By Dr. Rikki Racela, WCI ColumnistAs the WCI poster child victim of losing $50,000 to stupid whole life insurance, I have fielded many questions from fellow victims about the best way to get out of this detrimental financial product. Two words . . . actually one number and one word: 1035 exchange.
In this column, I will walk through the steps of how and why to do a 1035 exchange on whole life insurance and whole life’s evil permanent life insurance cousins: indexed universal life, variable universal life, and other variations. For those of you who had the financial foresight to not get into these products, I applaud you. But I also encourage you to keep reading since you probably know a fellow doc who has one of these terrible products that is killing their ability to build wealth and gain financial freedom. You can be immensely helpful to your fellow colleagues by discussing the 1035 exchange.
Whole Life Insurance and the 1035 Exchange
But first, should you even do one?
Before we delve into how to do the 1035 exchange, we must first ask if it's worth doing in the first place. If in the unlikely event that a whole life policy was sold to you appropriately, then you don’t need to do the exchange. WCI Founder Dr. Jim Dahle has written on appropriate uses of whole life insurance, and these include having a disabled child (who is dependent on your income even if you die in your 80s), having an estate tax problem (ex: you have a huge farm that will cause your kids to pay a massive tax bill after you die that could be covered by the death benefit), and “keyman” insurance if you are the head and an integral part of a company. Most of the people reading this would not have been sold whole life appropriately, and this column will still apply to you.
But Rik, what about the death benefit? Isn’t worth it to pay those high premiums for the death benefit? Easy answer: NO! You are paying WAY too much for a death benefit to cover your whole life, whereas premiums are at least 10x cheaper if you get a term life insurance policy where the term covers when you actually need the insurance. However, if you were sold a policy and now you have an unfortunate terminal health condition, it makes sense to keep whole life for the death benefit given your diagnosis. Otherwise, don’t keep your permanent insurance policy just for the death benefit. Get term life instead.
A more likely scenario where you might keep your whole life policy is if your cash value exceeds your cost basis. For those who don’t know these terms, don't worry. While I was getting financially literate, I didn’t know what “cost basis” was either. Cash value is the amount of money you have saved up in your policy, and it's the money you would receive if you were to surrender the policy. Cost basis is the amount of money you paid in premiums overall. If your cash value is greater than your cost basis, then serious consideration has to be made about keeping the policy, as the returns going forward when paying your whole life premiums are not so bad. All the bad returns you’ve paid previously are water under the bridge.
In fact, I recently talked with a physician friend who mentioned that he was happy with his whole life policy since the bad returns were behind him, and he uses it to “bank on himself” where he is taking out a loan on his cash value and not paying it back. I didn’t get into details, but he likely would have been a lot wealthier by just initially investing those whole life premiums in a taxable account. But his policy is at a point which works for him. If you are at this point, you likely don’t need to do a 1035 exchange. Also, if the cash value of your permanent life insurance policy is less than $10,000, don’t even bother with a 1035 exchange since this is the minimum you need to fund a low-cost variable annuity.
But for those who got screwed like I did and your cash value is less than the cost basis and you have at least $10,000 of cash value, this is for you.
More information here:
Should You Keep Whole Life Insurance Policy and How to Cancel
When to Exchange Your Whole Life Insurance Policy for a Modified Endowment Contract
The Tax Benefit of a 1035 Exchange
Now, let's talk about this fancy “1035 exchange” thing. Basically, it’s a tax benefit. The difference between the cost basis of your permanent life insurance policy and your cash value is how much money you’ve lost to the insurance company. You can’t declare that loss on your taxes. But you can exchange your permanent life insurance policy, where the cash value grows super slow, for a low-cost variable annuity, where the previous cash value of the permanent life insurance policy can be invested in a low-cost index fund and where it can skyrocket much faster.
