Universal plus life insurance

[thrifted]

I was 22 when a relative sold (is that the right word?) me an insurance plan. I am now 31 and have really little idea of what the pros and cons are of this thing.

Copied below is info from my annual summary of policy activity.

Policy balance
Accumulated cash value $2153
Cash surrender value $1320
Death benefit primary insured $102153

Premiums received $390 for the year  (or $30 per mo)
Expense charges, cost of insurance, riders $182  for the year (or $15 per mo)
Interest credited $85  for the year

I have a health condition (darn genes) but no kids or husband. No mortgage.

So my questions
Anyone else out there have life insurance?
I can't tell if this is whole or term. Can you?
Pros?
Cons?

Any help is appreciated.

[Another Reader]

This is whole life.  Generally, term life is much cheaper.  The saying goes "buy term life insurance, invest the difference."  Young people with no dependents do not need much if any life insurance.  However, if you have health issues, you may not be able to get other life insurance.  You should look into whether you can get term insurance now or at a later date before you decide to cancel this policy.

[thrifted]

Thank you and will do!

[ashem]

My husband had a few whole life policies his father had set up and we promptly cancelled them after we got married. I think they cost $85/month for $150,000 of coverage, or something crazy like that. We were sent a check for $2,000 from the cash value that had built up over the years.
We set up our term policies before we cancelled our whole life. I pay $55/month for $500,000 worth of term coverage. I have a benign heart condition, so I'm considered high risk. It would only cost $35/month for $350,000 worth of coverage (less for somebody without a health condition). Unlike whole life coverage, it's only good for 20 years, so we will probably (hopefully) never see a dime of that money. We have a mortgage and 2 kids, otherwise I would probably invest that money elsewhere. They used to sell whole life policies as 'investments', but that was before the age of the internet and Vanguard accounts. You could make a lot more money investing that stache elsewhere.

[James]

I was "sold" on whole life right after anesthesia school by a very good salesman.  I wasn't dumb, read the fine print, but he had an good answer for everything.  All told they guy probably made $10-15,000 off me in various investments and the whole life over the last 9 years.  After I started reading MMM I moved all my savings out of his funds and into Vanguard.  The fees on his funds were eating all the profit.  I have canceled the investment part of the whole life and am starting term life in a couple months at which point I will cash out the whole life and be done with that mistake forever.


Having said that, do the math and decide for yourself.  Get approved for the same amount of insurance in term, and if you are happy with it then start the term policy.  Only then cancel the whole life, you don't want to cancel first if you are wanting to stay insured.


Also decide at this point how much insurance you need.  If you have some savings and don't have dependence I'd skip it.  If you die and your savings cover your funeral then you should be fine.  If you get a husband or kids you can purchase term at that point if needed.  At age 31 your chances of death are very remote, even with a health condition.

[thrifted]

Thank you James and ashem!  Think my work offers term so ill start shopping. :)

[Another Reader]

Group term life through work is good for someone in your situation, but the insurance is tied to the job.  If you leave that job, you lose the insurance.  In your shoes, I would determine if I could purchase term life insurance as an individual before I gave up the existing policy.  You may not need or want life insurance today, but you may in the future.  I would want to know all my options before I canceled the existing policy.

[TomTX]

Your relative ripped you off.

"whole life" = Term life + crappy investment "cash value" + BIG chunk of cash for the broker.

...and if you die, they typically keep the "cash value", and just give you the term life payout.

[TheDude]

I think you need to evaluate whether you need life insurance. At most you need about 15k worth of insurance for burial needs and thats only if dont have any assets. Other than that you dont really have anyone to take care of so I would say you do need any life insurance at all.

[Another Reader]

The problem is the OP may want insurance in the future if a spouse and/or kids come along.  It may not be available, depending on the nature of the health issue.  It makes sense to know the options before summarily canceling the whole life policy, even if it is an expensive policy.

[TomTX]

I think you need to evaluate whether you need life insurance. At most you need about 15k worth of insurance for burial needs and thats only if dont have any assets. Other than that you dont really have anyone to take care of so I would say you do need any life insurance at all.

++

Who is depending on you for support? If there's nobody, not much need for insurance. Cash it out.

[RadicalPersonalFinance]

I can't tell if this is whole or term. Can you?
Pros?
Cons?

A universal life insurance policy is a term life insurance policy that will last forever if you put enough money into the premiums.  This is different than straight term life insurance which always goes away.  In a sense, it's a cross between term life insurance and whole life insurance.

I was 22 when a relative sold (is that the right word?) me an insurance plan. I am now 31 and have really little idea of what the pros and cons are of this thing.

