Author Topic: estate comp life insurance policy help  (Read 9913 times)

Hondacrv

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estate comp life insurance policy help
« on: November 07, 2013, 11:52:33 PM »
Hi,
I am a 40 year professional. our family income  is around 300K/yr. We have maxed out our investment in 403B, Roth and Health savings account. I bought a 500k estate complife life insurance policy from northwestern mutual 2 and 1/2 yrs ago.

http://www.northwesternmutual.com/products-and-services/personal/life-insurance/Documents/ecl.pdf

- Its a 500 K policy with 7K premium per year.

- It has a Guaranteed death benefit of 500k. Death benefit will keep increasing each year as well as cash value.
  (I was told death benefit increase every year as dividends are paid every year. e.g.: 500K + dividends paid in 2012 will become new guaranteed death benefit for 2013 and will continue like that but I don't see that in writing)

- Agent explained to me that, looking at past data, this policy will  probably self sustain in  12-13 years and I will not have to  pay premium  after that.


- I can withdraw cash after age of 65  from the policy , up to the amount I  put in as premiums without paying taxes  and borrow 90% of cash value increase at 8% interest rate.

My doubts regarding the policy are:

-Is the increase in death benefit in subsequent years a well understood fact or it has to be in written in policy to be guranteed?

-I have  already invested around 15K in the policy, it seems like a lot paying around 7000 k every year for possibly 13-15 years and longer.
 I was told that increase in cash value will be ~ 5% growth and beneficiary will get total cash value in tax deferred basis.

can i withdraw cash after age of 65  from the policy , up to the amount I  put in ,as premiums without paying taxes ?

My friend suggested a 30 yr term life policy and investing the difference in very conservative index fund will also give more than  5% return in long term.

- If I surrender the policy now I will loose 10K, which doesn't seem like a good choice either. Early in the policy I am in a big dilemma, should I continue or surrender the policy?
Happy investing.

brewer12345

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Re: estate comp life insurance policy help
« Reply #1 on: November 08, 2013, 10:46:15 AM »
Ah, another life insurance agent screw job. 

Let us start this very simply:

- Do you need the life insurance coverage?

- How much have you paid in so far and what is your cash value?  Hint: you have probably lost money on this "investment."

- Is there some reason you did not look at other highly tax efficient vehicles, such as long trerm holds of ETFs, or perhaps even a very low cost variable annuity?

lackofstache

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Re: estate comp life insurance policy help
« Reply #2 on: November 08, 2013, 11:11:26 AM »


- Do you need the life insurance coverage?


This is the first question, I'd ask. If your family would be okay w/o the insurance, it's going to be bad "investment." If they do, and you're okay with the bill, keep it.

The minimum guranteed death benefit is $500K, therefore, they can't/won't gurantee it raises w/ dividends. It will, though subject to the companies underlying investments, commissions, advertising, etc. Life insurance policies like this will yield you appreciation on the "investment" when you die, as long as you've taken the cash value out prior to death. It may not be the most optimized solution for growth, but it can be a good way to pass down money tax free if that's a goal. The problem w/ most investments is that upon death the gains are taxed, albeit at ordinary income levels, but they are taxed.

I'd say you should determine whether you need/want to pass down money at some point or if you'd rather maximize return on your money while you're living... Life insurance should only be used as life insurance, they can't say it's an investment, so you shouldn't treat it like one.

RadicalPersonalFinance

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Re: estate comp life insurance policy help
« Reply #3 on: November 08, 2013, 11:33:13 AM »
- Its a 500 K policy with 7K premium per year.

- It has a Guaranteed death benefit of 500k. Death benefit will keep increasing each year as well as cash value.
  (I was told death benefit increase every year as dividends are paid every year. e.g.: 500K + dividends paid in 2012 will become new guaranteed death benefit for 2013 and will continue like that but I don't see that in writing)

- Agent explained to me that, looking at past data, this policy will  probably self sustain in  12-13 years and I will not have to  pay premium  after that.


- I can withdraw cash after age of 65  from the policy , up to the amount I  put in as premiums without paying taxes  and borrow 90% of cash value increase at 8% interest rate.

My doubts regarding the policy are:

-Is the increase in death benefit in subsequent years a well understood fact or it has to be in written in policy to be guranteed?

-I have  already invested around 15K in the policy, it seems like a lot paying around 7000 k every year for possibly 13-15 years and longer.
 I was told that increase in cash value will be ~ 5% growth and beneficiary will get total cash value in tax deferred basis.

can i withdraw cash after age of 65  from the policy , up to the amount I  put in ,as premiums without paying taxes ?

