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Learning, Sharing, and Teaching => Investor Alley => Topic started by: MountainMan on February 21, 2013, 05:33:16 PM

Title: Rolling Over Life Insurance to IRA?
Post by: MountainMan on February 21, 2013, 05:33:16 PM

Hello, got a question for the esteemed forum members here.

When I was a kid, my aunt and uncle started paying for a Life Insurance policy for me.  They did the same for my sister.  I think it is a Whole Life policy.

Eventually, they stopped paying the annual premium and my parents took it over.  Then when I came of age, I took over the annual payment.  The annual premium is $110.

At this point, if I were to pass away, the total pay out appears to be about $25,000. 

If I were to close the policy, the cash surrender value would be about $5,000 or so. 

I think it would be better to invest this $5,000 and the annual $110 in VTSAX. 

So my questions are as follows:

1) Is it better to cash out the policy and invest the cash surrender value sum in VTSAX?

and

2) Is there such a thing as rolling over the cash surrender value to my Roll-over IRA to avoid taxes? 

Thanks.

Title: Re: Rolling Over Life Insurance to IRA?
Post by: TN_Steve on February 21, 2013, 06:26:09 PM

Quote from: MountainMan on February 21, 2013, 05:33:16 PM

***
When I was a kid, my aunt and uncle started paying for a Life Insurance policy for me.  ....  I think it is a Whole Life policy.

***

At this point, if I were to pass away, the total pay out appears to be about $25,000. 

If I were to close the policy, the cash surrender value would be about $5,000 or so. 

I think it would be better to invest this $5,000 and the annual $110 in VTSAX. 

So my questions are as follows:

1) Is it better to cash out the policy and invest the cash surrender value sum in VTSAX?

and

2) Is there such a thing as rolling over the cash surrender value to my Roll-over IRA to avoid taxes? 

Thanks.

No rollover option if not held in a qualified plan.  See this rigorous discussion of this very issue: http://www.bogleheads.org/forum/viewtopic.php?t=30145

An index fund is going to be better investment than a whole life policy.  I agree that you should liquidate and put into a Vanguard fund of your choice (for your appropriate risk/comfort level).  If you later need insurance, go with term (maybe even a 20 year fixed premium term if you have kids, etc.; that is whole other analysis!)

Title: Re: Rolling Over Life Insurance to IRA?
Post by: MountainMan on February 21, 2013, 07:29:54 PM

Thanks for the heads-up about the Qualified status.  I'll check into that.

If it isn't qualified, I suppose I'll pay the taxes and put the money in a Roth IRA.

Title: Re: Rolling Over Life Insurance to IRA?
Post by: TN_Steve on February 21, 2013, 08:38:40 PM

It sounds like it is not in a qualified plan, since your relatives bought it for you young.  Qualified = employer sponsored retirement plan, IRA, etc.  Putting life insurance in one of these is generally not (never?) a good planning idea . . .

Title: Re: Rolling Over Life Insurance to IRA?
Post by: tj on March 05, 2013, 10:51:56 PM

You could avoid the taxes by 1035 exchange into a Vanguard variable annuity. If there is not a lot of  gains, I would just cancel the policy and invest in a taxable account.

https://personal.vanguard.com/us/funds/annuities