Yes, variable annuity (VA) is a four-letter word, but in this case, I will outline why the Fidelity low-cost VA product acts as a savior when doing a 1035 exchange. The low-cost VA can quickly grow back to your cost basis tax-free. Once the variable annuity grows to cost basis, you surrender the VA and voila, you’ve made up the money you lost to the permanent life insurance policy without having to pay taxes on it. If you don’t surrender the annuity and it continues to make money, those profits become taxable when you surrender the policy—and if you surrender before age 59 1/2, the profits get hit with an additional 10% penalty. So, do yourself a favor and nix the annuity once it hits the cost basis and invest elsewhere.
Let me use my wife and I as an example. Our combined whole life policies had cost bases equaling $170,000. Again, this is the amount in total premiums we had paid into our policies after seven years. The combined cash value in our policies totaled $120,000. That means we had lost $50,000 to these malicious policies. Some investment, huh! But after I got financially literate, I 1035 exchanged our policies into low-cost VAs at Fidelity (which, in my analysis, is the best low-cost VA), invested those in total stock market and total international subaccounts, and waited a year and a half. By then, our policies grew by $50,000, and we surrendered our annuities. No taxes due! We then placed that money into our taxable account.
Contrast this to if we had just surrendered our whole life policies and directly invested them into taxable. Say we made back our $50,000 loss in that taxable account. Let’s assume we didn’t need the money anytime within a year, so we would be at long term capital gains rates. Since we are high income and very possibly will be spending a lot in retirement, we will assume the highest long term cap gains brackets, which would be 23.8% federal and 8.97% in New Jersey. So, $50,000 x 32.77% = $16,385 is the amount I saved in taxes by doing the 1035 exchange. Not a bad chunk of change, especially given how easy this process is, which I will outline below.
My wife's whole life insurance $25,000 loss . . . painful
Why You Should 1035 Exchange with Fidelity
Now that you want to do a 1035 exchange given its tax benefits, which product should you use? Easy: use Fidelity’s low-cost variable annuity, called the Fidelity Personal Retirement Annuity. No, I am not getting paid by Fidelity, but it has the lowest cost VA out there with the lowest fees. I mentioned earlier that variable annuity is a four-letter word, but after analyzing Fidelity’s low-cost VA product, it has basically eliminated many of the dirty parts—namely fees—of a VA. It’s almost as if Fidelity designed their VA to help clients get out of bad insurance products.
FiPhysician compared low-cost VAs and showed why Fidelity came out on top. As you can see from the article, you can invest in Fidelity’s total stock market subaccount at 37 basis points, total international at 44, and total bond at 39. These are the lowest-cost options of any low-cost VA; in contrast, the average cost to invest in a VA subaccount is as high as 224 basis points. The article is a little outdated since Vanguard no longer offers a low-cost VA and sold their VA business to Transamerica. Finally, there are no surrender fees with Fidelity’s VA. Thanks to its low costs, Fidelity it is!
More information here:
The 1 Portfolio Better Than Yours
What to Do If You’re Not on the Same Financial Page as Your Spouse
How to Do the 1035 Exchange
I have to give credit where credit is due. The original way I learned to do the exchange was by reading a comment by TJ on the WCI post How to Dump Your Whole Life Policy.
I have modified the steps based on my experience. Also realize that my whole life insurance term policies were covering my life insurance needs. Before you do these steps, make sure you have appropriate term life insurance in place.
- Ask for an “in-force illustration” of your permanent life insurance policy from your “advisor” and see if it is worth doing the 1035 exchange. The in-force illustration has all the information about your permanent insurance policy, including the important cash value and cost basis numbers.
- Tell your “advisor” to suspend premium payments because you are having trouble affording the policy (this was totally honest in my case, but you should also do this so you stop throwing good money after bad). If you don't do this but rather just stop paying the premiums, the policy may automatically take premium payments from your cash value. Make sure to formally ask that premium payments get suspended.
