Author Topic: Gauging value of whole life policy, question on taxable dividends  (Read 1123 times)

michael

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Hi all,
I recently was weakly convinced to check out and apply for a whole life policy with State Farm. Coverage is just shy of $90k and I've been contributing $100/month for the last three months to check it out.

I know whole life policies aren't wholly endorsed in most situations, but feel it might be worth continuing in this case. I'm 27, currently maxing out the 401(k), have plenty left over and am looking to both diversify as well as avoid taxable growth (I think I'm in the 25% bracket for 2013).

With this whole life policy, if I apply dividends toward reducing premiums, it could be paid in full in 10 years and enjoy tax-free growth after that. Unfortunately, through whatever misunderstanding/miscommunication, I've learned the policy has been set up to use dividends as "paid up additions" - in other words, dividends are used to buy more insurance, which means I'll be paying for the policy forever. I asked to have this changed but was warned that applying dividends to the premium would be taxable, so here's the question.

In my situation, should I bother continuing with this policy? If so, is the dividend change really taxable? It makes sense that it would be, but it is probably negligible if the policy is worthwhile in the long run.

I have more numbers in the paperwork at home if needed - just ask. Thanks!

brewer12345

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Re: Gauging value of whole life policy, question on taxable dividends
« Reply #1 on: December 04, 2013, 07:00:34 PM »
Let the policy lapse and consider the $300 you already spent to be a cheap lesson/stupid tax.

If you want tax efficient asset growth, just put your money in equity index funds or ETFs.  They are super tax efficient and you will avoid all the expenses of insurance vehicles.