Author Topic: Another whole life policy question- with nuance!  (Read 1459 times)

laughing_paddler

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Another whole life policy question- with nuance!
« on: July 29, 2016, 07:52:51 PM »
Heyo folks,

I've got a "paid up" cash value (WL) policy that my dad started for me that from my calculations is "earning" (growing by) about 4% annually.

Since starting to track and really hit the MMM life, I have been thinking of this as separate from my asset allocation, but I seem to recall some discussion somewhere of people using that decent interest rate as a substitute for the more stable part of my AA (bonds, cash).

At 34 yrs old, I'm currently sitting at about 7% bond allocation and as it happens, the cash value is about the right size to substitute for bonds. Is this a silly idea?

Are bonds superior to CVLIPs as the stable portion of the AA?

I think the answer is yes. But I don't have a good explanation. Thoughts?

mathjak107

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Re: Another whole life policy question- with nuance!
« Reply #1 on: July 30, 2016, 03:46:10 AM »
one of the advantages of a whole life policy is that you can over fund them with cash you typically would have sitting in a bank , pay no fees or expenses , get the 4% rate of interest and at retirement borrow that over funding out plus interest at no tax  and never pay the over funded part back .

you just have to check to see the limit . if you put to much in and exceed the mec limit they deem the policy a modified endowment policy .

life insurance is a big plus in retirement . if i leave my wife a million dollar ira  she has a forever taxed mess and has no clue what she gets to keep . in fact if i die she files single and those rmd's can be brutal.

but if i left her a 1 million dollar policy instead she gets 1 million tax free dollars .


whole life really has no investment portion , it is all premium and is the cost of a 100% chance of  pay out at death unlike term which has about a 2% chance of payout . . the cash value is only an agreed upon refund if you don't use the insurance . like an un-used gym membership you cancel . you will have over paid a lot if you take the cash value  .

your actual cost of  that policy is not only your premiums but decades of interest and perhaps dividends .; the policy's are usually structured so by age 100 the face vaue and cash value are the same . many company's call the policy endowed and just mail you back a check dead or alive .

« Last Edit: July 30, 2016, 03:55:07 AM by mathjak107 »

slugsworth

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Re: Another whole life policy question- with nuance!
« Reply #2 on: August 04, 2016, 12:19:09 PM »
I'm not an expert, but it would be nearly impossible to rebalance the way you do in a normal bond/equity portfolio.  It is tax advantaged, so pulling funds out of it might not be a great idea unless you see an opportunity that outweighs the tax benefits.

Are you continuing to make premium payments, or is this an old policy that is just hanging out there growing at 4%?

laughing_paddler

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Re: Another whole life policy question- with nuance!
« Reply #3 on: August 09, 2016, 07:32:18 PM »
Are you continuing to make premium payments, or is this an old policy that is just hanging out there growing at 4%?

I'm paying about $15 per month and my growth estimate of 4% is after (does not include) the premium payments.

You're right about the rebalancing act being a bit trickier, but if I need to add more bonds, that's easy, and if I have too many, well, I'm getting older every year, so theoretically (as I am approximately following the vanguard 2055 fund) I will just need to wait a bit and I'll be back where I want to be. 

I'm mostly interested in the underlying asset performance and reasons beyond an interest rate to pick bonds over an opaque whole life policy. Hoping others might chime in?