My friend suggested a 30 yr term life policy and investing the difference in very conservative index fund will also give more than  5% return in long term.

- If I surrender the policy now I will loose 10K, which doesn't seem like a good choice either. Early in the policy I am in a big dilemma, should I continue or surrender the policy?
Happy investing.

Call your agent and ask him/her these questions first.  That product is a unique product which is essentially a hybrid whole life policy.  It's not a universal life insurance policy, but it does have a component of whole life insurance and term life insurance internal to the policy.  It's also very flexible and the internal components can be changed while the policy is in existence.

Ask the agent to explain again how the policy works so you understand it clearly.

Here are some thoughts to help you though:

-The $7k premium is adjustable within limits and it can be adjusted up or down.  You and your agent picked that number somewhat arbitrarily when you designed the policy. 

-The death benefit will increase each year with the dividends as long as you use the dividends to buy paid up insurance.  If you take the dividends in cash, it won't. 

-The additional cash values and death benefit do become guaranteed once credited--it's in your contract and you can see it every year on your in-force illustration.

-Ask your agent to run a new in-force illustration for you every year and you can see when the policy will self-sustain as the dividend rate changes each year.  If you want it to self-sustain sooner, pay more premiums now.  If you want it to sustain later, lower the premiums.

-You can withdraw cash any time from the policy.  You don't have to wait for 65 and you don't have to withdraw at 65.

-Borrowing may or may not be the best way for you to access the cash.  You may want to borrow, you may want to surrender, or you may want to do something else.  It depends on your income tax situation at retirement.

-The beneficiary of a life insurance policy always gets the benefit income tax free.

-You can withdraw cash from the policy at any time--before or after 65--from the policy up to the premiums without paying income taxes.  That's called a return of basis.  Just make sure you don't do it so early that it will affect the health of the policy.  Better to do it later.

-My suggestion is that 30-year term almost never makes sense.  If you're going to pursue a buy term and invest the difference strategy, you need a much shorter term period.  30 years is such a long period of time that you'll usually come out ahead with a well-designed whole life policy, even if you cash it in after 30 years and don't keep it for life.  If you do term, either go with an annual renewable term product or make a plan to be self-insured in less than 15 years.

-Ask your agent to run a buy term and invest the difference comparison to see what you will need to average in a taxable account based on your tax bracket to beat the policy returns.  You will need to choose a valid proxy--meaning a bond index or CD rates.  Life insurance policies are very stable (guaranteed to go up every year), so you can't accurately compare them to a pure stock portfolio. (For the same reasons you can't compare a good rental house to a roulette wheel...extreme example but accurate.)

-Don't surrender the policy until/unless you talk to your agent.  You have a ton of options beyond surrendering that are probably smarter than a straight surrender, even if you feel you don't want it.

Finally, in your financial situation you need to consider all of your assets and which ones you'll use up and which you won't.

I own a similar policy and although I may use the values in my lifetime, that's not my intent.  My intent for that policy is for it's death benefit to persist for my heirs.  I will spend my IRAs down to nothing while alive and leave my life insurance and Roth as simple, effective income-tax planning for my heirs.  For me, the policy serves as the backup money--absolutely safe and guaranteed money which will assure my retirement if something happens in the markets that adversely affects my planned withdrawal rates for those investments. YMMV.

SummitAdviser

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Re: estate comp life insurance policy help
« Reply #4 on: January 03, 2018, 03:19:17 PM »
- Its a 500 K policy with 7K premium per year.

- It has a Guaranteed death benefit of 500k. Death benefit will keep increasing each year as well as cash value.
  (I was told death benefit increase every year as dividends are paid every year. e.g.: 500K + dividends paid in 2012 will become new guaranteed death benefit for 2013 and will continue like that but I don't see that in writing)

- Agent explained to me that, looking at past data, this policy will  probably self sustain in  12-13 years and I will not have to  pay premium  after that.


- I can withdraw cash after age of 65  from the policy , up to the amount I  put in as premiums without paying taxes  and borrow 90% of cash value increase at 8% interest rate.

My doubts regarding the policy are:

-Is the increase in death benefit in subsequent years a well understood fact or it has to be in written in policy to be guranteed?

-I have  already invested around 15K in the policy, it seems like a lot paying around 7000 k every year for possibly 13-15 years and longer.
 I was told that increase in cash value will be ~ 5% growth and beneficiary will get total cash value in tax deferred basis.

can i withdraw cash after age of 65  from the policy , up to the amount I  put in ,as premiums without paying taxes ?