Copied below is info from my annual summary of policy activity.

Policy balance
Accumulated cash value $2153
Cash surrender value $1320
Death benefit primary insured $102153

Premiums received $390 for the year  (or $30 per mo)
Expense charges, cost of insurance, riders $182  for the year (or $15 per mo)
Interest credited $85  for the year

This isn't quite enough information to do an actual analysis.  You need to order an in-force illustration from the insurance company and sit down and go over it with your agent.  Analyze how long the  cash values and death benefit will last at your current funding level and conservative interest growth.  Analyze how much you're putting into the policy and how the amount of funding will impact the cash value growth.  You'll only be able to run this with the actual illustrations.  These numbers are relatively meaningless.

You also need to analyze the company: how much are the internal expenses of the company compared to other life insurance providers?

Also, is this a variable policy with investment sub accounts or is it invested in the company's general account? This will make a big difference in what you compare it to.

I was 22 when a relative sold (is that the right word?) me an insurance plan. I am now 31 and have really little idea of what the pros and cons are of this thing.

This is probably a great policy to consider keeping.  At 22 years old, your mortality and expense charges are tiny as compared to the growth of the cash account.  If you come back in five years and want more life insurance or want a new policy (because of kids/wife), your M&E charges will be substantially higher.  Comparatively speaking, the numbers are terrific on a policy you bought at 22 years of age vs at 35.

I have a health condition (darn genes) but no kids or husband.

Whatever you do, don't cash out the policy if you don't have other coverage in force.  If you decide that you want is term insurance, just keep the policy you have and under-fund it  so it runs out when you want it to run out.

You've already paid the sales expenses to own the policy. It would be foolish to cash it out and buy a new term policy and pay an entirely new set of sales expenses. Just keep this policy and fund it like a term policy if that's all you want.

[thrifted]

Your relative ripped you off.

"whole life" = Term life + crappy investment "cash value" + BIG chunk of cash for the broker.

...and if you die, they typically keep the "cash value", and just give you the term life payout.

thanks tom!  i learned recently that this relative was actually pretty shady - even with his wife!  so i had to question what exactly i got myself into. 

[thrifted]

A universal life insurance policy is a term life insurance policy that will last forever if you put enough money into the premiums.  This is different than straight term life insurance which always goes away.  In a sense, it's a cross between term life insurance and whole life insurance.
This isn't quite enough information to do an actual analysis.  You need to order an in-force illustration from the insurance company and sit down and go over it with your agent.  Analyze how long the  cash values and death benefit will last at your current funding level and conservative interest growth.  Analyze how much you're putting into the policy and how the amount of funding will impact the cash value growth.  You'll only be able to run this with the actual illustrations.  These numbers are relatively meaningless.

You also need to analyze the company: how much are the internal expenses of the company compared to other life insurance providers?

Also, is this a variable policy with investment sub accounts or is it invested in the company's general account? This will make a big difference in what you compare it to.

This is probably a great policy to consider keeping.  At 22 years old, your mortality and expense charges are tiny as compared to the growth of the cash account.  If you come back in five years and want more life insurance or want a new policy (because of kids/wife), your M&E charges will be substantially higher.  Comparatively speaking, the numbers are terrific on a policy you bought at 22 years of age vs at 35.

I have a health condition (darn genes) but no kids or husband.

Whatever you do, don't cash out the policy if you don't have other coverage in force.  If you decide that you want is term insurance, just keep the policy you have and under-fund it  so it runs out when you want it to run out.

You've already paid the sales expenses to own the policy. It would be foolish to cash it out and buy a new term policy and pay an entirely new set of sales expenses. Just keep this policy and fund it like a term policy if that's all you want.

thanks for the very thorough reply 7 years.  this is exactly the information i was looking for.  i feel like such a rookie and having a community that is willing and able to answer questions is more than i can ask for.  i will call the insurance company to get the illustrations and discuss the investments, expenses and comparisons. 

[TheDude]

thrifted,  I still think the policy is a bad idea.  Right now you dont need any insurance. Whats your savings look like? Will you be able to self insure in the future? 100,000 is a pretty small benefit for the price your paying.

[RadicalPersonalFinance]

100,000 is a pretty small benefit for the price your paying.

This is an inaccurate way to analyze a universal life insurance policy.  For a universal life insurance policy, premiums are optional and adjustable. There isn't an immediate connection between the face amount of the policy and the premium. He could choose to stop paying premiums today and never pay one again. The policy would last for a certain number of years, depending on the internal cost of insurance. He could also reduce his premiums by 50% or he could choose to double them.  All of these options will impact the cash value, the rate of return, and how long the death benefit remains in force, but none of these changes will affect the death benefit. That's the entire point of universal life insurance and it's why the policy was invented.

