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How to get rid of IUL with the least $ loss

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  • How to get rid of IUL with the least $ loss

    Sorry for reposting this question. I originally posted it as a reply to an old 2018 thread on IULs so the answers I got were pertaining to the original 2018 topic vs mine.

    How do I get out of an IUL policy I purchased 3 years ago from a CFP I since then fired? Trying to undo the mistake without hopefully costing me a fortune. Someone suggested a 1035 conversion to a Vanguard Variable Annuity. Is an annuity actually a good product or just another costly gimmick like IULs? Any other thoughts on how to get rid of an IUL policy with the least amount of $ loss? Thanks very much!

  • #2
    The 1035 exchange to a low cost annuity allows you to preserve the cost basis. For example, if your cost basis was $30k and your policy is now worth $5k, you have a $25k loss. If you cashed out the policy, you would get your $5k back, but wouldn't get to do anything with the $25k loss you have. If you instead did a 1035 exchange to a VA, you could invest the funds and once the VA reaches $30k in value, you could get out of the VA without any tax consequences because you were able to preserve your original cost basis of $30k.

    Depending on the size of the loss, it may not be worth the administrative headache to go through the 1035 and monitor the VA of when to get out.

    If you posted more details on the policy, I am sure people would provide more specific thoughts!
    Financial Planning for Physicians | [email protected]


    • #3
      Thanks Andrew! The Indexed Universal Life policy is $300K death benefit, with $18K cash value at this time, so $318K total with surrender charges of $6K (not sure yet if there are any additional penalties). I pay in about $4300 per year. It was advertised to me as a "sure way to supplement my retirement income tax free with no loss regardless of the market performance" when I retire at 55 (13 yrs from when it was purchased). According to the illustration I was shown, the "break even" point was going to be at age 55, which is when withdrawals would have started. I also noticed that I could pay a minimum of $1500 annually for the policy not to lapse. Given these details, what's the smartest path forward? Thanks so much.


      • #4
        Ask the agent/insurance company:

        - How much you would get if you cashed out the policy today after all expenses

        - What your cost basis is

        Based on your figures, it sounds like it should be $12k that you would get ($18k CV minus the $6k of surrender charges). With you having it for ~3 years, your cost basis is probably ~$12-16k depending on how many payments you've made. If that's the case and you had a $4k loss, I don't think it would be worth the headache of trying to 1035 it to an annuity to preserve a $4k loss. If you are able to get out of the policy with $12k and only a $4k loss, you can consider it a relatively cheap lesson. Don't beat yourself up or continue throwing money at something that you know is not right for you.

        If you need life insurance and that was part of the reason you had the IUL in the first place then you'll want to look at term life insurance before cashing out the UIL. You'll have a significantly cheaper life insurance premium for more coverage (if needed) and then you can invest the rest of your saved $4,300 premiums each year. And hopefully you never have to worry about looking at an insurance "illustration" ever again
        Financial Planning for Physicians | [email protected]


        • #5
          Well said Andrew, thank you very much! Live and learn, for sure.


          • #6
            Vic & Andrew, thanks for the post and reply.  Andrew, I wonder if you'd recommend the same for my situation.  I'm in an almost exact situation as Vic(X2).  5 years ago, my well-intention cousin sold me a 7702 plan that turned out to be an IUL policy from Transamerica.  I not only purchased one for myself, but I also purchased another for my 4 yo daughter at the time, hoping that I could withdraw the accumulated cash value to pay for her college tuition once she turned 18 yo.  As I am starting to receive financial education through research and WCI reading, I'm ready to cut my losses the IUL policies that I purchased.  Thank you for any inputs!  So, here's my situation:

            My Policy as of 09/13/2019

            -Age at purchase 41 yo.  Purchased Oct 2014.  Face Amt: $100,000

            -Premium Paid(Cost basis): $19,200, ($4,800 annually X 4 yrs)

            -Cash Value: $17,327 = Index acct value, New Money Rate 0.75(???)

            -Surrender Value: $14,836

            -Coverage Amt Overloan Protection Rider: $100,000

            -Coverage Amt Accelerated Death Benefit Rider: $356,250

            -Coverage Amt Freedom IUL II Base Insured Rider: $375,000

            My Daughter's Policy a of 09/13/19

            -Age at purchase 4 yo.  Purchased Oct 2014.  Face Amt: $500,000

            -Premium Paid(Cost basis): $24,278($398 monthly X 61 mo)

            -Cash Value: $21,044 = Index acct value, New Money Rate 0.75(???)

            -Surrender Value: $13,454

            -Coverage Amt Accelerated Death Benefit Rider: $375,000

            As Andrew indicated, what are some 'administrative headaches' associated with going through the 1035 exchange?  What about the fees associated with Variable Annuity?  Are they costly as well?

            Vic, fyi: I did called Vanguard yesterday to get some info regarding the transfer & 1035 exchange.  They said that Vanguard is ending its annuity offering to investors in a few months(end of 2019), and are completely transfer its client servicing and account administration to Transamerica by the end of 2020.

            Thank you for any inputs


            • #7
              The administrative headaches are just tasks that you have to do more in general. Additional paperwork, you have a VA that you wouldn’t otherwise want to have, you’ll spend time tracking the cost basis relative to market value. It’s not like it’s overwhelming, but for a high-income earner, it depends what you place the value of your time at and if you want to worry about the logistics and make sure you’re doing everything correctly. In some situations, the dollar amount of the loss is large enough where it is worth it, but when the dollar amounts are smaller, it’s a personal preference of time v. money.

              Your policy – The CSV and CV are relatively close, but it’s still worth a look at an illustration to see what it would look like in a year or two to see if you may be better off keeping until the surrender period is up. Looks like it might be a 7-year surrender charge period.

              Daughter’s policy – Same thing as above, you may be better off keeping for a longer period until the CSV and CV get closer. It may be a 10-year surrender period given the differences in CV and CSV is much wider.

              Variable annuities can be expensive but there are some providers that offer low cost ones without surrender charges, which is why the 1035 can make sense.
              Financial Planning for Physicians | [email protected]