- Call your permanent life insurance company and say you want to do a 1035 exchange. Note that you don’t have to call your “advisor;” that way, you can avoid any unpleasantness. Just call the company’s general number. This worked out great in my case. My buddy/”advisor” who sold me the whole life policies later called me to try to convince me to turn the policy into “paid-up” status or to lower the premiums, etc. Ignore these desperate attempts to get you to keep feeding the beast and losing money.
- In my case, Northwestern Mutual referred me to their “1035 Exchange Unit” where I had to ask for a “Request for 1035 Exchange” form to be sent to me. Note: I am not sure if other insurance companies do this.
- Complete your portion of the “Request for 1035 Exchange” form.
- Call Fidelity and say you want to open a low-cost variable annuity and say you are doing a 1035 exchange. Forward them the “Request for 1035 Exchange” form, and Fidelity will fill out its portion and send it back to Northwestern Mutual. Note: I am unclear if other insurance companies have this type of form or even a 1035 Exchange Unit. This was how it was done with Northwestern Mutual, specifically.
- Fill out the required Fidelity forms and send them back.
And that’s it! The process only took a couple of weeks and not even an hour of my time. Fidelity would keep me up to date on the exchange throughout the whole process, and suddenly BOOM! I logged into our Fidelity accounts and there was our cash value, now in the domains of newly minted low-cost variable annuities.
Next came investing that cash value.
Investing in Fidelity’s Low-Cost Variable Annuity
What should you invest in the Fidelity low-cost VA? I would limit it to three subaccounts due to cost (when in a variable annuity, the funds are referred to as “subaccounts”):
- Total stock market index fund (cost of 37 basis points)
- Total international index fund (cost of 44 basis points)
- Total bond index fund (cost of 39 basis points)
There is an S&P 500 subaccount and an extended market index subaccount that are 35 and 38 basis points, respectively, that are also reasonable due to their low cost. All the other subaccounts within the Fidelity low-cost VA have fees that are way too high, so don’t even bother considering them. Out of these 3-5 subaccounts, you would invest as per your written financial plan (I hope you have one!) along with your chosen asset allocation. I would encourage you to fill this VA with all equities as part of your overall asset allocation because:
- You want this higher fee account to grow quickly so you can get out of paying those higher fees.
- You are making up a loss tax-free, and, in general, you want your highest-growing assets to grow tax-free.
- There is a little bit of friction when it comes to buying and selling in this account. You are limited to six transactions per year, and any other trades after that incur a $15 fee. There are also a ton of extra clicks to buy and sell in this VA. But when you see the value of your low-cost VA tank in a bad bear market, that little bit of friction can actually be the barrier you need to stay invested.
After you are fully invested in your VA, just be patient. In no time, you will be hitting your cost basis tax-free, closing your VA, and taking that money you lost on your stupid whole life policy as if nothing happened (at least, try not to think of the opportunity cost of not having that money invested; it’ll just make you mad!). From then, be sure to invest as per your written financial plan. For me, the money was originally supposed to be for retirement, so I placed that money in my taxable account as per my asset allocation of 65% total US, 25% total international, and 10% small cap value.
The Psychological Benefit of a 1035 Exchange
The best benefit of the 1035 exchange was not really the tax benefit of making up my $50,000 loss on our whole life policies tax-free. Instead, it was the psychological lift I got from being proactive about getting my financial life in order. It was amazingly cathartic to have a plan to get out of the evil clutches of whole life insurance. Almost like court victim impact statements, my going through this process was me yelling at my financial perpetrators, “No more!” It was also an affirmation that I was well on my journey to financial literacy.
Permanent life insurance is a legal form of financial battery, and I have PTSD. Trauma survivors have been shown in fMRI studies to have decreased connectivity to the anterior insula, amygdala, and anterior cingulate cortex of the brain. I didn’t check my brain as fMRI’s don’t grow on trees, but I would assume after my $50,000 loss from whole life that these structures would not light up in my brain before doing the 1035 exchange. After completing the 1035, I assume, and at least feel as if, I have regained connectivity within these cortical areas.
