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Inappropriate Whole Life Policy of the Week

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  • The White Coat Investor
    replied
    Today's edition with the usual player demonstrates a bit issue with a permanent policy--life changes.

    I purchased NWM WL in 2009 (at age 42), total death benefit $520k, annual premium $9900. Paid $109k into the policy so far, total accumulated value $124k, taxable income if surrendered $15k. Term insurance in place (since 2009). The premium is now burdensome due to life changes (long expensive divorce in-progress, credit card maxed out) thus 401k no longer maxed, have never done a backdoor Roth, etc. I’d like to surrender/cash out the policy to pay off above debts and invest the rest.

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  • The White Coat Investor
    replied
    New one:

    Last fall, I was approached by an old friend of mine, an associate with Northwestern Mutual, to purchase disability insurance. I'm currently 30 years old and was actually already thinking of following through on this, so I could capture the anticipated low premiums (I'm in great health and fortunate not to take any medications). I was told of a new law being passed on 1/1/20 which could affect my premiums, so I bit hook, line, and sinker and purchased DI and Term policies. When I had my semi-annual meeting with my financial adviser, I was then accurately informed of the "MOOD" definition NWM provides as well as the overall high cost for term that I was paying. (She even cited the WCI blog posts for further understanding of this!) I felt pretty dumb for not consulting my CFA first but also feel fortunate to have caught this early, and to have been reinforced by your blogs and podcasts. And that I was lucky in that I at least have term policy, despite its cost, given the current risks we all face at this present time regarding Covid.

    The reason I write this is to highlight my overall experience. I was approached as a close friend, and pitched that I needed someone to help me continue along my current trajectory but that unexpected things happen and should be planned for. When bringing up the definition of "MOOD" to my adviser, he tried to sell me on how the "MOOD" definition was still better than "true own occ."

    Lastly, when doing more digging I realized he had connected with many of my former med school colleagues through LinkedIn. I felt cheated, like I was dealing with a used care salesman. Throughout each call he would always ask for names of my colleagues so that he could also help them. I always refrained as I feel like I am in no position to provide personal guidance in this realm. Overall, the experience was a total sales job.

    I'm currently in the process of transitioning to other policies performed through an independent broker with advise from my CFA. Also for your readers, I should be paying roughly 50% less per month for stronger policies (let that sink in a bit) vs. NWM.

    Leave a comment:


  • The White Coat Investor
    replied
    A comment today on the blog:

    My wife has a whole life policy through Guardian which she has only been paying in to for ~17 months. Unfortunately the total premiums paid so far are $10k and the cash value is roughly $2k, so looking at an $8k loss. My plan is to surrender the policy and then invest the money in a tax advantaged retirement account (we do not currently max out all of our tax advantaged options). I feel this would be better than trying to do the 1035 exchange in to a VA at this point since the main benefit of the VA is the tax free growth back to basis. She also has student loans remaining, so we could throw the $2k at those. Any thoughts on this? Investing the cash value into a tax advantaged retirement account looks especially good right now as the market is “on sale” and we are young (28 & 30 y/o).

    This website has been a huge help as I’ve learned about the vastly better uses for our money than this whole life policy. You can add to your records another account of a doc being sold a whole life policy while still carrying significant student loan debt. Thankfully we will have this corrected soon!

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  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post


    That's only one of the benefits. The other is the ability to grow back to basis tax-free in the VA before surrendering.
    That's the only one I was talking about. Besides, most investors don't want to stick with their mistakes that long.

    Leave a comment:


  • The White Coat Investor
    replied
    Originally posted by jfoxcpacfp View Post

    Yes, they are still allowed but TCJA took away the tax benefits of the 1035 exchange (CL deduction).

    That's only one of the benefits. The other is the ability to grow back to basis tax-free in the VA before surrendering.

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post

    What do you mean? 1035 exchanges aren't allowed any more? How did I miss that? Or are you just pointing out that a VA can't be surrendered for a taxable loss?
    Yes, they are still allowed but TCJA took away the tax benefits of the 1035 exchange (CL deduction).

    Leave a comment:


  • The White Coat Investor
    replied
    Originally posted by jfoxcpacfp View Post

    This is pretty pathetic. Every day I have initial consults scheduled, at least 1 person (on average) has one of these, almost exclusively NWM. It boggles my mind. Did you point out that a 1035 exchange is no longer a tax benefit under TCJA 2017?
    What do you mean? 1035 exchanges aren't allowed any more? How did I miss that? Or are you just pointing out that a VA can't be surrendered for a taxable loss?

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post
    Yet another. You can't make this stuff up.
    This is pretty pathetic. Every day I have initial consults scheduled, at least 1 person (on average) has one of these, almost exclusively NWM. It boggles my mind. Did you point out that a 1035 exchange is no longer a tax benefit under TCJA 2017?

    Leave a comment:


  • The White Coat Investor
    replied
    Yet another. You can't make this stuff up.

