Help Me Understand Whole Life Insurance

[TwoJays]

Hi all,

New to life insurance and trying to get a handle on things as I recently found out I have a policy originally purchased by my grandfather. It's a whole life policy - which I've read isn't the best choice for most situations but I want to make sure I have a solid understanding of how it works, what I would gain/lose by cashing it out, and how I can reduce any taxes/fees while moving the money into a Vanguard account if that's the best route for us at this point.

Potentially Relevant Details: 25, married with plans to start having kids 3-5 years from now
- Current assets (other than insurance policy): ~$10k savings, ~$7k 403b, two paid off but older cars (i.e. 150k/200k miles)
- Current liabilities: ~$37k student loans ($21k subsidized for me, $9k subsidized for DW, $7k private loan that her parents want to pay but we want to cover if possible given 7% interest rate and the fact that they only make the minimum payment)
- My Income: $65k salary, $16k benefits but will be going to law school (not paying any tuition/fees/etc.) in August - have optional consulting role to bring in some side income if there's time/interest
- Wife's Income: Currently $16k as teaching fellow, will graduate with masters in May and make $35-40k + benefits upon graduation

Life Insurance Details: I'll be meeting with the agent two weeks from now so I'm not positive on the premiums, just basing it off what my father told me when he let me know about the policy
- Annual Premium: $600 (this seems super low to me but I don't have anything to gauge it against)
- Death Benefit: $53,000
- Mutual Fund Value: ~$7k

Primary Questions:
- Is the mutual fund value the "cash value" of the policy?
- Assuming I cancel the policy, can I roll the mutual fund over to Vanguard without paying taxes on the funds?
- Is it reasonable to ask for a chart showing the guaranteed values of the cash value, death benefit, etc. in the future?
- What other questions should I be asking?

Thanks for any and all input - it is much appreciated!

[Metric Mouse]

I think the best source of information is going to be the agent.  But a few notes just on the numbers you've posted:

$600/year is not much. At this point you're money ahead - it would take you 88 years of premium payments to 'break even' on the 53K payout on death. Since your life expentancy is much shorter than that, you'll never lose money on this product. Your grandfather has 'taken the hit' for you with 20-some years of payments.

Since you won't lose money, you may think of keeping this policy until you financially comfortable. It's not the most efficient use of $600, but it is cheap insurance to assist your wife and future kids in the event of your untimely death in the next decade or so. I believe the cash value will continue to grow, so it's not a complete loss of 'savings' either. The agent will have a table or equation of this.

Alternatively: as you mentioned, 'whole life' policies are usually more expensive then other policies - when you talk to the agent, perhaps get a quote on a twenty year term policy for whatever amount you feel comfortable would cover your families needs - I would guess that $7,000 cash value of the whole life policy will pay for quite a few years of premiums, and you'll get a hell of a lot more than $53K should you die while insured under the term policy.

Just some thoughts.

[chasesfish]

I think you have one of two options with this policy, depending on if you want/need life insurance

1) Cash it out immediately and move the money to Vanguard.   You can then get a term life policy if you need life insurance.

2) View this as an emergency savings, then call them up and change your elections so the "dividends" go against your premium payment.  Assuming its underlying earnings are 5%, this cuts your premium down to $300 - $350/year and it should go down each year.

I'd go with option #1, but if there's sentimental/emotional value in keeping the policy, its not *terrible*, just really mediocre.

[threefive]

A 20-year term policy with a half-million dollar death benefit for a healthy 25 year old will most likely be less than $300 per year. $6k will cover the premiums on that for the entire term. Cashing out and investing the cash value of the whole life policy in an index fund will most likely produce enough annual income to cover the term premium PLUS some gain on value (2-3% annually) PLUS your death benefit is now 10x larger PLUS you have relatively easy access to the money in an emergency. At 45, your kids are basically grown and you're sitting on a pile of cash because you're smart and reading MMM, so you no longer need life insurance.

[TwoJays]

Thanks to everyone who has posted so far - I really appreciate the insight. After meeting with the agent I have some updated numbers.

- Annual Premium: $300 (lower than I originally thought)
- Death Benefit: $53k
- Mutual Fund Value: ~$7k
- Cash Value: ~$1.8k (didn't realize that this was included)

Taking a look at it, it seems to me that the additional cash value makes it worth closing out the policy moving the mutual fund balance to Vanguard and pocketing the $1.8k to use as a cushion while I'm in school. On the flip side, what Metric Mouse said about the death benefit is even more true (176 years for break even).

Additional thoughts/insight is much appreciated!

[BrickByBrick]

Most whole life insurance policies I've come across are total rip-offs.  This one sounds surprisingly "meh" - it's not good, it's not terrible.  As others have said though, as a (healthy) 25 year old you could get a cheap term life policy for a comparable annual premium many times more than a $53K death benefit.  Since it's only good to you as life insurance in the event of your passing, why not make your wife $500K+ wealthier in the event of your untimely death for the same cost?

Cash it out, buy a decent term-life policy, invest the difference.

Disclaimer:  Unless you've neglected to mention you have/had suffer from cancer/diabetes/some other severely negative chronic health issue.  In which case keep this policy.  I assume that's not the case.

[Metric Mouse]

Did your agent have a payout table for this plan? Some of the mutual fund ones will "self fund" their own premiums after twenty years or so- basically the dividends and market gains go to paying the premiums, and you have a "free" policy for life.

[MrGreg]

Can you post more specific details about the policy?

Although cash value insurance is one of my pet interests (I know . . . I'm great at cocktail parties . . .) I have never seen a whole life policy that contained a mutual fund in it.  (There are variable universal life policies that do, but these are substantially different).

In any event if you don't like this policy you may be able to roll it into a cheap variable annuity at Fidelity or Vanguard.