Author Topic: Should we dump this whole life policy?  (Read 5280 times)

Happy Little Chipmunk

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Should we dump this whole life policy?
« on: September 10, 2014, 11:40:32 AM »
Oh great mustache hive mind,

I've read the other excellent threads on life insurance, but did not see this particular question answered.

The facts:
  • The husband was given a "Flexible Premium Adjustable Life" policy when he was but an urchin. It's for $500,000 with a $1000/year cost. The cash surrender value is now $36,000. (His grandfather sold insurance and paid for the first few years of the policy.)
  • Policy is with John Hancock, yield has always been 4.5% and guaranteed to be at least 4%
  • We're 48, I consider us FI but DH wants more cushion (and he likes his job) so I consider myself a semi-retired SAHM. (yes, SAHM is a job, but don't underestimate the lovely lightness of having older children who are reasonable beings most of the time. Nor the sense of freedom gained by knowing that I don't have to figure out how to re-enter the work force...unless I really want too. Hence the semi-retirement. But I digress...)
  • We have 2 kids at home, so insurance used to make sense, but I would have bought term if we didn't have this.
  • I don't have life insurance currently; I rely on my 'stache to assist DH if I kick the bucket.

I've read a bit about how insurance can reduce the tax burden to heirs when settling larger estates. But this insurance policy is not huge & I don't think tax issues should factor into my decision. We are not bumping against federal limits (although we have hit the lower limit of our state.)

My gut says dump the policy and put the money into other investments.

What say you all?

Cheddar Stacker

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Re: Should we dump this whole life policy?
« Reply #1 on: September 10, 2014, 11:46:18 AM »
I would cash it out and invest based on the facts you gave. There are a few people here that like whole life, but I'm not one of them.

usmarine75 (or something like that) used to sell insurance so hopefully he'll chime in. If not, I'm sure you could send him a PM.

Gone Fishing

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Re: Should we dump this whole life policy?
« Reply #2 on: September 10, 2014, 12:31:47 PM »
Just going by the math, the break even point against an 8% investment return is a lifespan of around 78, or pretty close to average.  If he has a good shot at living past 78, cashing it in and investing it and the premiums (with a moderate/aggressive strategy) would most likely result in a greater return.  If he has risk factors such as smoking, drinking, stress, diabeties, or is overweight, it may make sense to hang on to it.  How old are his parents, how is their health? 

Given how close to average the return is, it would also be helpful to ask if he would feel more secure with the $36k in the 'stache and $1000 less in annual expenses?  Or would he feel better about leaving an estate to you, your children, and possibly grandchildren.

If you decide to keep it, it might be worth reshopping the policy.  Given the longer life expectancies now vs 48 years ago, the premiums might be lower for the same policy.     

Happy Little Chipmunk

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Re: Should we dump this whole life policy?
« Reply #3 on: September 10, 2014, 11:44:51 PM »
My break even point was so close to So Close that I'm running with it.

The spouse would also like to simplify and writing those $1000 checks is a negative thing for him. We'll pull the plug once we get the Trust completed and move that money into a more useful (to us) investment.

Thanks!

aj_yooper

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Re: Should we dump this whole life policy?
« Reply #4 on: September 11, 2014, 04:10:24 AM »
I agree on your decision about the whole life insurance.  The policy does not sound too bad, actually.

I would replace the whole life with term insurance (say 10 year fixed) for you and your spouse.  My wife and I are retired and we purchased a 15 year term for both of us to replace income lost from pensions. 

Congratulations on your FI.

Happy Little Chipmunk

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Re: Should we dump this whole life policy?
« Reply #5 on: September 11, 2014, 12:12:02 PM »
Thanks aj_yooper.

I'm still in a bit of happy disbelief. I've always been a saver, but things really started to roll once I started reading this blog a year or so ago. Hubby doesn't quite buy it yet, but he's cut back at work and is doing more volunteering. It's a good, slow transition for us.

bearkat

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Re: Should we dump this whole life policy?
« Reply #6 on: September 12, 2014, 12:55:15 AM »
4% return guaranteed sounds good, but some questions to consider

Is that saying the cash value is guaranteed to increase by 4% / year? Or that there's a 4% dividend minus mortality costs, admin costs etc?

How much is the $1k of your normal budget for spending / savings? Does having this $36k in "bonds" align with your asset allocation?

If you like the idea of having insurance on him until the kids are gone, I might consider keeping this one instead of getting a new term for only a couple years (I don't know how old your kids are).

Big question: why do you need insurance at all (term or whole life) if you're already FI?

usmarine1975

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Re: Should we dump this whole life policy?
« Reply #7 on: September 12, 2014, 04:10:02 AM »
I will chime in thanks Cheddar. A thought that has not been mentioned.  I like Whole Life simply because it will be in force if kept when you die.  I do not consider it an investment and wouldn't compare it to such.  Do you know what your situation will be when he passes?

OK so the policy could potentially pay the premium for you.  Its the beauty of WL. Before you dump it to save on the premium check into that.  At the worst you could lessen what you are paying using cash inside the policy to pay the premium.  Basically if your dividend is getting close to your premium this is possible.  Some prefer to keep putting money into the policy others like to put it on auto pilot.

Disclaimer I used to sell Insurance and secondly I just dumped my WL policy it was not an easy decision for me it came down to cash flow.  We did however keep my 2 year olds WL policy.  I wouldn't make this decision quickly once you surrender the policy you can not turn back and I highly doubt a new WL policy would be cheaper but you can always investigate it.

chasesfish

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Re: Should we dump this whole life policy?
« Reply #8 on: September 12, 2014, 04:51:12 AM »
I have a question:  The guaranteed return is 4 - 4.5%.  If you have cash value of $36,000, shouldn't it be producing a dividend of $1440/year?  I would ask the company to use the dividend to pay the premium. 

You can look at it like you now having a free insurance policy that can be used for either heirs or for charity 40-50 years from now.

I don't know how your savings look otherwise, but you always have this as a safety net if you have to have it.

usmarine1975

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Re: Should we dump this whole life policy?
« Reply #9 on: September 12, 2014, 05:38:41 AM »
The Dividend from what I know is not Guaranteed.  It could be reduced and it can increase.  Looking into paying the premium via the CV & Dividend is something I would look at.  Also make sure you can get the Term Insurance you need.  I did have clients not able to get insurance.

begood

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Re: Should we dump this whole life policy?
« Reply #10 on: September 12, 2014, 05:46:57 AM »
We have three WL policies - one my parents started for me in 1965, one we started for my husband when we got married, and one we started for our daughter when we adopted her.

Would we do the last two again knowing what we know now? Probably not. But we consider the WL to be some diversification. We don't own real estate, we don't own a company. We have an investment portfolio, a savings account, and the cash value of the WL. We've borrowed from the insurance twice over the years and paid it back.

My husband's term insurance is ending next year, but that WL will remain in place. I seem to be okay with having them there, and I like the idea that when our daughter goes out in the world, getting life insurance is one less thing she'll have to worry about.