    WCI- First of all Thank you for creating this forum and to people who have posted their stories. Extremely helpful. I am also a victim of this. In 2014 i was sold a Guardian Whole life policy as a medium to stack extra money and create wealth long term.
    So far my for my policy No.1- started 2014
    Cost basis 91K
    Cash Surrender is 71K – Loan of 5K. So available cash is 64K if i surrender.
    Policy No.2 – started 2017
    Cash basis 20K
    Cash Surrender – 13.5K

    My total Cash surrender will be (77.5K) from my Cash Basis (111K) which gets me to a net loss of ~33.5K. I have stopped the payment to prevent further loss. Its is better to take a hit now than to keep bleeding more. I am single and no dependents. Just a home mortgage

    Now i can rollover with 1035 exchange to a point where i can bring my cash surrender to cash basis (approx 5-6 years) and remove tax free at break even point. I already have a VA created with Lincoln which guarantees me 5% annual Income benefit and if the market goes more than 5%, i’ll get the higher %. The cost is however 3% of the income, which was created by the same Advisor who suggested me Whole life insurance. (trying to suppress the anger )

    Leave a comment:


  • childay
    replied
    Originally posted by The White Coat Investor View Post
    This one sounds like a whole life insurance tupperware party:
    Wow.

    Leave a comment:


  • The White Coat Investor
    replied
    This one sounds like a whole life insurance tupperware party:

    Thank you, WCI. My friends told me just a few days ago that they had stopped contributing to their RESP's and had put everything into a whole life policy last year. They own a small business and were convinced by a "good friend of the family" who is a "very smart and likeable guy" that WLI was a better vehicle for not only them and their business, but for their little ones' education funding! (When I heard that I was almost sick.) In Canada the federal government pays an instant 20% on every dollar contributed to the Registered Education Savings Plan, to a maximum of $500 per year. So you put in $2500 and they'll kick in $500. 20% immediate return for zero risk, that you can then also invest in ETF's/stocks/MF's. Most folks don't even fund to the $2500 max per kid. But throwing that bonus away, to then get 3-4% return long term, and then having to BORROW and pay interest for your kid to go to school with money you could have properly invested... gross. She also said that they borrowed from the policy to buy a vehicle but were "paying themselves back at 8% interest rate so that they were paying it off quickly and were "paying themselves."" Thus implying that the interest was actually adding cash value to the policy (which I now know is NOT the case!). They now want to host a get together at their house so that others in our friend group can "get in on the benefits of BYOB". When I heard that, I knew I would need some firepower to go up against a slick salesman. It's been approximately 5 hours reading through every myth and every comment/ rebuttal. It was well worth it. Now to talk to my friends and try to get them to dump the policy, and not have that get-together. I'd love to go to it armed with the facts and show him up, but these are friends, and I probably wouldn't be invited back if I embarrassed a friend of their family in their home. So I will try and do it quietly.

    Leave a comment:


  • BE87
    replied
    Originally posted by The White Coat Investor View Post
    Big premiums on this one:
    Sounds like the original poster has started learning some basics regarding finance i.e. whole life is a bad product, but they haven’t quite figured out that northwestern mutual is one of the worst offenders when it comes to preying on physicians. Fire your NWM agent ASAP and get advise from an advisor with less conflicts of interest

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by The White Coat Investor View Post
    Big premiums on this one:
    out of the frying pan and into the flame

    Leave a comment:


  • The White Coat Investor
    replied
    Big premiums on this one:

    My husband and I purchased a whole life policy for my husband before finding WCI of course. Shortly after purchasing it we had a lot of buyers remorse and I was determined to learn more about how we could use it to benefit us. Like you said, in the podcast, "it might be a bad decision to buy a whole life policy but now that you have it, it might be a bad decision to get rid of it." We were sold on front end loading the policy with 250k/ year for the first 5 years. The company our commissioned "advisor" sold to us is through Lafayette. Fast forward 2 years now... We have been speaking with a new wealth manager (for our over all wealth management). He works for Northwestern Mutual and claims his product is far superior than Lafayette. If we surrender the policy we will surely be out of 150k which I am not sure I can stomach. I remember also in the podcast the option you gave to transfer it into a variable annuity and then cash it out once it reaches the cost basis. This new wealth manager is suggesting that we transfer our Lafayette policy into Northwestern mutual claiming that we will have far better returns compared to Lafayette. He came to this concluson by doing an "apples to apples" comparison, however the advisor didn't put the whole 250k into a whole life policy rather 150k was in a universal life and 100k in a whole life.

    Leave a comment:


  • The White Coat Investor
    replied
    This one from Bogleheads:

    I have whole life insurance policy and paying premium for last 20 months. Cash value is less then half what I have paid premium since may 2018.
    Why is the buyer upset? This should be an expected outcome.

    Buyers: Stop buying stuff that you don't understand how it works.
    Sellers: Stop selling stuff people don't actually want once they understand how it works.

    Leave a comment:

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