  I only have mine because it was purchased for me 35+ years ago, is paying for itself, and I desire to have some life insurance.  I'll cash it out when I have low income and no need for insurance because I'm fully FIREd and self-insured. 

tomsang

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Re: Cash out a whole life insurance policy or not?
« Reply #11 on: March 16, 2018, 10:35:38 AM »
I do appreciate the different perspective tomsang provides.  To me it seems like a waste of time to sit with the agent who will try to sell you on what a great investment this is and why you should buy an even bigger policy.  The agent is motivated sell new policies because that is how they get paid.  OP can do what they want, but if OP is not maxing tax advantaged investments already, probably unlikely to have the chance to write that 50k check anytime soon. Is it worth forgoing the tax advantage and paying the premium to have the chance to maybe someday write it?

Whole life policies are complicated beasts, not super easy to understand.  I don't like putting large chunks of cash into investments I don't understand, especially when the "investment" is also trying to be an insurance policy.  I only have mine because it was purchased for me 35+ years ago, is paying for itself, and I desire to have some life insurance.  I'll cash it out when I have low income and no need for insurance because I'm fully FIREd and self-insured.

I think you keep missing my point. My agent was able to show me mathematically, how I could get more money out of the account by keeping the account going.  That it pays 6%+, that in the future that I could put some amount of money back into the account to increase the cash surrender value earning a 6%+ yield, etc.  So if you are trying to put more into your tax deferred, you can still pull the dividends out of the policy and invest in tax deferred.   

The other point that I think you are missing is that the agent showed me that I could pull my money out Monday through Friday in 15 minutes.  So if you have an emergency fund in a savings account earning you 2%, this may be a better account.  Same liquidity, but paying a higher yield.  Cash out that money sitting in your savings account, and put it in an emergency fund called a whole life policy that earns 6%+.  I don't know what the dividend yield is on this accounts. I have heard some approach 9%.  My entire point is we are Mustachians, we don't just do what some people do.  We get the facts and make logical decisions based on these facts.  The mantra of don't buy whole life policies has nothing to do with a situation where you already own a whole life policy.

My sweet grandfather bought me one when I was born.  I was marching down to the insurance agent to cash it out for a better investment.  My insurance agent did not sell me anything else. She did show me that I could actually get more money out of the policy than if I cashed it out and that it paid over 6%.  She in a logic manner explained to me that these old policies are amazing.  I don't think she was tricking me so I would continue to pay the $25 a year, which she probably gets $.50.  We have four teenage drivers, businesses, rental houses, house, and other insurance needs.  I can't recall all the details about how these whole life policies work, but I do know that I don't think people should just cash them in without getting the facts.

So, as a good Mustachian, go find out the facts and let us know.  The answer may be to cash it out and move on or the answer may be cash out your emergency fund and double down on whole life for a better yield.  This topic pops up every once in awhile, so it would be nice to show the logic on whatever decision the OP makes.   
« Last Edit: March 18, 2018, 11:43:52 AM by tomsang »

BTDretire

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Re: Cash out a whole life insurance policy or not?
« Reply #12 on: March 17, 2018, 03:31:26 PM »
+1^    I'm skeptical, salemen can be very convincing.

 I had a similar bought at birth policy, when my parents gave it to me
I cashed out, and put it in VTSAX, back in the 90s.

MrThatsDifferent

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Re: Cash out a whole life insurance policy or not?
« Reply #13 on: March 17, 2018, 04:16:39 PM »
My grandfather did this for me and then he passed away and left my grandmother with a lot of debt. I cashed out my policy, which also had shares, got a nice chunk and gave it all to my grandmother. Donít even think about it. Money has better use while alive then dead.

salmo trutta

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Re: Cash out a whole life insurance policy or not?
« Reply #14 on: March 18, 2018, 07:41:22 AM »
Not married and no kids? Why do you need life insurance?

And Whole Life policies are *horrible* investment vehicles. You've had the policy for 35 years and built up a cash value of $2,200? That should tell you all you need to know. 35 years x 65 dollars/year = $2,275. You're losing money!

Cash it out ASAP and drop the $2,200 into SWPPX. Drop $100/month in there alongside it and you'll have a quarter-mil by the time you're 65. Drop $500/month and you'll have a cool million. Now THAT's life insurance!

If an insurance agent promises that same type of return, report them to your state licensing agent as a fraud.

Cheers,

Salmo

Car Jack

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Re: Cash out a whole life insurance policy or not?
« Reply #15 on: March 18, 2018, 10:08:31 AM »
Where a whole life policy makes sense is if you are now uninsurable and need life insurance because people depend on you.