Research also focuses on the forgiveness circuit of the brain to be the left ventromedial prefrontal cortex, posterior cingulate gyrus, and right temporo-parietal junction. After doing the 1035, I feel these areas of my brain have reinforced connectivity. I can’t say it’s because I have forgiven the insurance company that screwed me out of $50,000—the equivalent of 25 overnight calls for my wife or 12 weeks of grueling neurology work at the highest RVU weeks for me, time that kept us from seeing/spending time on our marriage or loving our kids.
No, the 1035 exchange helped me forgive somebody who was previously so financially stupid, somebody more important that I will live with for the rest of my life: myself.
Have more questions about life insurance and what kind of policies would be best for you? Hire a WCI-vetted professional to help you sort it out.
Are you a fellow permanent life insurance victim? Are you a good candidate to do the 1035 exchange? Is the potential tax benefit of a 1035 exchange worth your time? Do you think I have overblown the psych benefits of a 1035 exchange?
The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2025); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.
This is fantastic Rikki. I appreciate you telling your story with such honesty, vulnerability, and humor which I hope/believe will help others feel motivated to move on from these terrible policies while granting themselves some forgiveness and grace in the process.
I also appreciate the step-by-step pragmatism of the post. Having a “how to” resource on these 1035 exchanges to point friends and clients towards will be very helpful for me and the many people I recommend this strategy to.
yeah thanks dude this was something I was looking for when I was trying to do the 1035 exchange and I had to scour the WCI forums. hopefully this makes things easy for other whole life victims!
First, thanks to WCI staff for many referrals over many years. Second, Dr Racela’s post needed more attention to MEC implications for early 1035s. I once learned of a man who tried to pledge a MEC for a loan and was refused. Third, I have recently engineered for clients two 1035 transfers to paid up MEC policies in top insures with the result of 4.5% tax-free returns to surrender without market risk. Fourth, subject to the condition that a WL policy must be held to death for tax-free returns, except for some policies sold at retirement that don’t produce a taxable gain on surrender, if WCI says OK to 20% in bonds, why not in WL where they’re not taxed annually?
While lots of people see WL and bonds similarly due to similar long term returns, there are notable differences between them and the differences certainly don’t all favor whole life. Early returns and liquidity for instance.
thanks James for reading and in all honesty I’m not sure what you mean regarding MEC implications. My whole life policy had paid up additions to the MEC limit and I still wasn’t going to break even on my policy until 15 years in. I just wanted out as whole life was not helping me achieve my financial goals of optimizing the most money I could use in retirement.
I did the 1035 exchange a couple of years ago and my fidelity low cost variable annuity has almost grown back to basis ($360,000). As a surgeon, I do think about asset protection. Although I realize the chance of an above policy limit is small, it’s not zero. In my state (Florida) annuities are asset protected. I’m debating whether I should leave the annuity in place vs. surrendering it and investing the money in taxable. If my taxable account is in both my name and my husband’s name, is that asset -protected in the case of an above policy limit malpractice claim? If it offers the same protection, I would surrender the annuity. If not, I may leave the annuity in place. Any suggestions are welcome. Thanks!
I’m not sure you have the correct understanding of how asset protection works. You have to declare bankruptcy for anything “to work.” But Florida has particularly strong asset protection laws. In bankruptcy you can generally keep 100% of annuity value. Tenants by the entirety titling is also available for both real property and something like a brokerage account. So if just you were sued successfully and had a huge above policy limits judgment not reduced on appeal, in theory they could not take your taxable account because your husband owns the whole thing. But nothing is absolute in asset protection law and I suspect there would be fewer situations where a creditor could get your annuity in bankruptcy than when they could get your taxable account.
