Author Topic: Insurance to varable annuity and other Q's  (Read 4301 times)

caprisun

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Insurance to varable annuity and other Q's
« on: July 01, 2015, 02:20:25 PM »
A generous relative gifted me a permanent life insurance policy from NW mutual. This is a pretty old policy and has a cash value of about $84,000; the basis in the policy is about $34k, the gain about $50k. I have no need for life insurance and hence am only looking at this from an investment perspective. I'm looking for advice on what to do with the policy - it seems most of the advice I've seen is for people who just bought one, which would cause me a taxable event in my case.

My options as I see them are:
1) do nothing, the earning are tax deferred, it is making around 5.6%
2) take out the basis as a cash withdraw and invest that in taxable account; use a 1035 exchange to move the earnings ~$50k to a vanguard variable annuity to prevent causing a taxable event. (I'm thinking VVA-total stock market, fees = .46% and it looks like the broad index fund equivalent)

Thoughts, advice?

Thanks! 

MDM

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Re: Insurance to varable annuity and other Q's
« Reply #1 on: July 01, 2015, 02:56:25 PM »
caprisun, welcome to the forum.

The kneejerk response to "what does one do with whole life policies?" is "cash them in and reinvest."  But if that 5.6% is a guaranteed return, and the $50K would be heavily taxed now, and the generous relative might be wont to inquire about how the policy is doing...a reasonable case can be made to let it ride.

caprisun

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Re: Insurance to varable annuity and other Q's
« Reply #2 on: July 01, 2015, 03:39:05 PM »
Thanks MSM,

I don't think that the 5.6% is a guaranteed return, I took a look at a recent illustration and it indicated that my guaranteed return is 3.58% (dividing increase in value from next year by this years cash value). Does that change your thoughts on letting it ride?

 

regulator

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Re: Insurance to varable annuity and other Q's
« Reply #3 on: July 01, 2015, 03:52:59 PM »
Thanks MSM,

I don't think that the 5.6% is a guaranteed return, I took a look at a recent illustration and it indicated that my guaranteed return is 3.58% (dividing increase in value from next year by this years cash value). Does that change your thoughts on letting it ride?

So an important question is whether this is the increase in cash value year to year (after all the contract charges have been taken out), or is it the crediting rate (before all the charges have been taken out).  If (as it sounds like) this is the rate based on the former, I would let it ride and count it as fixed income allocation.  If it is the latter,I would sharpen the pencil.

caprisun

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Re: Insurance to varable annuity and other Q's
« Reply #4 on: July 01, 2015, 04:17:19 PM »
Regulator, the guaranteed rate I provided is the amount in the illustration that my 'guaranteed cash value' will rise, so, it is after all of their charges have been taken out.

I don't like the policy in part because those charges are a black box (as is everything else) and I don't really understand the these policies. . . and the company has no interest in helping to educate their members.

Further background, I am maxing out my 403b; trying to max out my trad IRA (I nearly did it last yr), but the total balance of those plus an older roth is only ~$100k; so if I consider it my fixed income portion of my investment, it totals ~45% of my liquid investment (less a small amount of cash; I also have a bunch of home equity FWIW). . .

Considering my portfolio, does it still make sense to allocate this as fixed income? How would you suggest rebalancing or is that mute issue until I catch up (which is near FI)?

MDM

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Re: Insurance to varable annuity and other Q's
« Reply #5 on: July 01, 2015, 04:43:42 PM »
3.6% is significantly lower than 5.6%.

If you can transfer the entire cash balance to a Vanguard annuity with no fee or tax, that seems worth doing.  I'm not familiar with Life Insurance to Annuity 1035 transfers.  If you had the money in, for example, a NW Mutual annuity, you could do the 1035 and the transfer would be tax free.  But you could be hit with an early withdrawal penalty from NW Mutual on the annuity funds.

caprisun

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Re: Insurance to varable annuity and other Q's
« Reply #6 on: July 01, 2015, 05:46:28 PM »
I spoke with NW mutual and I spoke with vanguard and neither seemed to think I would trigger a tax event. . . and neither charges for the transfer.

Regarding returns, they have two columns in the illustrations, one is 'guaranteed' which and I'm not sure how I goofed it this before, has me going from a cash surrender value of $83,830 to $86,643 this year (3.36% increase) and another column that indicated it is 'Non-guaranteed' and shows me going from $83,830 to $88,181 (5.19% increase) this is a bit less as a percent than this last year.  A few years ago they were quoting north of 6%. . .so there is an upside and essentially a floor of a bit over 3%.  I ran a number of different years through excel and it isn't 3.36% in future years, it reduces slightly, I'm guessing because a mortality rate is buried in it which increases with age.  In 20 years the guaranteed rate is 2.74 and in 40 years the guaranteed rate is 1.74%.
 

regulator

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Re: Insurance to varable annuity and other Q's
« Reply #7 on: July 01, 2015, 05:52:36 PM »
If you offered me a tax sheltered vehicle that had zero credit risk, liquidity any time I wanted it and a minimum guaranteed rate of 3.36% (and which has been paying 5.XX% lately) I would show up with mid 6 figures.  I would keep this policy and treat it as emergency fund/future downpayment on a house/fixed income.

Yes, returns have been coming down with bond rates, but because this is an older policy with the effects of past interest rate environments there is still a lot of meat on the bone.  Seen a money market fund with a 3% rate lately?