There's 2 things there.  You have nobody who depends on you, so sell it even if you have cancer and aids and parkinsons and ALS and a bad heart. 

Financial.Velociraptor

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Re: Cash out a whole life insurance policy or not?
« Reply #16 on: March 18, 2018, 10:11:33 AM »
Do you have enough cash value to "autopilot" the policy?  At some point, the cash earnings are enough to cover the term portion of the premium.  You have your broker set the thing to give you a life insurance for life policy with no further out of pocket costs.

tomsang

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Re: Cash out a whole life insurance policy or not?
« Reply #17 on: March 18, 2018, 11:37:18 AM »
Did you independently verify what your agent told you?  Perhaps by running it by an accountant or a former insurance agent who is absolutely no longer in the business?  Not saying you or your agent are wrong.... You just might be ignoring a conflict of interest.  I think agents generally get annual renewal/residual income from policies that have already been sold and for which they are listed as an agent.

I am a CPA with 25 years of experience, with minors in finance and accounting.  Yes, I verified what she was saying and it made complete sense.

One of the big issues that I see on this forum, are people that are so anti something that they refuse to do an hour of investigating to see if there is another story.  In this case, the right answer may be to drop the policy and move on or it might be to put your emergency fund into the cash surrender value to convert something that is earning 2% to something that is earning 6%. Each policy is different, you need to get the facts before making blanket statements.   

I have never said to keep the policy, what I have said is find out what the facts are regarding this policy.  Each policy is different.  My policy was a $10k whole life policy that my grandfather set up on my birth. This policy was completely useless as $10k is nothing.  I was adamant about dropping this policy until I got the facts from the agent.  It is hard to argue with the facts.  The premiums for my policy were miniscule per year.  As I mentioned, the value of the policy may be to drop more money into it an use it as an emergency fund.  If you have safe money earning 2%, that can be dropped into it and earn 6%-7%, then this may be a great tool to have.  My entire point is don't listen to those that just say drop something, as there may be a better way to tap the cash surrender value. 

If you can't trust your agent to give you facts, then you need to fire your agent immediately and get a new one.  If you think he is going to sully his reputation for a small fraction of the $65 yearly premium, you should fire him today.  My bet is that he "makes" less than $5 a year on this old policy.  Ninety percent plus of the money made by agents selling Whole Life Policies are in the first 5 years.  That is why I would never tell someone to buy a Whole Life Policy, but I would tell people to get the facts before closing one down.

The Dave Ramsey's of the world just say to drop these policies.  It is too hard, complicated and a mixed message for him to say to do the research to figure out the pros and cons of these old policies.  The Mustachians will invest an hour to see if there is true value in these policies.  Mine was great, but each policy is different.  Get the facts!



Mighty-Dollar

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Re: Cash out a whole life insurance policy or not?
« Reply #18 on: March 18, 2018, 02:40:02 PM »
Never mix insurance with investing. Cash out!
http://investingadvicewatchdog.com/whole-life-insurance.html

smallstache

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Re: Cash out a whole life insurance policy or not?
« Reply #19 on: March 20, 2018, 02:18:34 AM »
There are multiple sides to this argument...

OP's $2200 cash value on a $20k policy that is ~35 years old and still costs him/her $65/year...probably not worth keeping.

My two paid up $250k whole life policies with combined cash value of $90k earning a tax-deferred 6% interest rate, next to my $1.4M stock portfolio and $1.2M rental real estate portfolio...I see no reason to cash in those policies.  Additionally, They are tax-free if used for long term care.  I never paid a broker's commission, but about $100 a year comes out of the interest to pay the expenses.

My point is whole life insurance has its place.  It may have no place in OP's finances or the finances of a lot of people on here, but it definitely has a place.

GoodToGrow

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Re: Cash out a whole life insurance policy or not?
« Reply #20 on: October 26, 2018, 03:40:14 AM »
    I own a cash value whole life insurance policy with a paid-up additions rider.  There are very few topics which seem as polarizing as this one, but I have seen quite a bit of knowledgeable posts and genuine interest here within MMM and wanted to share my experience just for the event of consideration if there is someone out there that is interested. 

    Life insurance isn't an investment.  Stop thinking that it is, and stop comparing it to investments.  You're buying insurance.  The only people remaining should be those that want insurance, and are weighing the options of every possible insurance option based on their particular needs/desires.  That will remove a vast majority of the population, so realize MMMers that we can probably rule out most of the persons on this site as being persons interested in this 'product'. 