Hi Shareen I remember when you first did the 1035 exchange! congrats on it growing back to cost basis!!! Yeah I wouldn’t keep the annuity just for asset protection. As Jim mentions the likelihood of being sued above policy limits are super low. Also, that annuity can’t be taken out of until age 59, so it kills any FIRE aspirations you might have. Then there is also the fact that the money will come out at ordinary tax rates if you surrender the annuity, or if you annuitize it is a blend of cost basis/growth when it comes out but still not at long term cap gains rates. finally, it is a tad bit more expensive but over time that 40bps of extra cost can add up!
Hi Shareen,
What fund or stock did you place your 1035 exchange in, if you don’t mind me asking? I’m approaching year 2 in October and have gained about 16k but need another 12k to reach my cost basis. Would definitely like to access this money sooner rather than later if possible without a loss.
I used the lowest cost, broad based index fund that Fidelity offered at the time. I have since surrendered and the money is in the zero the fidelity total stock market index fund.
This is a small thing, but surely the annuities didn’t reach exactly $170,000 at the time you took them out, there was likely a remainder. Did you take out the entire balance and just pay the tax and penalty? Or did you leave it in the annuity? My guess is if you’re the kind of person that tries not to check accounts too often, you might surpass your break-even number and end up with some balance subject to taxes and penalties.
christian you got me man! yes, the policies did go over by a hundred bucks or so, so I just paid taxes and penalties on that growth, but it was minimal 🙂
This excellent piece perpetuates a common mathematical error. Nothing can be “10X cheaper” unless going negative (and thus producing a profit). One time(s) cheaper will be zero, while ten times less will be minus nine times the original amount. What the author intended to write was likely one tenth as costly.
Thanks Dave not sure I understand but might just be semantics. I am just going by the expense ratio of 4bps outside the annuity and 40bps within the annuity for a total stock market index. 40 divided by 4 = 10.
Wow, a $50,000 loss, that’s crazy. It’s worse than that time when I got into private lending and loaned out $10,000 to someone, I was down 100% (100% front load fee!) instantly as I couldn’t access any of the money for years. That’s when I realized I was duped and that private lending was evil.
yeah dude, don’t feel so bad- I got screwed 5x more than you did 🙁
I’m in the same position and trying to figure out what to do.
The NW mutual policy was initially sold to me as a Roth substitute. That is, the after tax money could be withdrawn tax free, and the earnings could be withdrawn as a loan that would’nt be paid back. Do you think this is a good way to get Roth dollars?
Also, would there be any advantage to keeping the Fidelity annuity through retirement? This would provide a fixed source of income for fixed expenses.
Thanks.
No, a whole life policy is NOT a Roth IRA.
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
Yes, it can make sense to hold a whole life policy that you never should have bought. Yes, it can make sense to hold an annuity until death. But for most people sitting on a big loss in their whole life policy, the right move is to exchange it to a low cost annuity, let it grow back to basis, and then surrender it and invest the money in a retirement or taxable account.
Thank you for this article! I am in a similar situation with a WL policy I don’t want and this guide is very helpful.
I am starting the process now but when I tried to get my premium payments suspended all they could offer me is a “surrender of additions” which would just take money out of my policy. Did anyone else get this response when they started this process?
Yes, if you don’t cancel or exchange the policy it will just pay the premiums out of your cash value.
Hey LaBianca, I had more options but it might be because I was at Northwestern Mutual and the whole life policy was structured differently. I had the option you mentioned of paying the policy premium out of the cash value. I also had the option of suspending payments while I did the 1035 exchange and at least in Northwestern Mutual there was a couple of months before they would start taking the premium out of my cash value. Finally, there was the option of “paid up” status where whatever I paid in premiums would reflect a lower death benefit, but I didn’t have to pay into the policy every again and that cash value I had now can grow very slowly and I can borrow against it/draw from it with the basis coming out first. I did not take this last option as it was not clear to me if my cost basis would now be whatever my cash value rather than premiums paid.
