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MemoryLeak
09-10-2017, 02:15 PM
Thought about asking this in the very interesting IRA inheritance thread, but it really is a different question.

I have a paid up life policy with a cash value around $289,000. The death benefit is around $528,000. I've been leaving it alone based solely on the idea that I'm getting 4% on this (the cash value).

Specifically, last year the cash value was around $277,000 (the death benefit was $520,000). This has been consistent for several years. So I'm looking at this as a really good CD to park money should I ever get in trouble financially.

Am I missing some alternative approach or reasoning that would lead me to take the cash?

OldGuy
09-10-2017, 02:37 PM
This depends a bit on lots of things. First part of your cash value increase is because each year you are paying your premium and if you aren't very old only a portion of this is buying you insurance. Find out what a similar term policy would cost you at your age and see how much over that, this whole life policy costs you. That's the extra amount you are contributing to the cash value. If this is contributing 3% to your increase in cash value, then the return you're earning is only 1%.

In addition, how does the cash value increase. If you have a guaranteed increase in the cash value, you can compare this to your rate in a CD. If the increase depends on the stock market, you're not doing very well compared to hat.

By and large, whole life is a very poor investment vehicle. It's one advantage is it is "forced" on you.

MemoryLeak
09-10-2017, 03:02 PM
This depends a bit on lots of things. First part of your cash value increase is because each year you are paying your premium and if you aren't very old only a portion of this is buying you insurance. Find out what a similar term policy would cost you at your age and see how much over that, this whole life policy costs you. That's the extra amount you are contributing to the cash value. If this is contributing 3% to your increase in cash value, then the return you're earning is only 1%.

In addition, how does the cash value increase. If you have a guaranteed increase in the cash value, you can compare this to your rate in a CD. If the increase depends on the stock market, you're not doing very well compared to hat.

By and large, whole life is a very poor investment vehicle. It's one advantage is it is "forced" on you.
This is a paid up policy - I don't pay premiums. But the gist of what you're saying is that comparing the return on the cash value to a CD is an appropriate and valid way to decide.

What gives me pause is that, in the end, what I really have is a ~$240,000 death benefit policy (although it is free for all practical purposes, but getting smaller as the cash value increases).

I'm looking for alternative ways to look at this (if there are any).

Saint Cad
09-10-2017, 05:09 PM
It's my understanding that your beneficiary gets EITHER the cash value OR the death benefit (http://www.investopedia.com/ask/answers/050615/what-difference-between-death-benefit-and-cash-value-insurance-policy.asp) but not both. So that cash value disappears upon your death.
Feel free to correct me if I'm wrong.

Snnipe 70E
09-10-2017, 05:55 PM
There is one major advantage. If it is paid out as life insurance then there will be no taxes when you pass and your family is paid. If you cash out now and invest the money it will become part of your estate.

MemoryLeak
09-10-2017, 07:23 PM
It's my understanding that your beneficiary gets EITHER the cash value OR the death benefit (http://www.investopedia.com/ask/answers/050615/what-difference-between-death-benefit-and-cash-value-insurance-policy.asp) but not both. So that cash value disappears upon your death.
Feel free to correct me if I'm wrong.
Right, the death benefit will include the cash value so in my case I could replace (cash in) my policy and get some sort of term insurance around $240,000. Of course I would have to pay for that and I'm not sure I could get coverage at a reasonable rate (a quick check shows 15 year term at somewhere between $105 and $175 per month depending on whether I have a "medical condition").

I don't think trying to replace the 'insurance' part of my policy with term insurance makes any sense. So I'm struggling with trying to evaluate the declining 'insurance' part of the policy. The cash value is steadily increasing (last year by $12,000) and the total death benefit increases slower (by only $8,000 last year). So at some point it makes no sense to have the policy and put the cash value in the market.

I'm just wondering if there's some approach to deciding when that is (and is it now).

pmwgreen
09-10-2017, 08:18 PM
I think you should contact the insurance company and see what your options are. To begin with, when you get the annual statement about death benefit and cash value they usually put in a bunch of other stuff too. You could look at that. Do you get dividends? If so, it sounds like they are being reinvested somehow. You could get them paid in cash. Otherwise you could get cash out via a loan and keep some insurance intact.

The problem with cashing in the policy comes with taxes. It sounds like this policy is worth a bit more than the premiums paid in so you have to pay taxes on the difference. You could cash out only a portion to refund the premiums and avoid the taxes. As I say, the insurance company can advise you. If you don't need the insurance portion, you might get an annuity and those will have about a hundred options there too.

It sounds like you are in pretty good shape with a lot of choices.