    One of the prerequisites is to know why you are buying something and what it is being used for.  I would not ever consider purchasing one without fully knowing the ins and outs of the insurance company, the performance/history/rating/current population of policy owners of that company, reading as much as possible about it prior to approaching an agent, and taking time to find an agent that isn't...you know, a life insurance agent (=  ALL agents get paid by selling policies, sort of like car sales, brokers, real estate agents, bankers, mechanics, wait staff and politicians.  It's a pretty good idea to ask the agent how they are paid.  Getting a cheeky response?  Move on along. 

    My policy was started in 2012, and is a whole life + PUAR (paid-up additions rider) policy.  It has an annual premium paid as a lump sum once/year, and that amount of the premium never changes.  To keep the policy in force, one needs to pay the premium.  Don't pay the premium, lose the insurance.  This is what trips up most humans, as having a premium payment every year for the remainder of their lives regardless of circumstance is a difficult path, and is part of the reason that insurance companies are not liked.  However, policies of old were very rigid in this regard whereas I found when starting my policy that actually there was some flexibility here.  My company, for instance, has a 30 day grace period and offers some riders to the policy that can allow you to miss payments (I didn't elect that as a rider).  Suffice it to say, this is a long time horizon thing.  You might imagine that it should be, as you expect to have your beneficiaries receive a payment at the time of your passing.

    Currently my amount of 'dividend' is approaching the amount of the premium, and if/when it does then I could instruct the company to direct those dividends to cover the annual premium (this is called, "paid-up").  I don't know for a fact when that will be, but if trends continue as they have been then it appears within two years my policy will be paid-up.  In theory, those dividends would pay the premium every year and I would no longer have to do so.  There is a catch - life insurance companies don't have to pay premiums (similar to how companies that offer dividends on stock don't have to pay dividends).  When you are screening life insurance companies and products, you also want to use companies that have a strong history of paying dividends (additionally have a run-time with the product you are considering that shows dividend payments).  In summary, dividends are tied to the amount of insurance you have and the length of time that you have them.  I still intend to pay my premiums from my pocket, though, because this maximizes the amount of cash value I have in the policy.

    Not every whole life insurance policy has the additional PUAR (paid-up additions rider), and that is something that is a must if you are really looking to maximize your cash value portion of the life insurance or minimize your time until the policy is paid-up.  What this guy does is buy an incremental amount more of insurance with the dividends.  So it's a compound interest thing.  The dividend rates vary, they aren't guaranteed, and they may be different between your base policy amount and any paid-up additions.  This does amount to increasing your policy level of insurance, without increasing your annual premium payment (hence the 'paid-up additions' nomenclature for PUAR). 

    The cash value portion of the policy works in a similar manner as a bank savings account as you pay it into the policy.  Withdrawing is a little bit more of a twist, where you can directly withdraw the money you have contributed (penalty free) or you can take a loan against the money.  There is an interest amount credited to your cash value savings account in the form of dividends, and there is also a loan interest if you take the loan.  You can pay the loan back, but you don't have to as long as you keep the policy current.  It's often better to contribute to the cash value portion of the policy than it is to pay the loan back, but not in all cases.  In the early years, the cash value does not match what you put into the account.  However, with compounding and a reasonable policy, your cash value could and should exceed what you have paid in to the insurance policy (including premiums). 

    One big thing as well - when you pass away, there is no cash value portion that is provided to your beneficiaries.  The cash value applies to you as you are living.  Any monies tied into the cash value policy is kept by the insurance company when you pass.  This is something that you need to consider very carefully when investigating if this is the right product for you. 

    Right - so what are the numbers?  In my case, it looks like this:
    • Original insured amount was $850k
    Current insured amount is $2.2M
    • Current cash value is $265k
    Including premium payments, loans, and interest, 85% of the money that has been paid in to the policy is available as cash

Is life insurance good, bad, or ugly?  This is completely dependent on your situation and desires, your comfort and thoughts, your other financial positions and goals, your family and you.  I, for one, am not willing to eliminate something from consideration until I understand what it is and how it may benefit.  There are other subjects I have not discussed herein, but in truth are part of the key reasons I opted to embark upon my life insurance adventure.  These are not considered by the gurus, and is something that I think underpins the mass judgy views on the subject (Hi Suze Orman & Dave Ramsaywhat). 

You do you, but I don't regret my decision yet. 
« Last Edit: October 26, 2018, 03:48:26 AM by GoodToGrow »

MustacheAndaHalf

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Re: Cash out a whole life insurance policy or not?
« Reply #21 on: October 26, 2018, 06:45:21 AM »
She in a logic manner explained to me that these old policies are amazing.  I don't think she was tricking me so I would continue to pay the $25 a year, which she probably gets $.50.
You're defending old whole life policies by claiming an insurance company makes a 2% commission.  Where did you get the 2% commission figure?