I would do the 1035 exchange and if this is the only option they offer you then just try and get the ball rolling on the 1035 so that they don’t take out money out of your cash value to pay your premium.
Hi Rikki and WCI,
Are there any follow ups for those of us with less than 10K cash value? NW Mutual gave me all kinds of options as far as going “paid up” now versus paid up at a later age or reducing the death benefit to reduce payments all without changing to an MEC. My annual premium cost paid monthly is 6K and I’ve been paying in 3.5 years (cost basis of ~21K) but only have a cash value of just under 6K. If I simply cancel I’m paying a huge stupid tax price; however, better to pay the smaller stupid tax now than the bigger one later. Are there any other options for this scenario since I can’t do a 1035 exchange?
Thank you- really appreciated this post!
< $10K in cash value? I think I'd just cash it out and walk away. Sorry this happened to you.
Sorry no real other options 🙁 But on the bright side, you only lost $15k. They say comparison is the thief of joy, but only when there isn’t a bigger sucker compared to you. I lost $50,000!!!! And the opportunity cost of investing $28,000/yr for 7 years in a low cost index fund. And my wife’s respect. And my own self-respect. thanks NWM!
your stupid tax is nothing compared to mine! congrats on getting financially literate and getting out of whole life much sooner with much less damage than I did!
Just cash it out and take that money and put in taxable as per your chosen asset allocation. And hone that anger you feel to read all WCI books, blog posts, have a written financial plan and achieve all your financial dreams!
Hi, I am assuming you already surrendered your policy, but I am in a similar situation and I think I found some other options for us. Anyone reading this who has less than $10000 cash value could look at my comments further down in this comment section.
Hi Rikki and WCI,
Great post! I’ve been looking for something with this type of detail about WL 1035 exchanges and VAs.
I unfortunately have 2 WL policies and want to surrender both. One was opened 15 years ago and another was open 5 years ago when my agent convinced me to convert some of my term insurance to WL. My first policy’s CV is slightly above cost basis, while my second policy’s CV is well below cost basis but not high enough to meet the $10k minimum for Fidelity’s VA. I wanted to know if I can do a 1035 exchange for both my WL policies into the same Fidelity VA account to meet the minimum. If this is possible will the gain in WL#1 reduce my loss in WL#2 and due to the higher account balance I could reach my original combined cost basis quicker?
WL#1
CV: $37,331.00
Cost Basis: $35,552.03
Gain/Loss: $1,778.97
Annual Premium: $2,517.50
WL#2
CV: $8,280.00
Cost Basis: $14,707.08
Gain/Loss: $6,427.08
Annual Premium: $2,936.80
The other thing is if I pay my WL#2 policy premium for another year my guaranteed surrender value is $10,891, which would make the Fidelity VA minimum. Should I just pay for another year and move only WL#2 to the Fidelity VA and cash out WL#1 and pay a little taxes on the gain? I really don’t want to put any more money into WL#2.
Is it worth the hassle compared to buying any needed term and just cashing out? I wouldn’t exchange to preserve a $4K or even a $6K loss. Maybe a $40K loss.
Hi, in case anyone else in this situation is reading this in the future, I was able to confirm that you can do two 1035s to transfer two whole life policies over to the same low cost variable annuity with both Fidelity and Transamerica, you can see my comments further down in this comment section.
Hi Rikki and WCI,
I have a whole life policy (2 actually, one is older and was started by my parents, but I am talking about the newer one here) from Northwestern Mutual and am trying to get out of it – if possible before I end up automatically paying another $500+ monthly premium at some point in the next 3 days (they seem to charge my bank account on either the 2nd, 3rd or 4th of every month). I have been paying premiums for 18 months, my annualized premium is $6,456 so I have a cost basis of ~$9700, and my cash value is $965. I am wondering if I should just try to call Northwestern Mutual early tomorrow morning and surrender my policy before I make the December premium payment, or if there is instead some option to use a 1035 exchange. I know in this post you said I don’t have that option since my cash value is <$10000, but there are a couple of things I am confused about:
For the White Coat Investor, you said in response to Dan's comment above that you wouldn't exchange to preserve a $4K or $6K loss, but wouldn't that still be 1 or 2 thousand dollars in tax savings? Perhaps you just value your time higher than I value my own.