Jonathan Chance
09-10-2017, 10:04 PM
If it's whole life then the dividends are paying the premiums. But we don't really know enough about what form of insurance it is to allow for any real worthwhile opinions to be formed.

pmwgreen
09-10-2017, 11:27 PM
If it's whole life then the dividends are paying the premiums. But we don't really know enough about what form of insurance it is to allow for any real worthwhile opinions to be formed.

Yup. It's like asking for medical advice on the forum. He needs to see a professional.

OldGuy
09-11-2017, 12:10 AM
Yup. It's like asking for medical advice on the forum. He needs to see a professional.

Be careful in consulting a professional. An insurance salesman/rep is not a fiduciary. That means they are not legally required to give you advice which is in your best interests. What is in the best interests of an insurance agent is probably to have you cash it out and buy term -- because he will get a commission on that. This is true even if you talk to the agent who originally sold the policy. Commissions are heavily front loaded so that they earn virtually all the commission in the first few years the policy is in effect.

This should not be taken to mean cashing out isn't the best thing to do. We don't have enough information to tell.

jasg
09-11-2017, 12:28 AM
As others have noted, cashing it out might leave you with a huge tax bill. It may be taxable at ordinary income tax rates, not the lower capital gains rate. Proceed carefully.

MemoryLeak
09-11-2017, 02:06 PM
Well, thanks everyone.

I was looking for alternatives to simply calculating the return on the cash value as a way to evaluate whether I should cash in the policy. The annual increase is running at 4% which strikes me as an excellent low risk return. I guess I should include a notional amount for term life (say $1,800/year) in the return since I would need to replace the $240,000 part of the death benefit should I cash in the policy.

As a note, this started life as a modified endowment contract and I converted to a paid-up policy when the cash value exceeded the total of the premiums I had paid (mainly so I would 'feel' like I hadn't lost any money other than opportunity cost). I simply looked at the return I was getting on the premium. I thought I could do better putting that money elsewhere so I exercised the option to convert to a paid up policy. This policy was a small part of an overall plan. Turns out the crash in 2008 (or was it 2007) made the policy a good deal compared to most other investments at the time.

Voyager
09-11-2017, 02:21 PM
As others have noted, cashing it out might leave you with a huge tax bill. It may be taxable at ordinary income tax rates, not the lower capital gains rate. Proceed carefully.

It is.
When my father-in-law hit 100 the cash value was equal to the death benefit. He did not cash it out exactly because of taxes. (When he got the insurance the tables only went up to 100, so he broke them. Now they go up to 120 or so.)

To hide some money from my wicked stepmother my father bought a policy on me with my daughter as beneficiary. I just cashed that out in closing out the estate and had to pay withholding. I'm in a relatively low bracket this year so it is fine.

MemoryLeak
09-11-2017, 02:47 PM
The information y'all provided prompted me to investigate the dividend. This year it was $4,112 and was going to purchase additional paid up coverage (so $4,112 buying about $7,500 more death benefit). Struck me as a bad deal and $7,500 doesn't move the dial much.

So I contacted the insurance company and had them convert it to a check to me. The anniversary is in late July and it turns out I have 66 days after the anniversary to make changes for the dividend - so in under the wire. So this year the net increase will be $15,382 for a return of 5.5% - a definite keeper. The total death benefit will remain at $520,577. And since the dividend is so much smaller than the total premiums I've paid, it won't be taxable.

For those wondering why I don't take the cash value out as a loan - it's 9% interest which would go against the death benefit which is also reduced by the loan. Plus, I don't need the money and 5.5% is a great low risk return should I ever need the cash value.

Orwell
09-13-2017, 11:29 AM
Turns out the crash in 2008 (or was it 2007) made the policy a good deal compared to most other investments at the time.

Plus, I don't need the money and 5.5% is a great low risk return should I ever need the cash value.

I agree with you. My wife has a whole life policy that has a higher death benefit than we really need/want, but the cash value and death benefit both go up much more than the annual premium costs us. So, we keep paying the premium and consider this policy to be safe and similar to a bond fund in our total allocation. The cash value went up 4.2% this year, which is a pretty good return on a safe investment. The death benefit also went up by more than the premium. At some point, we may stop paying the premium and let it fund itself. Or we may borrow against the cash value. Or actually cash it in.

Be careful in consulting a professional. An insurance salesman/rep is not a fiduciary. That means they are not legally required to give you advice which is in your best interests. What is in the best interests of an insurance agent is probably to have you cash it out and buy term -- because he will get a commission on that.

Yes, be very careful when talking to insurance agents, or any commission-based "advisor" or broker. Many are honest and will give you good advice, but not all by any stretch.