Whole Life Insurance

In My Humble Opinion
1

My mom took out not one, but two, whole life insurance policies on me a couple decades ago. I guess either she figured I’d come to no good end and she wanted the cost of burying to be handled somehow and someone sold her on this idea, or she figured on popping me when the time seemed right :wink: … either way, she died before I did and made me the person who would inherit them.

So I now have a pair of whole life insurance policies, on myself. Changed the beneficiary (that was like pulling teeth, hate dealing with them). So the damn things are no longer set up so that if I die I get paid for it in compensation.

I’m still invested in gambling that I’ll die sooner rather than later, which isn’t a wager I’d tend to make.

Got a premium bill for both of them. One says the 2021 dividend is $96.21 and my premium is $77.25, the other has dividend of $50.05 and premium due of $97.80. So I’m holding these things and staring at them and trying to wrap my head around why having these policies is better than stuffing some money in a coffee can and labeling it “for burying me or otherwise disposing of the corpse when I croak”.

I have a bit of a brain-block on financial matters sometimes, and it seems to be worse on life insurance. I’ve let these sit here unpaid long enough that they’re now loaning themselves money at some variable interest rate using my policies as collateral or some such thing, which isn’t warming me towards the situation, but am I being foolish to be contemplating telling them to cancel them and hand me the cash value and then go stick it in a regular investment account instead? Are there reasons I should leave this money tied up in these whole life insurance policies?

2

I cancelled my life insurance to invest the money instead. Life Insurance is good when you have kids to support. There reaches a point where you’re better off investing it. Insurance isn’t really a good investment despite what agents will try to tell you.

Now it sounds like your policies are very inexpensive at this point. Are the premiums you lists monthly, quarterly or yearly?
If monthly, I would recommend dropping the second one and saving the $47.75 per month. But it looks like the first one is fully invested and earning money. You might as well keep it.

Without more info I don’t know what else to tell you.

3

Just my 2cents, but I’ve never liked whole life policies. They were hugely popular 30-50 years ago. The only life insurance policies we have are “if you die, your beneficiary gets paid”.

4

If you’re risk adverse, they’re a decent place to hold long-term cash - they are likely growing the cash balance faster than a savings account. But if you have a greater need to be invested in the market, cash them out.

5

This is very likely the best plan, but you should look carefully at the specific terms of the policies and try to separate the “life insurance” part from the “investment” part.

Although Whole Life is generally a bad investment, there are individual policies that were written in the past that, for example, priced certain assumptions about inflation into their contracts and became a decent investment as inflation cratered. I know someone with such a policy, and the insurance company regularly sends offers to buy it out because it’s actually a good deal now, and they can’t cancel it unilaterally. I suppose if your insurance company is not trying to do so, that’s pretty good evidence that you don’t have such a policy.

If the thought of making such a spreadsheet fills you with dread, then think about the absolute amount of money involved. Is it enough that it’s worth consulting with a financial planner to discuss?

It sounds like you don’t need insurance, that you don’t have dependents to support. In that case, it probably makes sense to get rid of them.

6

At this point I’m still trying to get a handle on the raw facts. “Dividend” is roughly the same as “premium” for the same year, give or take. Does that mean the policy increased in value (i.e., is worth that much more to me) by roughly the same amount as the annual cost of owning it, so it’s a wash?

I hate to ask them to explain it to me because they have a vested interest in representing the situation to their own advantage. And I’m starting out with my eyes already glazed over.

7

You have a couple of options:

Cash it out. You can call them up and ask them “if I cancel the policy, what is the surrender value?”. They can’t wiggle on that.

Convert it to a paid-up policy. You can ask them, “I don’t want to pay any premiums on this. What are my options for converting this to a paid-up policy?” They won’t wiggle on that, because it still results in them keeping the policy. They’ll give you an amount of insurance that will be issued. You will lose your cash value in it.

Ask them for an illustration for the policy going forward. Ask them “If I continue this policy, provide me with an illustration showing the guaranteed rate of return on the cash value.” Insurance companies have to provide this to you. They’ll probably also give you one with a 5-year average rate of return, which will likely be a lot higher. That’s not necessarily given in poor faith - those are real numbers, but they’re not guaranteed (note: some insurance companies have a guaranteed ROR of 0%, and that’s what you’re looking out for).

8

Yes, everything I’ve read about whole life, universal life, etc. is bad. You’re much better off buying term life insurance and investing any extra money you have in mutual funds.

9

Confirms my impression.

10

Agree 100% with @Crafter_Man about whether and when to buy or not buy whole life. But …

That’s not where @AHunter3 is. He’s not considering buying some whole life. He already has some whole life. Which policy(ies) have some specific built up value, some specific guaranteed rate(s), and some specific surrender value.