It's also probably unwise to encourage someone in thrifted's position to cancel a universal life policy and replace it with a term insurance policy.  He already owns a term insurance policy inside the universal life contract.  A universal life contract consists of a term insurance policy with increasing premiums which lasts to age 100 or age 120 and an investment account.  Instead of replacing a universal life insurance policy with a term insurance policy, usually the better way is simply choose when you want the investment account to be exhausted (which ends the policy, cancels the coverage, and accomplishes the same thing as ending a 10-year level term policy) and fund the policy accordingly.

That's why he needs to check the terms of the contract.  Many times, the internal term cost of a universal life insurance contract can be less than the cost of a straight, stand-alone term policy.  And, in his situation, it has the benefit that he could choose to continue his coverage for longer if the situation warrants in the long term.

[TheDude]

But 7 I dont think he needs life insurance at all. I think he could save that much in low cost index funds and self insure himself. The fees on the policy are pricey. If he insists on having insurance I think it would be a could idea to do a cost analysis of the universal vs term vs term from work. Life insurance is a crappy investment. Only in rare circumstance should you be in a whole or universal  policy. He maybe in that small minority due to his illness but if he doesn't need it then it make no sense for him to have any life insurance.

[RadicalPersonalFinance]

But 7 I dont think he needs life insurance at all. I think he could save that much in low cost index funds and self insure himself. The fees on the policy are pricey.

I understand and yes, it's important for him to consider whether he wants to own the policy or not.  That's why he should order the illustration and talk to an agent about the company and the expense of the policy.

It's not possible to know without that info.

If the policy was well-designed and properly funded, it's very likely that he should keep the policy, even if it's purely as an asset for him (cash values) rather than as life insurance death benefit for his heirs.  10 years into a contract all of the costs are paid (commissions, internal underwriting costs, etc.) and it's possible that his cash values are growing by a couple of dollars for every dollar of premium.

It's also possible that the policy was not well-designed and has high internal cost and is with a low-quality company. In that case, he might be better served to cash the policy in or, if possible, to do a 1035 exchange of cash values into a better designed policy.

Incidentally, universal life insurance contracts are often NOT well designed and have often been under-funded.

If he insists on having insurance I think it would be a could idea to do a cost analysis of the universal vs term vs term from work.

A good rule of thumb with group term insurance at work is this: take everything your employer gives you for free and don't buy anything extra at work unless you're unhealthy; in that case, buy as much extra at work as possible.

If somebody needs and wants life insurance, group term life insurance isn't a good option because the contracts are not portable: if you lose or leave your job, you lose and leave your life insurance. This is especially a problem for Mustachians who are planning to leave their jobs quickly.

Also, group term life insurance usually has higher costs because the policies are guaranteed issue; the insurance company must issue the policy to all applicants.  This means that if you're unhealthy, you should get it at work. If you're healthy, you can usually get cheaper insurance elsewhere.

The key for him is the health problems.

Life insurance is a crappy investment.

This depends 100% on the purpose of the policy, the design of the policy and the company.  There are lots of life insurance policies which are terrible and there are many which are really well-designed.  It depends on the situation.

That's why I responded to the thread. IMO, blanket statements like these aren't useful.  It would be like saying that stocks are a crappy investment or real estate is a crappy investment. Neither of those statements are true; rather, there can be stocks with are terribly over-priced and real estate deals which don't work at all. It all depends on the specifics of the situation.

Hope that helps.  Just trying to give a bit more detail than broad generalizations.

Ultimately, it depends on his specific policy, company, and situation. 

[TheDude]

A good rule of thumb with group term insurance at work is this: take everything your employer gives you for free and don't buy anything extra at work unless you're unhealthy; in that case, buy as much extra at work as possible.

If somebody needs and wants life insurance, group term life insurance isn't a good option because the contracts are not portable: if you lose or leave your job, you lose and leave your life insurance. This is especially a problem for Mustachians who are planning to leave their jobs quickly.

Also, group term life insurance usually has higher costs because the policies are guaranteed issue; the insurance company must issue the policy to all applicants.  This means that if you're unhealthy, you should get it at work. If you're healthy, you can usually get cheaper insurance elsewhere.

The key for him is the health problems.

7 I agree with the above. Under most circumstances I would never buy employer base life insurance. I only recommend that if life insurance from another source is not possible.