I found here https://www.bogleheads.org/forum/viewtopic.php?t=410327 a discussion about a low cost variable annuity from Transamerica which seems like it might only require a $1000 initial value. I am wondering if you just missed that during your search Rikki and if that is something that might be worth it for me to do if I do end up paying December's premium and the cash value goes up beyond $1000.
Could I use a 1035 to transfer the $965 into a Fidelity variable annuity and then make up the rest of the $10000 required starting value with cash? Or is the way that it works such that I am unable to use both a 1035 and cash to meet the $10000 starting value? Or perhaps even if I could make up the rest of the starting value with cash, you're implying it wouldn't be worth a couple thousand in tax savings due to the fees lowering the interest I'll get on that $10000 when compared to other investments?
For Rikki, you said in response to LaBianca's comment above that you were able to suspend payments of your premiums while you did the 1035 transfer. If I were to do that (assuming I can even do that), do you know if I could still surrender my policy and get the cash value instead of going through with a 1035 transfer? Basically I just want to buy some time to figure out if I should do a 1035 or if I should just surrender it.
Thank you so much for this website by the way. If I didn't find it this weekend then who knows how much more money I would've lost to the crooks over at ************** before realizing what was happening.
I answered some of my own questions and have some updates after calling Fidelity, Transamerica and Northwestern Mutual this morning.
For my second question, about the Transamerica annuity, it turns out the minimum would actually be $5000. However, the other Northwestern Mutual whole life policy I have has a cash value of a little under $6000, and I could transfer them both over with 1035s into the same variable annuity. So this is what I will likely end up going with, as it also has low fees (around 40 basis points total) and I would be able to meet the minimum initial investment.
For my third question, about making the minimum initial investment using a combination of 1035s and cash, I confirmed that that is allowed. So if I end up wanting to use Fidelity instead of Transamerica, I could still do that even though the cash value of my whole life policies is less than their $10000 minimum.
For my fourth question, about buying time to decide between surrendering and doing a 1035 before having to make my December premium payment, I was able to call Northwestern Mutual and get the December payment to halt (they had actually already started the process of making that withdrawal but they were able to stop it before it charged my bank account). The reason I was able to do this without immediately surrendering the policies is because they have a 31 day grace period for missed premium payments. And as for the possibility of the premium getting automatically payed out of my policy’s cash value, that would only occur 50 days after missing the premium payment, so I still have a month to figure out what I’m going to do.
I will post another comment here to update when I do end up finalizing all this, as this may be useful for other people who have significant losses but less than $10000 in cash value.
Thanks for sharing your experience. Glad it can be done with low amounts, but I do question the utility of it. The smaller the exchange, the less bang for your hassle that you’re getting.
Yea, $1-2K isn’t a big enough loss for me to buy an annuity for. I mean, that’s like $300-600 in tax savings for most people, less whatever the additional costs of the annuity are. How much IS your time worth?
Be careful posting publicly things like “the c***** at such and such a company.” I don’t like the company any more than you do, but a statement like that is generally easily provable as libelous/defamatory and if we get a subpoena, we will turn over your IP address etc. What they did is technically legal even if perhaps unethical, so you can’t call them crooks for selling you something you shouldn’t have bought. I edited out the name of the company from your post and hopefully that’ll keep us both out of trouble. It’s not like all the WCIers don’t already know which company it is anyway.