The smartest thing to do in his specific situation is to have somebody with the smarts to do actual insurance calcs sit down with the actual policies and the actual dollar amounts and see what’s the smartest move forward from here.

If the amounts are small enough versus his total net worth then there’s not really a wrong answer; do what’s simplest and sleep easy. But if the money’s enough to matter, then it’s enough to do a thorough job of investigating the various ways to extract value from where he is.

11

Yeah, that’s kinda where I am. Holding a small whole life policy because it was easy to sign up for through work and it made a bit more sense at the time, though I was mostly talked into it. (I was more interested in the additional accident coverage, illness coverage, and especially considering my job, cancer coverage). It’s basically worthless, paying out in like 2077 for $22k. In other words, it might keep my family from paying out of pocket for putting me in the ground. It’s so little a month I’m willing to let it ride, but I’m kind of wondering if I could get anything useful out of it in the next few years to help with other expenses.

12

Except that very few people actually do that. We all know that the slogan is “Buy term and invest the difference” – but a more realistic slogan would be “Buy term and buy pizza/beer/whatever” because most people are either too scared of the stock market or too ignorant, or just plain don’t have the self-control.

13

I somehow found out my mother had such a policy out on me, which made at least some sense when I was mostly a deadbeat living off her generosity, but by the time I found out I had way more money than the policy was worth in a taxable investment account, not to mention my retirement accounts, and I managed to convince her that it wasn’t such a great idea any more. I even got the money when it was cashed out despite her paying for it all this time.

If I was in the OP’s position, I would basically do the same thing I did when I found out about the one on me - turn it into cash as soon as possible. It’s extremely unlikely the the life insurance company is providing you with a reasonable return on your investment. I don’t really know how these contracts tend to work other than knowing to run away from any financial company that offers a product that has fairly impenetrable terms (life insurance, annuities, various other investments) compared to “this mutual fund tracks the S&P 500 with 95% upside capture and 99% downside capture”.

14

Yes, policy A increased in value $96 at a cost of $77, which is money for jam, except that there is also the ‘opportunity cost’ of the money you could put in the bank… or in the stock market … or use to pay off your credit card.

At this point, putting money in the bank isn’t earning anybody anything, and you don’t sound like a stock market person, but if you have credit card debt, cashing out your insurance might be a good thing. But if it’s worth $22K in 2077, it’s surrender value is probably still very close to zero. $0. Nothing. Nill. A couple of hundred.

You should ask (or scan the dividend/premium notices for) the cash value.

“Whole of life” insurance is a bad idea for young men with young families who need insurance, but as a straight money proposition it looks better and better the older you get, where the expected “present value” of the insurance goes up and up, and the cost doesn’t. If I could buy $22K of insurance on my 95 year old mother for just $1000 down and $19 per year, I do it like a shot – money for jam. That’s not life changing money, but I wouldn’t turn down that deal.

If starting “Whole of Life” insurance is a bad idea for a young man with a young family, and retaining it a good idea for a centenarian who wants to be remembered fondly, is there a crossover point where it changes from a bad idea to a good idea?

No, for a lot of people it’s more like a long flat spot, where it doesn’t make much difference, because the insurance value isn’t worth much (after your kids move out and your partner has enough to live on), and the surrender value isn’t worth much (because you aren’t going to die any time soon).

This is the long flat spot where many people stop paying the premiums, so that the value of the investment runs down. That’s what you do when you reach a certain age: stop investing “for later”.

Letting it run down is the same as gradually decreasing the amount you have bet that you’ll have a fatal car accident, and people are comfortable gradually letting that bet run down because we don’t like change and decisions, and cashing it out early releases only a trivial amount of money.

Of course if it’s got a large surrender value, that might influence your decision. First stop: find out the surrender value.

Eventually, you’ll realize that you’re probably going to die soon. When that happens, the flat spot is over, and if the policy still has any value it’s a good investment deal. Even then bread today might be better than jam tomorrow, but at least the investment question will have a simple answer.

15

Short answer is, Insurance is never an investment. Life insurance is to offset your loss of future earnings (for your survivors) and since that will decline every year, buy enough term to fix what money will fix.

16

OP, do you have credit cards to pay off?

If so, cash out and pay them off?

17

As a general rule, paying down debt, assuming that the rules on the debt allow it, is always the best investment.

18

With the exception of a mortgage. Mortgage rates are so low currently, you’re better off keeping the mortgage and investing the money. Also there are usually additional tax benefits to the mortgage, unlike most other forms of debt.

19

Nope! Learned that lesson about 20 years ago. I never run a credit card debt, pay them off in full each month. I do have student loan debt but that’s a different animal, closer to the mortgage situation mentioned above, in addition to which there are perennial whispers of federal forgiveness or compromise.