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Inappropriate Whole Life Policy of the Week

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  • The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

    This week’s edition. 7 years. Cumulative return of what, -40% or so. Sold to someone who hadn’t even paid off student loans, a big car loan, or a mortgage. #financialmalpractice #thanksfornothingguardian

    I am a married EM Physician (my wife just started working as a Real
    Estate Agent and has minimal income) who naively purchased an
    incredibly costly Guardian Whole Life Insurance policy my last year of
    residency, 6/14/2012. The plan is Guardian Whole Life Paid up at age
    99. I have a HUGE monthly of $1982.72, Total Face Amount of
    $1,549,562, current death benefit of $1,551,262, and a total cash
    value of $88,459. The policy start date as mentioned before was
    6/14/12. So I've been paying $1982.72/ x 79 months = $156,634.88. 
    I currently have approximately $127,000 remaining in student loans
    with $43,000 at 4.75%, $35,720 @ 4.23% and $47,900 @ 2.875%. 
    I have $530,000 left on a 30 yr fixed mortgage at 4.125% and $40,000
    car loan at 3%. No other debt.

     

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #196699 Reply
    Liked by Vagabond MD
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
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    Joined: 05/13/2011

    Saw this one on the Bogleheads forum. Not really enough info to say much, but the usual theme is present- the policies were sold, not bought and now the purchasers feel duped by a “friend”.

    There are two policies in question – Both have 20 yr maturity and were purchased around the same time, around 8-9 yrs back. One of them is for a male cousin in mid-30s (200K face value) and another is for my aunt in late 50s (100K face value). The male policy owner is married with kids and carries a larger term life policy as well. I was talking to them a few days ago and they’ve begun to realize that their policies are not really earning higher dividends as the sales guy advertised (he was supposedly a friend of the family and “recommended” these policies when the aunt went through some health issues) and if it makes sense to continue with the policies. There is a cash penalty of around $2500 and $3800 to forfeit 200K and 100K policies respectively. Neither of them is in dire need of cash but feel like they’ve been duped and their money can bring in higher returns even if it is invested conservatively, cash penalty amount notwithstanding.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #196966 Reply
    FunkDoc83 FunkDoc83 
    Participant
    Status: Physician
    Posts: 210
    Joined: 04/12/2018

    Can you give us an example of an appropriate whole life policy of the week, or lifetime?  Maybe none exist……..

    #197049 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
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    Joined: 05/13/2011

    Sure. I’ve done it before in this thread and on the blog but here it is again:

    Appropriate Uses of Permanent Life Insurance

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #197777 Reply
    The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

    This week’s edition. Same song, different verse. 5 years in with a cumulative -40% return or so. Sweet investment eh?

    So, like so many who have posted here we are looking to get out of a Whole Life Insurance policy. Right now (about 5 yrs in) we have paid in about 62,500 and have a cash value of about 39,000. We are debating doing the variable annuity thing described to grow back the lost money tax free vs taking the check and paying off some other loans and free up monthly cash to fund a spousal IRA.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #198011 Reply
    Avatar HandFellow 
    Participant
    Status: Physician
    Posts: 193
    Joined: 01/18/2016
    The White Coat Investor wrote So I’ve been paying $1982.72/ x 79 months = $156,634.88. 
    I currently have approximately $127,000 remaining in student loans
    with $43,000 at 4.75%, $35,720 @ 4.23% and $47,900 @ 2.875%. 
    I have $530,000 left on a 30 yr fixed mortgage at 4.125% and $40,000
    car loan at 3%. No other debt.

     

    Click to expand…

    I like the sentence stating that besides a total of 5 loans totaling 696000 dollars, he has no debt.

    #198035 Reply
    Lordosis Lordosis 
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    Status: Physician
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    medical school scholarship sponsor

    When someone with a whole life policy decides to get out. What advantage is there to converting to a variable annuity as mentioned above vs just cashing out.
    If you take the money out and put it in the market wouldn’t it do better than a VA from the start?

    “Never let your sense of morals prevent you from doing what is right.”

    #198051 Reply
    Avatar adventure 
    Participant
    Status: Spouse
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    Joined: 10/24/2016

    When someone with a whole life policy decides to get out. What advantage is there to converting to a variable annuity as mentioned above vs just cashing out.
    If you take the money out and put it in the market wouldn’t it do better than a VA from the start?

    Click to expand…

    You can preserve your loss, if you allow the funds to grow up to your basis (what you paid), then you can cash out of the entire thing, tax free. Some hassle involved, for the stupid little policy we had, we just dumped it, took the cash, and decided it was an expensive mistake, but cheap to learn in in 2017 instead of 2047.

    More here:

    https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

    #198083 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    When someone with a whole life policy decides to get out. What advantage is there to converting to a variable annuity as mentioned above vs just cashing out.
    If you take the money out and put it in the market wouldn’t it do better than a VA from the start?

    Click to expand…

    You can preserve your loss, if you allow the funds to grow up to your basis (what you paid), then you can cash out of the entire thing, tax free. Some hassle involved, for the stupid little policy we had, we just dumped it, took the cash, and decided it was an expensive mistake, but cheap to learn in in 2017 instead of 2047.