I do however disagree that this a problem for Mustachians. If Mustachians  plan on leaving their job quickly then they should enough cash to not need life insurance.

[RadicalPersonalFinance]

I do however disagree that this a problem for Mustachians. If Mustachians  plan on leaving their job quickly then they should enough cash to not need life insurance.

Good point. You're right.

[thrifted]

This isn't quite enough information to do an actual analysis.  You need to order an in-force illustration from the insurance company and sit down and go over it with your agent.  Analyze how long the  cash values and death benefit will last at your current funding level and conservative interest growth.  Analyze how much you're putting into the policy and how the amount of funding will impact the cash value growth.  You'll only be able to run this with the actual illustrations.  These numbers are relatively meaningless.

You also need to analyze the company: how much are the internal expenses of the company compared to other life insurance providers?

Also, is this a variable policy with investment sub accounts or is it invested in the company's general account? This will make a big difference in what you compare it to.

Whatever you do, don't cash out the policy if you don't have other coverage in force.  If you decide that you want is term insurance, just keep the policy you have and under-fund it  so it runs out when you want it to run out.

You've already paid the sales expenses to own the policy. It would be foolish to cash it out and buy a new term policy and pay an entirely new set of sales expenses. Just keep this policy and fund it like a term policy if that's all you want.

i contacted my insurance company today and they will send me illustrations by email.  they said that the cash values and death benefit will last until 2066, when i'm 85 years old.  this is at my current funding level and with conservative interest growth. the representative i spoke with didn't know if the account was a variable policy or general account. i wasn't sure how to phrase the question 'how the amount of funding will impact the cash value growth" so when they asked what i meant by that i didn't really know what else to say. so no answer there either. he also said that if i were to stop my premiums the place would only last until 2029, when i'm 48 years old.

am i asking the right questions 7 years?

[TomTX]

Did we ever answer the question as to whether you actually need life insurance?

Is someone (child, spouse) depending on you and will otherwise be destitute without the life insurance?

[RadicalPersonalFinance]

Yes, you're asking the right questions.  I'd suggest that you sit down with an insurance agent from that company if you have one (call the office where your relative worked and ask to meet with someone) or, find another life insurance agent locally that you can work with on your various options and explain them to you.

they said that the cash values and death benefit will last until 2066, when i'm 85 years old. 

So, now you know that you're under-funding the policy a bit if you want it to last forever.  If you want your policy to last until age 100, you should increase the premiums to the level necessary to sustain the policy forever. Work with an agent to figure out what that number is. You are young; it won't be that much higher than you're currently paying.

the representative i spoke with didn't know if the account was a variable policy or general account.

Open the contract and read it.  It will be very clear in the contract.  The contract will either talk about various sub accounts that you can invest in (sub accounts will sound similar to a mutual fund) or it will talk about the general portfolio.  If it's a variable policy, you received a prospects with it.  If it's not a variable policy, you didn't.

i wasn't sure how to phrase the question 'how the amount of funding will impact the cash value growth" so when they asked what i meant by that i didn't really know what else to say. so no answer there either.

You should ask this question of a good local life insurance agent.  In many companies, the front-line customer service reps are not experts or agents; they're merely customer service reps.  An agent will be able to explain this to you clearly.

he also said that if i were to stop my premiums the place would only last until 2029, when i'm 48 years old

So, now you have a baseline to compare your options.  If you desire to have insurance but don't want it to last forever, you could choose to stop paying the premiums and you would effectively have a term life insurance policy in force until you're 48 years old. Would this be cheaper than cashing in the policy and purchasing a replacement term policy? You would have to get quotes. The nice thing about keeping this policy and effectively turning it into a term policy is that you would be able to continue your premiums in the future if you decided that you wanted the life insurance coverage for longer. 

This is about the limit of how I can help.  I'd suggest you contact a local agent or financial advisor.

Here are the decisions you should make:
1. Do I want life insurance now? If yes, consider keeping the policy. If no, consider surrendering. Consider your parents/siblings/charities/etc. in your planning. The multiplication effect of life insurance death benefit can be substantial as you're building your net worth.
2. Might I want life insurance in the future based on changing financial situation / family situation? If yes, consider your health conditions and find out if your current health conditions will impact your ability to get a policy and the rates. You're probably better off keeping this policy. If no, consider surrendering.
3. If I don't want the death benefit, am I better off keeping the policy for the cash value (investment) component?  What are my opportunity costs either way? This is where you should review your portfolio, understand the advantages and disadvantages of life insurance as compared with your other investment options.