When you talk about people hating whole life insurance, you need to cover the general picture and not just the situation for people with 30+ year old whole life policies.  For most people, buying a new whole life insurance policy involves commissions that are an order of magnitude higher than 2%.

https://www.insure.com/car-insurance/insurance-agent-commissions.html
"In contrast, life insurance agents make most of their money in the first year of a new policy. Such front-loaded commissions can run anywhere from 40 percent to more than 100 percent of the policy's first-year premium."

https://www.thebalance.com/life-insurance-agent-commission-2645804
"Every company is different, but life insurance agents may make 30 to 70 percent in commission of the first year premium on term life insurance."

The general situation has much more of a conflict of interest than your "$.50" number suggests.

Car Jack

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Re: Cash out a whole life insurance policy or not?
« Reply #22 on: October 26, 2018, 07:19:22 AM »
I suspect the agent either doesn't know what they're talking about or are outright lieing to you.

Think of it from the insurance company's side of things.  You're paying a set premium as you age.  But as you age, the cost to insure increases every month.  They are supposedly giving you 6%.  Insurance companies invest in T bonds.  Show me how they're going to take your premium and give you any insurance plus 6%.  They can't.  What is going on is that this magical 6% is NOT on what you put in.  It's on some other lower number after the insurance portion is paid and the commissions and fees are paid.  So out of $100 that you pay in, you think you're getting $6 a year later.  Most likely, it's more like the salesman gets $5, the insurance company takes out $5.  Let's say the insurance costs $65.  So now you're down to $25 to invest.  It gets invested and somehow you get 6% back on that.....well it's 6% of $25 or 1.5% of what you actually paid.  The statement will show 6%.  It's very similar to a load fund except that insurance load is charged every year and it will increase every year with your age until you will literally get to a point where the insurance cost is higher than the premium, so then they eat into the cash value.  This may or may not happen, depending on how much more than the premium you're paying.  When I got my in force illustration (you have this, right?), it showed exactly that.  On twin policies for my sister and me, bought at the same time by my dad, I know she cashed out 10 years ago and received $14k.  On my policy, I cashed out and (10 years later of payments) received $13k.  From the illustration, it broke down insurance cost per month and I could clearly see that it was more than my annual premium.

Insurance companies don't have magical pixy dust investments that can give you insurance plus 6% of what you're paying in with this 2% environment.  Whack yourself in the head and think about it.  How the hell could they?

OurTown

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Re: Cash out a whole life insurance policy or not?
« Reply #23 on: October 26, 2018, 07:32:22 AM »
I had one of these, a NY Life whole life policy purchased by my parents when I was a kid.  I cashed it out early in my MMM journey and paid off a car.

YoungInvestor

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Re: Cash out a whole life insurance policy or not?
« Reply #24 on: October 26, 2018, 07:55:18 AM »
I suspect the agent either doesn't know what they're talking about or are outright lieing to you.

Think of it from the insurance company's side of things.  You're paying a set premium as you age.  But as you age, the cost to insure increases every month.  They are supposedly giving you 6%.  Insurance companies invest in T bonds.  Show me how they're going to take your premium and give you any insurance plus 6%.  They can't.  What is going on is that this magical 6% is NOT on what you put in.  It's on some other lower number after the insurance portion is paid and the commissions and fees are paid.  So out of $100 that you pay in, you think you're getting $6 a year later.  Most likely, it's more like the salesman gets $5, the insurance company takes out $5.  Let's say the insurance costs $65.  So now you're down to $25 to invest.  It gets invested and somehow you get 6% back on that.....well it's 6% of $25 or 1.5% of what you actually paid.  The statement will show 6%.  It's very similar to a load fund except that insurance load is charged every year and it will increase every year with your age until you will literally get to a point where the insurance cost is higher than the premium, so then they eat into the cash value.  This may or may not happen, depending on how much more than the premium you're paying.  When I got my in force illustration (you have this, right?), it showed exactly that.  On twin policies for my sister and me, bought at the same time by my dad, I know she cashed out 10 years ago and received $14k.  On my policy, I cashed out and (10 years later of payments) received $13k.  From the illustration, it broke down insurance cost per month and I could clearly see that it was more than my annual premium.

Insurance companies don't have magical pixy dust investments that can give you insurance plus 6% of what you're paying in with this 2% environment.  Whack yourself in the head and think about it.  How the hell could they?

