Cashing out a life insurance policy is a good idea--or am I missing something?

[alpenglow]

My fiance just found out that when he was born his grandfather took out a life insurance policy on him. I guess when the grandpa died, the payments lapsed for a bit, and then his mom started taking them over and recently asked us if we wanted to start paying it.

I’m kind of trying to figure out the point of the policy and how it could actually benefit my partner during his actual lifetime. It seems ridiculous to be paying a premium when we could be making money from it instead. His mom is the account holder so we don’t have a ton of details about it, but she mentioned something about being able to borrow against it to buy a house or something like that, but wouldn’t we just have to pay that back anyway? Sounds like a bad deal to me.

Can they be useful though? Right now I’m thinking we should agree to take it over, and then immediately cash it out. Are there any reasons/considerations that that is a Bad Idea or something we shouldn’t do? (If it makes a difference, we’re not planning on having any children.)

[sparkytheop]

Sounds like a whole-life policy.  I'd find out the details, but likely cash it out.  You should have the option to withhold taxes when you do so (the gains are taxable, so may or may not be much).

I cashed one out recently, got it when I was young and dumb and in a completely different situation.  I don't see the point in trying to use it as a loan, since yes, it would need to be paid back.

As to "can they be useful?"-- if it is a high $ policy with low premiums, and there is some condition preventing your fiance from getting term insurance (a disease, health condition, etc), it might be useful, but if he can get a term easily, you live beneath your means, and there are other savings that would cover expenses after a death, than probably not useful enough to keep it.

[Goldielocks]

They are good for paying immediate money when you die (like term insurance), but particularly nice if you have  a certain term policy that only requires premiums for a set number of years, then you don't contribute anymore.   You then get the CSV (money value) when you die (to pay for estate tax, for example), or when you cash out, or when you borrow against it, for a set interest rate.

Of that CSV amount, some will be paid up captial (tax free), and some will be accumulated interest.

The money in the whole life policy CSV is often invested at low rates, and there is a management fee.  Think of them like a bond fund with a poor MER, that you can access the money value very quickly, plus life insurance.

Surrender charges now that you are an adult (like rear loads) are likely minor.   The big issue with these policies is that there are large commissions which trigger large fees.   Most people do not need a LARGE insurance payout after a certain age, like 50, for the average folks, when they have their own savings.   Whole life covers you to the end when a small policy could always be useful, but not a large policy.

[alpenglow]

Thank you both for the considerations (hadn't considered the health angle--fiance is healthy and no diseases, though) and the information! He's going to get some more information and hopefully paperwork from his mom and we'll decide what to do from there... Thanks again! :)

[sparkytheop]

Good luck! 

If you do decide to cash it out, the person you have to go through will likely try everything they can to get you to keep it in some form ("Oh, do you need the money now?  Just do a loan instead, it's so much better."  "Oh, you don't need the money now?  Well, just keep it!"  "We can set it up so your dividends pay the premiums!" etc.)  Once you've done your research, if you make the decision to surrender the policy, stay firm.  I had to go through multiple emails, her wanting to meet in person (we live in different cities and I work a rotating shift), wanting to make phone calls, etc.  Finally, after missing her phone calls several times because I didn't have cell reception at work, she sent me the forms.  Such a pain, but it was nice to close it out and get the cash back.

[alpenglow]

Good luck! 

If you do decide to cash it out, the person you have to go through will likely try everything they can to get you to keep it in some form ("Oh, do you need the money now?  Just do a loan instead, it's so much better."  "Oh, you don't need the money now?  Well, just keep it!"  "We can set it up so your dividends pay the premiums!" etc.)  Once you've done your research, if you make the decision to surrender the policy, stay firm.  I had to go through multiple emails, her wanting to meet in person (we live in different cities and I work a rotating shift), wanting to make phone calls, etc.  Finally, after missing her phone calls several times because I didn't have cell reception at work, she sent me the forms.  Such a pain, but it was nice to close it out and get the cash back.

Thank you! And also, yikes, that sounds like a nightmare to me. Luckily I think the fiance will be the one who has to take care of that... he is great on phones, unflappable and polite. Unlike me, I get nervous and irritable!

[Interest Compound]

Definitely do the math on this. Even better, post all the details here and we'll do the math for you :)

Long story short, Whole Life Insurance is the worst. The absolute worst. But there's a bright side here. Most of the fees are taken in the first few years of the policy, so it can actually make sense to keep it now that you've had it for so long.

Now it really pains me to type that, as I personally view Whole Life Insurance (and all the other "investment" live insurance varieties) as a complete and total scam, but what's done is done, so no point going off on my typical rant here.

I'd probably cash it out anyway, just to avoid any association with ANY whole life insurance policy/company, but if you're interested in keeping it, we can help you do the math. :)

[Goldielocks]

Definitely do the math on this. Even better, post all the details here and we'll do the math for you :)

Long story short, Whole Life Insurance is the worst. The absolute worst. But there's a bright side here. Most of the fees are taken in the first few years of the policy, so it can actually make sense to keep it now that you've had it for so long.

Now it really pains me to type that, as I personally view Whole Life Insurance (and all the other "investment" live insurance varieties) as a complete and total scam, but what's done is done, so no point going off on my typical rant here.

I'd probably cash it out anyway, just to avoid any association with ANY whole life insurance policy/company, but if you're interested in keeping it, we can help you do the math. :)

There are worse products out there -- like group education savings plans, and Universal (Variable) Life with high fees and on-going payments until you die...