If your policy is a variable policy, you should compare the expenses of the portfolio with expenses of your other investment options. If it's variable, it's an investment and you can rationally compare it to stock and bond investments.  Consider then your tax situation. (Life insurance cash values grow with no current income tax.)  In the same way that you would prefer to own bonds and bond mutual funds inside IRAs and other tax-deferred accounts (because income is taxed as ordinary income; higher rate) and to own your stocks outside (if there's no more room in the tax-deferred accounts; stocks are taxed at capital gain rates upon realization of gain; capital gain rates are currently more favorable), consider keeping the policy for your bond funds.  This depends on your asset allocation.

Consider creditor protection and bankruptcy planning of cash values in your situation based on your state law. In many states, cash values are exempt from the claims of creditors in the same way as your tax-qualified retirement plans are.

If the policy is not a variable policy, you can't rationally compare it to your stock portfolio. Life insurance companies are required by law to invest their general accounts in very conservative investments.  So, it would be an invalid comparison to compare the returns of the policy to, for example, an S&P 500 Index Fund.   They're apples and oranges and have dramatically different risk/return rates. In that case, compare the policy to the fixed income portion of your portfolio and consider if it can fill that need in your allocation.  For example, could you position your other investments more heavily into equities knowing that you have this money in reserve?

You also need to consider the opportunity cost of keeping the policy. Should those funds be invested more strategically in other investments?  (FYI, this is generally the only line of thinking that most people use in their analysis.  Their line of thinking is: "Stocks = higher return than life insurance, so cash in life insurance and buy stocks."  It's important, but it's not the only valid line of thought. You need to consider your situation and your goals carefully.)

Also, consider your cash reserve needs.  Most people prefer to have some liquid cash on hand for reserves/emergencies/etc. If it's invested in the company's general account, this could fill that goal and it's likely that the returns are higher than you're getting in a savings account or CD at the moment.  This policy would have the added benefit that those returns are sheltered from current income tax and they might be safe from the claims of creditors (depending on state law) as opposed to savings accounts and CDs.  (If you were using the policy for that purpose, you could access the cash values through a policy loan. Most insurance companies will electronically deposit the cash into your account within a few days.)

Finally, if the policy no longer meets your goals and you don't want to own it anymore, consider if you have unrealized gain in the contract.  If you have tax-deferred gain, you might be able to keep the gain tax-deferred by doing a 1035 exchange into another financial product that will help you in your quest for FI.

I hope this helps. Unfortunately, all I can do is help you consider various aspects of your plan. I'd recommend that you consult a local professional who can understand your situation and what you're trying to do.

At the end of the day, it's a decision that will depend 100% on what your specific financial goals are and what you're trying to achieve. Your goals will be different from mine and from any other person's on the forum.

[thrifted]

Did we ever answer the question as to whether you actually need life insurance?

Is someone (child, spouse) depending on you and will otherwise be destitute without the life insurance?

not married - no kids.  but my boyfriend of 16 years is my beneficiary.  at this point, i have a student loan debt of $10,500 and retirement investments of $29k and of course this life insurance plan for $100k. this is a very naive question but when i die - does my student loan debt disappear and my beneficiary receive the retirement and life insurance? ie the beneficiary wouldn't have to use the retirement/life insurance? also, do you list life insurance as an asset?

[RadicalPersonalFinance]

When you die, everything that you own has to stand good for what you owe.  The executor of your estate will marshall all your assets and use them to pay your creditors.  Any assets that remain will be distributed to your beneficiaries according to your will.

No one becomes liable for your debts unless they borrowed the money with you. So, any debts that you owe (e.g., student loans) will be paid by your estate but your boyfriend/family do not become liable. If your estate is insufficient to satisfy the debts, your creditors will simply be out the money.

As long as it is structured properly (there are exceptions), life insurance generally flows according to contract law, not according to probate law. So, if your boyfriend receives the life insurance death benefit, he receives it unencumbered by any debts.  The beneficiary has no obligation to pay your debts. Incidentally, he will also receive the money free of any federal income taxes. Life insurance is governed by state law, so you should check with your local advisor.

Generally, any accounts (such as IRAs) that have beneficiary designations flow according to contract law (meaning they aren't governed by your will) as well, so the same thing might be true of your IRA.  You need to check with someone familiar with your state-specific laws.

Yes, life insurance should be listed as an asset on your balance sheet.  I would use the cash value number for my net worth statement.  You could classify it either as an investment asset (if it's a variable policy) or as a cash equivalent.  (Large banks use cash value life insurance policies as part of their tier 1 capital reserves. FDIC views it as the equivalent of a cash asset.)