Keep it? 10 year old whole life policy. Cash value greater than total premiums

[EpicCrawfish]

Keep it? 10 year old whole life policy. Cash value greater than total premiums



I'll preface this by fully acknowledging that I shouldn't have taken out a whole life insurance policy back in 2008 when I was 24 and single. I wish I could go back and yell at my younger self. That said, I'm now stuck trying to figure out whether the policy I have is perhaps worth keeping given that I'm past the super expensive and draining early years.

I'm not quite sure how to reason about this, so I'll just lay out some raw details. I'd really appreciate constructive advise or pointers on the sorts of questions to ask to make sense of my situation.

Me: 35. Married. Spouse not working but very employable professional. Two kids. Plenty of investments in both qualified and unqualified accounts. Plenty of liquid savings.
Policy: Northwestern Mutual Adjustable CompLife (ACL)
Held since: 2008
Annual premium: $6,000 (As I remember it, this is far more than the premium for the policy would typically be. This includes a substantial addition that goes directly to the cash value. The purpose being, if I remember correctly, to grow cash value more quickly and increase the dividends received, which also go into cash value)
Death benefit: ~$520,000
Cash value: ~$65,000

At this point I have about $5,000 more of cash value than the total premiums I've paid. That pretty meager, but consider that the policy did act as life insurance over the last 10 years. Assuming a comparable term policy is $700 annually then my ACL has provided $7,000 of 'value' that would have otherwise been paid for term insurance. My thinking is that I've 'made' $12k (65 - 60 + 7) on the policy. Put another way: I've paid out $60k, gotten my money back, plus $12k of value in the form of cash and insurance.

I don't know if that line of thinking is reasonable or just misleading myself. Is there a better way to think about the value (or lack of value) realized?

Each year the portion of my premium that goes to cash value increases somewhat. Cash value growth also has a guaranteed minimum. I'd need to request a current 'illustration' to see exactly what those figures are. I plan on doing that tomorrow.

Paying a $6k insurance bill each year is a drag for sure. While I'm working it's 'fine' in the sense that we can afford it and I probably should have life insurance. If I were to quit my job I definitely want to get rid of that bill. There are two options at the time I decide to do something about this policy: One is to just stop paying, which would reduce the death benefit to the 'paid up' amount while leaving the cash value there to accrue dividends. Second is to just cash the policy out and do something else with the money.

Has anyone else been in this situation or know enough about these products to help me muddle through this? I imagine there are probably aspects of the policy that need to be shared to provide any real guidance. I'm happy to do so, but I'm honestly not sure what the salient details are.

Many thanks for any help.

[jacoavluha]

Get a term policy for the amount and duration that you need first. Then cash out. I pay less than $3k per year for a $4,000,000 policy.

The math you need to do is, how much would a term policy of the same death benefit had cost you per year? And then if you invested the remainder that you saved, how much money would you have?

Another way to think about it. The salesman has to make money. And so does the insurance company. They have big fancy buildings. And lots of employees. They make the money from you. Simple as that.

[Radagast]

I assume that your alternative is to take out $65,000 now and then invest $6,000 per year from then on. I typed those numbers into Portfolio Charts with a 45% US stock, 30% international stock, 25% bond allocation. https://portfoliocharts.com/portfolio/portfolio-growth/
It looks to me like historically your median break even point was about 20 years and the worst case was about 25 years. If you expect to live that long or longer, cash out ASAP. Of course, feel free to use your own allocation and look around at other resources. For example: https://www.portfoliovisualizer.com/monte-carlo-simulation

[reeshau]

At this point I have about $5,000 more of cash value than the total premiums I've paid. That pretty meager, but consider that the policy did act as life insurance over the last 10 years. Assuming a comparable term policy is $700 annually then my ACL has provided $7,000 of 'value' that would have otherwise been paid for term insurance. My thinking is that I've 'made' $12k (65 - 60 + 7) on the policy. Put another way: I've paid out $60k, gotten my money back, plus $12k of value in the form of cash and insurance.

...

Paying a $6k insurance bill each year is a drag for sure.

The fallacy in your thinking is that you could have a bigger investment value doing it yourself.  Taking your numbers, you would have had $5,300 per year ($6k - $700) to invest: almost enough to fully fund a Roth IRA.  Had you been able to do that since 2008, you would have a lot more than a $5,000 gain.  (and remember, that is net of the term life payment)

Bottom line:  there is no time when whole life becomes better.  The math is consistent; term + (invest the difference yourself) always beats whole life.

caveat:  Have you had any health conditions develop since you took out this policy?  The safest route is to make sure you have your new term policy in place before you cancel the whole life, to make sure you are both continually insured, and there is no reason that you would be denied.

[YttriumNitrate]

I'll preface this by fully acknowledging that I shouldn't have taken out a whole life insurance policy back in 2008 when I was 24 and single.

***

Death benefit: ~$520,000

***

Assuming a comparable term policy is $700 annually then my ACL has provided $7,000 of 'value' that would have otherwise been paid for term insurance.

A 30 year term policy on a 25 year old male in good health with a death benefit of $500,000 runs about half the number you quoted.

[YttriumNitrate]

I'll preface this by fully acknowledging that I shouldn't have taken out a whole life insurance policy back in 2008 when I was 24 and single.

***

Death benefit: ~$520,000

***

Assuming a comparable term policy is $700 annually then my ACL has provided $7,000 of 'value' that would have otherwise been paid for term insurance.

A 30 year term policy on a 25 year old male in good health with a death benefit of $500,000 runs about half the number you quoted.

