Case Study - FIRE & Whole Life Policy

[Jwolfe]

Hi All,

First post on the board but I'm trying to work my way into the FIRE community. I began investing when I was 24 (32 now) unfortunately I didn't know much about what I was doing other than placing the money in index funds - not how much to place, not how much I should save, etc.. Anyway, recently learning about FIRE I am systemically making changes to our budget in attempt to escape the world of work earlier than planned. I'll take any and all advice in pursuing FIRE. My current plan is to focus on paying down all debt (aside from mortgage, while I passively look into downsizing) but my particular question right now revolves around what I should do with an old whole life policy my parents invested in since I was a child. I'm attempting to figure out if I should: Cash it out, pursue a life settlement, continue to pay the $13/month. I've included basic numbers below as well as our current budget.

Gross Income: $81,000
Bank Acct: $1,234
Roth 403B: $44,429 (Three-Fund Portfolio)
Vodafone Stock 61 Shares @ 20.33 = $1240.13 (gifted from Grandma)
IPERS:$47,225 (Pension program for Iowa Public Employees)
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Student Loans: $11,634.63 @ 4.25%
Family Loan: $1,800 @ 0%
Van Loan:$6,522.19 @3.84%
Mortgage: $204,000  @ 4%
----------------------
Term Life Insurance until Age 55: 500k for $31.70 a month
Whole Life Insurance coverage of 46.2k with a cash value of $6,073 - $13/month (I calculated this "investment" making 1.4% annually)
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Monthly Budget
Mortgage   1766 (includes PMI, Homeowners Insurance, and Mortgage)
Internet   40
YouTubeTV   55
Life Insurance   58.43 (Includes both parents)
Auto Insurance   94.05
Van Loan   307.5
Iowa Student Loan   237.1
Child Health Ins.   20
Water (Every 3 months)   33
Trash (Every 3 months)   18

Pet Supplies   55
Planet Fitness   10
Car Gas    100
Electricity   75
Heat   100
   
Iowa Student Loan Extra Payment   162.9
Tithe or Charity   25
Young Livin'   115
Miscellaneous   90
Emergency Fund/Savings   45
Wolfe Loan   100
   
Groceries   523.88
Cell Phones   34
   
Paycheck   4656.58
403B Contribution   200
IPERS (My Cont.)   391.72

Thanks for all help!!

[fell-like-rain]

By my math, your expenses are $3000 and change, and assuming the 4656 is after taxes and deductions, sounds like you’re doing pretty well in terms of savings.

Re: the whole life, I’m not an insurance expert, but it seems like whole life is rarely the best option for people. As you’ve probably realized for yourself, given the term policy you’ve taken out as well. Given that it’s just $13 a month, it’s not a huge deal, but I personally would just cash it out. No matter what kind of penalties or whatever they levy, you’re almost certainly better off in the long run just investing it yourself.

[Jwolfe]

Thanks for the response, got the response below in a different forum. Sounds like I'll be holding the policy for $13/month due to the combined benefit of roughly 7-8% interest AND concurrent life benefit.

"So it looks like in 2020 the cash value increased from $5,646.42 at the beginning of the year to $6,073.37 at the end of the year.... or by $436.95. The year over year increase is 7.7%.

For that year, you paid $156 in premiums. So your "investment" was $5,646.42 at the beginning of the year and $5,802.42 ($5,646.42 + $156 premiums paid) at the end of the year, so your average investment for the year was $5,724.42.

The $436.95 in relation to an average investment of $5,724.42 is 7.6% before considering any value of insurance conveage.

And if you include the value of $45-46k of life insurance coverage based on what you pay for term that would be worth around $34 ($31.70 * 12/$500*$45). If you add that to the $436.95 and look at it in relation to the $5,724.42 it increases the return from 7.6% to 8.2%.

I'll concede that these returns all sound a bit high, but perhaps not so much since the raw increase in the cash value from year-to-year is 7.7% to begin with."

[fell-like-rain]

Whoever was doing that math included your premiums paid in the gain for the year- the actual investment gains were more like 4.9%. Also, if you had had that money invested in a US total market index fund, it would have returned over 30% this past year. Like I said, you’re almost certainly better off just cashing it out and investing it yourself.

[Chrissy]

The debt that's costing you the most is the amount of your mortgage that stands between you and getting rid of PMI.  I'd focus on that.

Cash out the whole life insurance.

Also, I think you might be missing some expenses.  Hair cuts?  Clothes?  Gifts?  You're paying for a child's health insurance, so where are the other kid expenses?  Music lessons?  School supplies?

Why do the life insurance premiums in your Monthly Budget add up to MORE than the premiums listed for the policies you carry?

[ontheway2]

By my math, your expenses are $3000 and change, and assuming the 4656 is after taxes and deductions, sounds like you’re doing pretty well in terms of savings.

Re: the whole life, I’m not an insurance expert, but it seems like whole life is rarely the best option for people. As you’ve probably realized for yourself, given the term policy you’ve taken out as well. Given that it’s just $13 a month, it’s not a huge deal, but I personally would just cash it out. No matter what kind of penalties or whatever they levy, you’re almost certainly better off in the long run just investing it yourself.

I'm coming up with a little over 4k in expenses

OP, what is with the Young Livin'? Is that your personal use expense, or is it being pursued as a side gig?

[rmorris50]

So did you keep the policy? OLD WL polices are fixed income goldmines in today's economic environment. Keep it and use it as the fixed portion of your portfolio, esp for $13 a month. Get a projection from the insurance company of how they expect it to perform going forward. I bet it looks pretty attractive from a fixed income perspective. Take new monies you earn and put it in the stock market, but keep this WL as part of the fixed portion of your portfolio. Most OLD WL policies should NOT be surrendered, the are most likely very rich for a fixed income.

Note that I would recommend most people staying away from purchasing new WL policies. This advice is for WL policies at least 10 years old, definitely more than 20 years old.