MDM

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Re: Insurance to varable annuity and other Q's
« Reply #8 on: July 01, 2015, 06:03:34 PM »
Seems a classic risk/reward trade-off.  If you are looking at 20-40 years before you would likely need to withdraw funds, Vanguard's offering provide a higher likely return.  This could become a significant portion of a cash flow bridge between retirement and age 59.5 penalty-free access to your 403b & IRA funds.


caprisun

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Re: Insurance to varable annuity and other Q's
« Reply #9 on: July 01, 2015, 06:26:27 PM »
Regulator/MDM, or others, do you know of any resource to better understand these policies? I really dislike not fully understanding the investment vehicle. I realize that NWM has been around a long time, but I've gotten incorrect information from the rep's and I think that they obfuscate the returns on their life insurance products (e.g. they refer to all of their returns as dividends when only about half of the return is actually a dividend).

I would feel a lot better owning the policy if I understood it better. I'm considering requesting the public filing that they made way back when.

regulator

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Re: Insurance to varable annuity and other Q's
« Reply #10 on: July 01, 2015, 06:41:39 PM »
Regulator/MDM, or others, do you know of any resource to better understand these policies? I really dislike not fully understanding the investment vehicle. I realize that NWM has been around a long time, but I've gotten incorrect information from the rep's and I think that they obfuscate the returns on their life insurance products (e.g. they refer to all of their returns as dividends when only about half of the return is actually a dividend).

I would feel a lot better owning the policy if I understood it better. I'm considering requesting the public filing that they made way back when.

You can get the statutory financial statements filed with the state insurance regulator by the company that issued the policy, but that is only likely to confuse you.  Basically whole life policies are opaque and there is no changing that.  If I owned such a policy I would simply look at the rate of return based on the guaranteed minimum.  With a very solid mutual company like NWM you will very likely get more than that, but at least you know what the floor is.

MDM

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Re: Insurance to varable annuity and other Q's
« Reply #11 on: July 01, 2015, 07:35:43 PM »
Regulator/MDM, or others, do you know of any resource to better understand these policies?
As insurance products go, my experience is more with annuities than life insurance.  To the extent the documentation is similar...:
You could ask for a written description of how the cash value changes over time.  As regulator notes these descriptions can be opaque, but the calculation itself can be surprisingly simple (e.g, a few Excel cells with short formulas in each).  If you wade through the contract language and can reproduce the cash value changes over the past couple of years, you will probably have gained enough understanding.  At least, it worked that way for me when deciphering variable indexed annuities sold to my 80-year old mom.

regulator

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Re: Insurance to varable annuity and other Q's
« Reply #12 on: July 01, 2015, 08:19:46 PM »
Mdm, whole life is even less transparent than EIAs.  Basically it is what they tell you it is.  In the case of a good  company like nwm that is not the end of the world.

MDM

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Re: Insurance to varable annuity and other Q's
« Reply #13 on: July 01, 2015, 08:30:42 PM »
whole life is even less transparent than EIAs

A tidbit perhaps worthy of inclusion at http://www.ripleys.com/.

caprisun

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Re: Insurance to varable annuity and other Q's
« Reply #14 on: July 02, 2015, 03:03:18 PM »
Quote
whole life is even less transparent than EIAs


Ug. I did see in looking through my (very old) policy doc's that they did have to file an actuary table with the insurance commission - and that I have a right to the whole filing, so I might do that. It might make things more confusing as Regulator said. . .but I would risk that.

I think that if you look at this page https://www.northwesternmutual.com/products-and-services/life-insurance/how-we-determine-dividends, it is really clear that they don't actually try to make their returns or dividends clear. The 'dividend' that I could have delivered to me in cash, in this example is $2,038 and has no relation to the 5.6% dividend scale that they claim. It is pretty obnoxious that I have to do so much work to even figure out the return on an investment.

I would really prefer to have an index fund or a bond in a tax advantaged account just so I understood what I owned.


MDM

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Re: Insurance to varable annuity and other Q's
« Reply #15 on: July 02, 2015, 03:25:03 PM »
I think that if you look at this page https://www.northwesternmutual.com/products-and-services/life-insurance/how-we-determine-dividends, it is really clear that they don't actually try to make their returns or dividends clear. The 'dividend' that I could have delivered to me in cash, in this example is $2,038 and has no relation to the 5.6% dividend scale that they claim.

Actually it does.  What isn't clear from that document is how the 5.6% number itself was determined.  That information may be in the "Northwestern Mutual's Dividend Scale Interest Rate" document.  The 5.6% was used to multiply $61,445 and get the $3,441 interest credit.  That $3,441 was $2,038 more than the "Guaranteed" cash value increase, so $2,038 becomes your "dividend".


regulator

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Re: Insurance to varable annuity and other Q's
« Reply #16 on: July 02, 2015, 10:16:43 PM »
The very best large mutual (including NWM) basically determine a dividend scale by taking their earnings, setting aside a chunk to augment their own regulatory capital, and then allocating the rest to policyholders (who are also the owners of the company).  Very large, well run mutuals like NWM are good at this and very efficient, so they tend to have pretty generous dividend rates.  Stock companies and poorly run mutual set their dividend scales by paying the least they can possibly get away with and not have policyholders cancel in droves.