My friend suggested a 30 yr term life policy and investing the difference in very conservative index fund will also give more than  5% return in long term.

- If I surrender the policy now I will loose 10K, which doesn't seem like a good choice either. Early in the policy I am in a big dilemma, should I continue or surrender the policy?
Happy investing.

Call your agent and ask him/her these questions first.  That product is a unique product which is essentially a hybrid whole life policy.  It's not a universal life insurance policy, but it does have a component of whole life insurance and term life insurance internal to the policy.  It's also very flexible and the internal components can be changed while the policy is in existence.

Ask the agent to explain again how the policy works so you understand it clearly.

Here are some thoughts to help you though:

-The $7k premium is adjustable within limits and it can be adjusted up or down.  You and your agent picked that number somewhat arbitrarily when you designed the policy. 

-The death benefit will increase each year with the dividends as long as you use the dividends to buy paid up insurance.  If you take the dividends in cash, it won't. 

-The additional cash values and death benefit do become guaranteed once credited--it's in your contract and you can see it every year on your in-force illustration.

-Ask your agent to run a new in-force illustration for you every year and you can see when the policy will self-sustain as the dividend rate changes each year.  If you want it to self-sustain sooner, pay more premiums now.  If you want it to sustain later, lower the premiums.

-You can withdraw cash any time from the policy.  You don't have to wait for 65 and you don't have to withdraw at 65.

-Borrowing may or may not be the best way for you to access the cash.  You may want to borrow, you may want to surrender, or you may want to do something else.  It depends on your income tax situation at retirement.

-The beneficiary of a life insurance policy always gets the benefit income tax free.

-You can withdraw cash from the policy at any time--before or after 65--from the policy up to the premiums without paying income taxes.  That's called a return of basis.  Just make sure you don't do it so early that it will affect the health of the policy.  Better to do it later.

-My suggestion is that 30-year term almost never makes sense.  If you're going to pursue a buy term and invest the difference strategy, you need a much shorter term period.  30 years is such a long period of time that you'll usually come out ahead with a well-designed whole life policy, even if you cash it in after 30 years and don't keep it for life.  If you do term, either go with an annual renewable term product or make a plan to be self-insured in less than 15 years.

-Ask your agent to run a buy term and invest the difference comparison to see what you will need to average in a taxable account based on your tax bracket to beat the policy returns.  You will need to choose a valid proxy--meaning a bond index or CD rates.  Life insurance policies are very stable (guaranteed to go up every year), so you can't accurately compare them to a pure stock portfolio. (For the same reasons you can't compare a good rental house to a roulette wheel...extreme example but accurate.)

-Don't surrender the policy until/unless you talk to your agent.  You have a ton of options beyond surrendering that are probably smarter than a straight surrender, even if you feel you don't want it.

Finally, in your financial situation you need to consider all of your assets and which ones you'll use up and which you won't.

I own a similar policy and although I may use the values in my lifetime, that's not my intent.  My intent for that policy is for it's death benefit to persist for my heirs.  I will spend my IRAs down to nothing while alive and leave my life insurance and Roth as simple, effective income-tax planning for my heirs.  For me, the policy serves as the backup money--absolutely safe and guaranteed money which will assure my retirement if something happens in the markets that adversely affects my planned withdrawal rates for those investments. YMMV.


RadicalPersonalFinance---

I stumbled upon this thread when I was researching your website. I'm curious your thoughts on the subject because of your history with NWM. In your answer regarding Estate Comp Life you challenge the notion of "buy term and invest the difference." If you are buying life insurance strictly for the death benefit, there should never be an argument of how it performs vs a similar asset class (bond index and CD rates). If you are comparing it to a taxable investment of a similar risk, then it looks like you are buying the policy primarily as an investment. If this is the case, I am curious what your thoughts are on liquidating the taxable investment vs liquidating the cash value in the policy. From my experience, getting cash out of a life insurance policy can be very challenging compared to liquidating a taxable investment. The rate of return in a correctly structured insurance policy should outperform a bond index and CD no question, but, my concern with recommending the cash value as an investment, is dealing with the distribution strategy when the investor ends up needing the cash out of it. Especially, with a company like Northwestern that pays significant dividends, a lot of advisers neglect to inform their clients that the dividends decrease the basis in the policy (regardless of how those dividends are used) and when the client goes to withdraw cash they end up having to pay significant income tax (rather than cap gain tax in the taxable account) or take the cash out via loan, which has it's own set of problems in the long run.

To me, the distribution strategy is significant, but I'm curious to hear your thoughts on the subject and appreciate any insight you may have! Thanks!