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Inappropriate Whole Life Policy of the Week

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  • WCI’s podcast inspired me to share our policy. I think highly unlikely we will keep the policy until death, but certain details are holding me back from canceling right away. Feedback is welcome.

    This is an AXA 900k variable life policy sold to my in laws for my wife back in 2013.
    Initially funded with a lump sum, then my wife has been paying $300/month into it since.
    The value of the account is tied to various diversified stock index funds. You can see in the attachment that stocks did quite well over this 12 month period.

    Total premiums paid (basis?) = $37,836.17
    Policy account value = $38,756.48
    Cash surrender value = $28,625.21 (after surrender charge)

    PROS:
    If you look at what they call “Insurance Costs” we are only paying $147.10 yearly for the $900k insurance, which is very cheap. However, I suspect this number is low artificially, and the real costs of insurance are tied into the other (very high) charges.
    After the plan’s 10 year anniversary, supposedly the surrender charge will hit $0 and we can access the entire policy account value.
    Also after the 10 year anniversary, the interest for loans against the policy decreases from 3% to 2%.

    CONS:
    As you can see, they skim 4% off the top every time money enters the account. Ouch.
    “Other Charges” are huge. You can see that they vary with the total account value, and roughly add up to 5% of account value per year.

    Assessment of options:
    1. Take the money out now. This would incur a >$10k surrender fee, and might have to do the switcheroo with a variable annuity to recoup losses.
    2. Take the money out in 2023 without surrender fee. This means 5 more years of charges (also around $10k), but has the benefit of 5 years of insurance coverage. If the value grows enough to keep up with the charges, maybe we can sell close to basis and not have to worry about losses. Regardless, I think we should stop paying into the plan and let it support itself.
    3. Keep paying into the policy and use it for infinite banking? No matter how many times I hear about this, I can’t quite wrap my head around how it works. If we take a loan against the policy, is the 2% interest going back into our policy value?
    Click to expand...


    I dont get it, this is still really terrible. The math is simple. 5 more years of charges at 300 a month is 18K. Time value of money (opportunity cost) and avoiding the fees and bs is all very worth it. This policy has barely kept afloat at neutral and its been in force literally during the best stock years ever.

    As for the insurance part, the 900k is crap. I have 3M term on me laddered at 2/20, 1/30 and 1/10 for my wife and I think we pay less than 2k per year. Term is very inexpensive. Stop the bleeding. The insurance cost for the 900k is not artificially low, your fees are artificially high.

    Comment




    • Stop the bleeding.
      Click to expand...


      That needs to be emphasized in bold. I don't understand why I would continue to pay $300/mo for the next 5 years.

      Get some term then cancel the policy. If I read your post correctly, you didn't even buy the policy (your in-laws did). I suppose you could get them to continue to pay the $300/mo (I don't think this is a great idea though).

      When I told my parents years ago that I wasn't taking over the whole life insurance policy that their financial advisor had them setup for me when I was an infant, they kept the money   Was this supposed to be a financial gift from your in-laws?

      Comment







      • Stop the bleeding. 
        Click to expand…


        That needs to be emphasized in bold. I don’t understand why I would continue to pay $300/mo for the next 5 years.

        Get some term then cancel the policy. If I read your post correctly, you didn’t even buy the policy (your in-laws did). I suppose you could get them to continue to pay the $300/mo (I don’t think this is a great idea though).

        When I told my parents years ago that I wasn’t taking over the whole life insurance policy that their financial advisor had them setup for me when I was an infant, they kept the money  ???? Was this supposed to be a financial gift from your in-laws?
        Click to expand...


        Totally agree. It's the classic "throwing good money after bad".

        Comment


        • The $300/mo are what they call a "premium" but really they are voluntary contributions. It could just as easily be or $50 or $100 and the policy will continue to pay for itself out of the cash value. The $300/mo has nothing to do with what the policy is actually costing us. If you look at the screenshot I attached, the actual costs are:

          $147.10 "insurance cost" for the entire year - this is what I'm referring to as artificially low
          $1956.50 "other charges" for the year - this is where the problem is, and it's not clear what all these fees are really paying for

          Which was actually $175.30 per month over this 12 month period. I am well aware that is still more than the equivalent amount of term life, but that's not what I'm comparing here. I'm comparing the cost of of the surrender charge of >10k versus the cost of keeping it for 5 years, after which point the surrender charge will no longer apply.

          Edit: Also, when I say I am considering keeping this plan around, I don't mean in lieu of term life.

          Comment


          • The way I read the statement is that in the twelve month period ending in 11/17, you/wife contributed $3600. $144 was taken out immediately for no apparent reason (what possible administration expenses are justified for an electronic transaction with negligible frictional cost?). Another $147 for "insurance". And $1812.50 for administration and sales commission. A measly $1496.40, less than half of what you pay, filters into the investments (which are likely high expense ratio funds).

            If it were me, I would not add a single penny more to this scheme. Her parents obviously meant well for her, but went about it the wrong way.