Many of these policies were written at a time when interest rates were higher. Look up the lawsuit currently going on against Manulife for an example of poor planning generating an arbitrage opportunity. Basically a fund is arguing that the wording of the policy would allow them to deposit infinite amounts of money at 4%, effectively e-banking then to make infinite profit (up to Manulife's eventual bankruptcy).

A European insurance product even allowed the holders to choose the funds held in the policy retroactively to some point, also enabling arbitrage. I think it was AXA.

I'm not a lawyer so I don't know if it has merit, but it is certainly proof that insurance products may not be as well thought out as you expect them to be. Especially if they were underwritten a long time ago.

GoodToGrow

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Re: Cash out a whole life insurance policy or not?
« Reply #25 on: October 27, 2018, 12:11:05 AM »
I think there is a misunderstanding on how the commissions work and how insurance companies work. 

The insurance industry is typically in the upper echelon based on return metrics (ROE, ROI, etc.), but that's not to say that they invest all of their money in traditional investments (just like banks don't simply invest money to make profits - they loan it to other patrons, sell their mortgages, etc.).  In fact, insurance is one of the larger players on the secondary market, so by their simple existence they do indeed have investments that us as individuals cannot invest in (but don't only make their money in this manner).  However, they make money off of people who buy policies, loaning their money, and investing (the float).  Think about it - if your principle job is to be the life insurance company, you need to generate enough in policy fees and have a large enough pool of people so that you don't pay out all of your money upon death. 

The cost to insure you does not increase every year from the cost of the insurer.  The cost for you to buy insurance at a later time will most certainly go up.  The cost for the insurer to insure you is when you buy the policy.  Hence the actuaries, and why they set the cost for your policy as they do.  They've covered their costs with you buying the policy and the many other policy holders.  Annual premiums being set for a whole life insurance policy for perpetuity fails to understand the mathematics.  I'm not sure why this would make you think that a life insurance agent is lying to you, it is a fact. 

There are commissions for all types of insurance.  Term insurance has commissions, and whole life has commissions.  You factor this part of it in when you are considering different companies and products.  Same like buying a car or buying a house.  Whole life will be a more expensive type of policy than a term policy, and is rife with fees.  However, as it ages it's perhaps not as bad as you might think.  They tend to front-load the commissions, and the residuals into the future are nearly non-existent (see the example the OP laid out).   

GoodToGrow

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Re: Cash out a whole life insurance policy or not?
« Reply #26 on: October 27, 2018, 12:26:06 AM »
One point for people who are wanting insurance and weighing whole life vs. term.

With term, the premise is typically that you have a period of time where you have a family and want coverage in the event of your death.  In the future, if you don't have a family and it's you and the spouse, maybe you don't need any insurance any longer (I'd be curious to find out if most on MMM have insurance or not, I would suspect not).   

There is a consideration here, though.  If you are thinking that you will have term now and then consider another term insurance later, be aware that the cost of that term insurance renewal will be considerably higher than what you have quoted now.  I'd recommend you ask the agent to provide current term insurance quotes for your age in the future with varying health conditions if you are weighing term vs. whole. 

In my situation, if I did a 20 year term and wanted to renew with only 'good' health in 20 years, the cost of the term was considerably higher than buying now.  Of course, I did not factor in the time-weighting of money and should have at that time, but the longer you live the term renewals will likely be troublesome and one may not be able to be renewed at later stages of life.  I was more interested in the fact that they would of course be re-assessing my health and I may not be 'insurable' (they may refuse to insure me).  As my life has developed I have difficulty in running, which has definitely negatively impacted my health. 

Goldielocks

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Re: Cash out a whole life insurance policy or not?
« Reply #27 on: October 27, 2018, 12:52:19 AM »
A few more things to consider (may not apply to OP, general considerations)

A permanent policy is excellent at paying taxes on your capital gains when you die, allowing your beneficiaries to inherit all the proceeds without selling / forcing a sale of property or stocks.

You can donate your policy by transferring it to your favorite charity and get the value as a tax deduction.   They can keep paying the annual dues and get the $20k when you die, or cash it in (as it is theirs, now).

The tiny permanent policy that my mother got when I was small (on her life), let me apply for a scholarship to that insurance company, which I received.   Then my daughter applied (as grand daughter of policy owner), and she was awarded the scholarship, too.   So, our family has recouped $16k from the insurance company, versus payments of approx. $6000.  AND grandma was told when she was 65 that she is "fully paid up" and has a policy with a Cash Surrender Value, a Death Benefit, and ZERO annual payment.

Yeah, I know scholarships are not guaranteed, but the payback on this particular policy has been huge:  Scholarship, Cash Surrender Value, life insurance while kids were small....