[Financial.Velociraptor]

Is the earnings on the cash value sufficient to cover the term portion of the policy?  If you can drop the "Paid up additions" (PUA) rider and just keep the term portion for no cash out of pocket going forward it makes sense to keep it.  Ask your advisor about your "auto-pilot" options.  It is pretty common with whole life to stop paying in additional premiums at some point and just let the earnings cover the cost of the insurance without any future growth. 

The cash value is still yours at disbursement.

[I'm a red panda]

Get a term policy for the amount and duration that you need first. Then cash out. I pay less than $3k per year for a $4,000,000 policy.

The math you need to do is, how much would a term policy of the same death benefit had cost you per year? And then if you invested the remainder that you saved, how much money would you have?

Another way to think about it. The salesman has to make money. And so does the insurance company. They have big fancy buildings. And lots of employees. They make the money from you. Simple as that.

What's your logic for needing that large of a policy?  That's one of the biggest ones I've ever heard of.

[Rob_bob]

I don't have/need life insurance but you need to check on a term life policy, it has to be waaaaay less than what you are paying and I can't imagine the interest you are getting is very good compared to investing it. 

Whole life is sold so salesmen and insurance companies can make money, not to do you a favor.

I would get out of it now.

[chasesfish]

I wouldn't get out of the policy now.

I would contact NWM and ask them to "net" bill you.  Apply all dividends received towards your premium.  That should reduce your out of pocket expense to under $3k and have it decline each year going forward.  Based on the irregular amount of $520,000, I'm assuming the policy was originally for $500k and your dividends are currently being reinvested under some option to buy more insurance.

There is nice value to having a permanent life insurance policy.   Is that value worth you paid?  No, but that's a sunk cost.  You should get an underlying 5-6% return per year and in a couple of years the policy should be of zero cost to you with dividends paying your premiums and you'll have a $500,000+ payout for estate management.  You can also borrow against the $65k at any given time if you need the money.  That's a nice safety net.

Disclaimer:  I love the concept of whole life, but the commissions are so steep I've never done it.  The OP has already paid that sunk cost, enjoy the benefit.

[jacoavluha]

Get a term policy for the amount and duration that you need first. Then cash out. I pay less than $3k per year for a $4,000,000 policy.

The math you need to do is, how much would a term policy of the same death benefit had cost you per year? And then if you invested the remainder that you saved, how much money would you have?

Another way to think about it. The salesman has to make money. And so does the insurance company. They have big fancy buildings. And lots of employees. They make the money from you. Simple as that.

What's your logic for needing that large of a policy?  That's one of the biggest ones I've ever heard of.

just a standard “multiple of income” recommendation, it’s quite common

[EpicCrawfish]

Ah, now this is interesting. As others are quick to point, and I acknowledge, everything that has come before as a sunk cost. The question is: going forward, what's the right strategy.

I found my policy documents and you're right that the policy was originally for $500k. $300k of base with $200k of adjustable term insurance. The additional premium I pay (~$2.5k) are for "paid up additions" to "reduce term insurance". I admit I'm not entirely clear on what that means, but I understand that paid up additions go to the cash value. Policy dividends are set to purchase paid up additions, which is presumably where the additional $20k of coverage has come from. Your suggestion to direct those dividends instead to paying the premium is interesting. My last dividend was ~$1.5k so it's not close to covering the whole premium, but would take some of the sting out.

I recognize that this policy will never be as efficient as investing directly. However, it seems like it may be a reasonable part of the (small) 'conservative' part of my portfolio since a) it won't lose value in a down turn b) there is at least some minimal level of growth guaranteed c) it provides a liquid source of funds should I ever need it.

Does any of this additional detail change the picture?

I wouldn't get out of the policy now.

I would contact NWM and ask them to "net" bill you.  Apply all dividends received towards your premium.  That should reduce your out of pocket expense to under $3k and have it decline each year going forward.  Based on the irregular amount of $520,000, I'm assuming the policy was originally for $500k and your dividends are currently being reinvested under some option to buy more insurance.

There is nice value to having a permanent life insurance policy.   Is that value worth you paid?  No, but that's a sunk cost.  You should get an underlying 5-6% return per year and in a couple of years the policy should be of zero cost to you with dividends paying your premiums and you'll have a $500,000+ payout for estate management.  You can also borrow against the $65k at any given time if you need the money.  That's a nice safety net.

Disclaimer:  I love the concept of whole life, but the commissions are so steep I've never done it.  The OP has already paid that sunk cost, enjoy the benefit.

[I'm a red panda]

Get a term policy for the amount and duration that you need first. Then cash out. I pay less than $3k per year for a $4,000,000 policy.

The math you need to do is, how much would a term policy of the same death benefit had cost you per year? And then if you invested the remainder that you saved, how much money would you have?

Another way to think about it. The salesman has to make money. And so does the insurance company. They have big fancy buildings. And lots of employees. They make the money from you. Simple as that.

What's your logic for needing that large of a policy?  That's one of the biggest ones I've ever heard of.

just a standard “multiple of income” recommendation, it’s quite common

It's surprising to see a mustachian use income and not expenses as their multiplicand.

If your income is that high, your stashed us presumably quite large. Are you spending more on premiums to replace something not needed to get replaced?

[jacoavluha]

It's surprising to see a mustachian use income and not expenses as their multiplicand.

If your income is that high, your stashed us presumably white large. Are you spending more on premiums to replace something not needed to get replaced?

I not a mustachian. I hope that's okay.

[seattlecyclone]

It's surprising to see a mustachian use income and not expenses as their multiplicand.

If your income is that high, your stashed us presumably white large. Are you spending more on premiums to replace something not needed to get replaced?

I not a mustachian. I hope that's okay.

Shun the non-believer! Shun!



just kidding