            Comment




            • The way I read the statement is that in the twelve month period ending in 11/17, you/wife contributed $3600. $144 was taken out immediately for no apparent reason (what possible administration expenses are justified for an electronic transaction with negligible frictional cost?). Another $147 for “insurance”. And $1812.50 for administration and sales commission. A measly $1496.40, less than half of what you pay, filters into the investments (which are likely high expense ratio funds). If it were me, I would not add a single penny more to this scheme. Her parents obviously meant well for her, but went about it the wrong way.
              Click to expand...


              Her parents were sold this plan (and others) by a sleazy friend. They have specifically advised me to stick to term life, so their eyes have since been opened. I'm sure the friend is the only one who would mind us ditching it.

              I'm not sure expense ratios even matter. Later in the document, they appear to assign the "insurance costs" and "other charges" to each of the funds weighted equally. It's so bizarre, it makes me suspect I don't actually own the funds at all (as the fees seem kind of arbitrary), but rather the price of the fund is merely used to determine the value of the account.

              Comment




              • $1956.50 “other charges” for the year – this is where the problem is, and it’s not clear what all these fees are really paying for
                Click to expand...


                See if you can dig up the annual compensation paid to the insurance company's CEO and other executives.  That's what these charges paid for.

                Comment


                • This week's edition:
                  I have a whole life policy with Guardian that I am considering dumping. I have had it for 3 yrs, cash value is 6800, I have paid in about 24000.

                  Let's see. that's got to be an annualized return of what, -25% per year? Sweet investment eh? Can't lose money eh?
                  Helping those who wear the white coat get a fair shake on Wall Street since 2011

                  Comment




                  • Let’s see. that’s got to be an annualized return of what, -25% per year? Sweet investment eh? Can’t lose money eh?
                    Click to expand...


                    I want to 'like' the post b/c I approve of the sarcasm, but I think you really need a dislike button.

                    Comment


                    • If any body cares to explain or point to a link, what is the "cash value" portion of whole life insurance ? like how does it accumulate? I guess you pay premiums and part of it goes to investment and rest to cash value? Curious if there is a post that explains the nuts and bolts of this product.

                      Comment


                      • Each policy by each insurance company is going to be designed differently, but usually they are opaque enough that you can't tell why the cash value goes up or down, or where that money is going. This is most likely intentional. They don't want you to understand the product, or you would be able to see that it's a bad decision up front. If someone knows otherwise, I would like to see a link also.

                        Comment






                        • Each policy by each insurance company is going to be designed differently, but usually they are opaque enough that you can’t tell why the cash value goes up or down, or where that money is going. This is most likely intentional. They don’t want you to understand the product, or you would be able to see that it’s a bad decision up front. If someone knows otherwise, I would like to see a link also.
                          Click to expand...


                          Thats like most insurance products. I just never got a clear XYZ on this WLI product. WCI has poked holes in it aplenty but I can't be objective unless I know what it is. Agreed re: opacity; things that make profit are usually opaque.

                          Comment






                          • Each policy by each insurance company is going to be designed differently, but usually they are opaque enough that you can’t tell why the cash value goes up or down, or where that money is going. This is most likely intentional. They don’t want you to understand the product, or you would be able to see that it’s a bad decision up front. If someone knows otherwise, I would like to see a link also.
                            Click to expand...


                            Your money goes into their pocket.

                            Most insurance companies pay a "dividend" which is a portion of their profits after their expenses (mortality, operating, commissions, interest, lapses, etc).  I put it in quotes because it's not the same thing as a dividend that you receive from owning a share of stock or mutual fund, etc.  Generally a policy will pay a bigger dividend in years following a rising market and lower or no dividends in years following a poor performing market.  Some products with a "guaranteed dividend" the dividend is more akin to an interest payment.

                            Comment


                            • I haven't been getting every one of these I hear about into this thread, but here's another good one for this week. It's the usual player. No surprise there. 6 years into this thing this doc still has student loans. That's pretty much financial malpractice in my book to sell someone with student loans a whole life policy. Much less a resident.

                              PLEASE HELP! I'm listening to your podcast, reading your book, doing
                              what you recommend BUT I'm so confused on this whole life insurance
                              that was sold to me when in residency. I currently have $131,745 in
                              Whole Life with Northwestern that was started in 2012. Of course, I
                              tried to get out of this to put in a Vanguard variable annunity but
                              the rep is trying to convince me to keep it in. Is it ever recommended
                              to keep the money in Whole Life if I am maxing out my 401K, paying off
                              student debt, maxing out roth doing back door roth ira, and investing
                              in vanguard.





                              Helping those who wear the white coat get a fair shake on Wall Street since 2011

                              Comment


                              • Today's update. So much for not being able to lose money in a WL policy.
                                I have a whole life policy that I want to get rid of that has about 6800 cash value with a basis paid around 26,000.
                                Helping those who wear the white coat get a fair shake on Wall Street since 2011

                                Comment

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