Hello,
I have a question about taking out the money after 1035 exchange into the Fidelity annuity. Will I have to pay a 10% penalty if I take the money out before age 59 1/2? My cash value is about $15,000 and the basis I paid was over $30,000 in the whole life policy. If I get to my basis in the annuity, will I not have to pay the penalty if I take the money out?
You would only owe income tax and 10% on EARNINGS. Meaning you sell it for more than your basis in the insurance policy. The idea behind this strategy is to exchange it to an annuity, let it grow back to basis, then surrender the annuity tax and penalty free. No penalty in that situation.
Not sure I’d bother for a tax-free $15K, but that’s your call as to how much tax free growth is worth the hassle. Is doing all this worth $5K in saved taxes to you? Or do you just need to get any needed term insurance in place, surrender, reinvest your $15K, lick your wounds, and move on?
Hello WCI,
Following up on Merna’s question, I just called Fidelity to surrender my Fidelity deferred annuity and they stated I would have to pay the 10% fee since I’m surrendering it before 59 years old. I am $186 below my cost basis as of today. Is the representative at Fidelity misinformed?
Kind of. You will have to pay the 10% penalty on all of your gains. Since you’re below your basis, there are no gains to pay on. You certainly don’t have to pay a 10% penalty on basis in a non-qualified annuity.
This is a non-qualified (outside of retirement accounts) annuity, right?
This is a retirement deferred Annuity it says. When I had asked Fidelity, this was their only annuity they said they offered.
Where did the money that went into the annuity come from?
Came from Whole Life policy. I called back and another representative said I will only be responsible for fees on the gains. Just have to submit the form and should be good to go.
Then it’s non-qualified. There will be no taxes due.
Rikki,
I am sorry to hear that happened to you. Whole life is a scam and you are right in the fact that it will take you 10+ years of funding it to maybe breakeven.. NWM also offers potential dividends that aren’t really a thing as I am currently surrendering a NWM policy as we speak that has been funded for 13 years and the client hasn’t broke even. They are supposed to earn 3-4%/year in dividends but this policy clearly did not. With that said, you can get those returns in a HYSA. IULs are not much better as they credit you based on an indexes return. These are both insurance products sold by insurance agents that passed a 120 questions insurance exam but sell these things as investments.
With that said, VULs if funded properly up to the MEC limit, can work as a true investment and offer actual market returns. But for this to work and to justify paying the fees that come with these products you need to have a top health rating and a very low cost of insurance. You also want to have the least amount of insurance as possible to fund them up to MEC limit so most of the money in premiums you are paying is going in the cash value and being invested (and not towards fees).
Again, I am sorry that happened to you NWM gives financial advisors a bad name. They also sell disability to physicians and don’t have a true own-occupation of definition. But we continue to meet folks that have these products and sadly, they are like a fly on the wall that will always be there I guess because people see that they sponsor the NCAA tournament, instantly trust them, and then get sold an underfunded whole life policy
Market returns less fees and insurance costs you mean. It’s been a while, but VUL has been discussed here pretty extensively.
https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/
Thank you so much to the whole WCI team for everything I’ve learned from you all! My husband and I each have a whole life policy at NWM that we’re looking to get out of, and we’re thinking of doing the 1035 exchange to the low cost annuity at Fidelity. For each policy, we’ve put in about $42,000 and each has a cash value of about $21,000 right now. So if we just surrender both, we’re out a little over $40,000 total. I have two questions about this process.
First, how long is it likely to take for this annuity to grow back to the cost basis? Of course there will be variability, but if we invest in the subaccounts suggested in the article, are we likely looking at something like 2 years, or 10?
Second, can both whole life policies be put into the same annuity? Or will we have to do each separately?
Thanks again!
1.Depends on what you invest the VA in and how well it does. But if it earns 7% a year, $20K doubles to $40K in a decade. If you earn 10% a year, it doubles in 7 years.
2. I don’t actually know. I bet you could put them both in the same one but I don’t know for sure.