    More here:

    https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

    Click to expand…

    Unfortunately, that article was published in 2014. The 1035 exchange loss deduction discussed was available only subject to the 2% floor on itemized deductions. Those were eliminated in TCJA 2017 so, beginning in 2018, these losses are not available for use. Possibly coming back in 5 years, but not a good reason to keep a bad product longer.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #198086 Reply
    Liked by childay
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
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    Joined: 05/13/2011
    Earnest refinancing bonus

    When someone with a whole life policy decides to get out. What advantage is there to converting to a variable annuity as mentioned above vs just cashing out.
    If you take the money out and put it in the market wouldn’t it do better than a VA from the start?

    Click to expand…

    You can preserve your loss, if you allow the funds to grow up to your basis (what you paid), then you can cash out of the entire thing, tax free. Some hassle involved, for the stupid little policy we had, we just dumped it, took the cash, and decided it was an expensive mistake, but cheap to learn in in 2017 instead of 2047.

    More here:

    https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

    Click to expand…

    Unfortunately, that article was published in 2014. The 1035 exchange loss deduction discussed was available only subject to the 2% floor on itemized deductions. Those were eliminated in TCJA 2017 so, beginning in 2018, these losses are not available for use. Possibly coming back in 5 years, but not a good reason to keep a bad product longer.

    Click to expand…

    The article has been updated from when it was originally written. No, you can’t just take the deduction, but you can still let it grow back to basis and surrender it.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #198090 Reply
    Faithful Steward Faithful Steward 
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    Status: Financial Advisor, Small Business Owner
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    Joined: 06/12/2017
    Unfortunately, that article was published in 2014. The 1035 exchange loss deduction discussed was available only subject to the 2% floor on itemized deductions. Those were eliminated in TCJA 2017 so, beginning in 2018, these losses are not available for use. Possibly coming back in 5 years, but not a good reason to keep a bad product longer.

    Click to expand…

    Johanna, are you saying that if a client pays $100,000 into a whole life policy with a cash value of only $50,000, that after doing a 1035 exchange from the life poicy into an annuity the annuity would only have a cost basis of $50,000? Or would the cost basis be $100,000?

    I want to make sure I’m not misunderstanding your post.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #198091 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1279
    Joined: 02/15/2016

    Honestly, what I’ve always wanted to know is how physicians can do this to each other. Since the system feeds off physicians sending other physicians and their residents/fellows to these agents, what are they thinking? I don’t refer anyone I wouldn’t send a family member to. Don’t you guys have the same attitude?

    Click to expand…

    A hypothesis:  since the original physician bought the policy, they must think it’s a worthwhile product.  They then refer their friends without knowing it.  It’s also hard to convince someone that what they spend hundreds of thousands of dollars on was an absolute waste of money and they should just take their loss.  I’ve tried to convince other physicians of lots of medical things.  We tend to be a stubborn group.

    Similar to when you hear people say all these terrible things happened to them based on bad decisions and/or bad luck and then they say:  “But I wouldn’t go back and change a thing because it made me the person I am today.”  This has to be a coping mechanism of sorts.

    #198093 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7948
    Joined: 01/09/2016
    Unfortunately, that article was published in 2014. The 1035 exchange loss deduction discussed was available only subject to the 2% floor on itemized deductions. Those were eliminated in TCJA 2017 so, beginning in 2018, these losses are not available for use. Possibly coming back in 5 years, but not a good reason to keep a bad product longer.

    Click to expand…

    Johanna, are you saying that if a client pays $100,000 into a whole life policy with a cash value of only $50,000, that after doing a 1035 exchange from the life policy into an annuity the annuity would only have a cost basis of $50,000? Or would the cost basis be $100,000?

    I want to make sure I’m not misunderstanding your post.

    Click to expand…

    I’m saying that there is no longer any deduction available for a loss on a 1035 exchange.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #198126 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4470
    Joined: 05/13/2011

    Unfortunately, that article was published in 2014. The 1035 exchange loss deduction discussed was available only subject to the 2% floor on itemized deductions. Those were eliminated in TCJA 2017 so, beginning in 2018, these losses are not available for use. Possibly coming back in 5 years, but not a good reason to keep a bad product longer.

    Click to expand…

    Johanna, are you saying that if a client pays $100,000 into a whole life policy with a cash value of only $50,000, that after doing a 1035 exchange from the life poicy into an annuity the annuity would only have a cost basis of $50,000? Or would the cost basis be $100,000?

    I want to make sure I’m not misunderstanding your post.

    Click to expand…

    $100K. The cost basis from the original policy is preserved. But you can no longer deduct the loss. You can only let it sit in the VA and grow back to basis tax free.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #198217 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4470
    Joined: 05/13/2011

    This week’s edition, a doc with 6.8% student loans who was just sold a whole life policy. #financialmalpractice

    I started listening to your podcasts last month. I’m an orthopaedic surgeon and my wife is family medicine. 6 months ago our 10yr term life insurance was converted to a $1 million Mass Mutual Legacy 20 Whole Life Insurance plan with a monthly premium of $1,467.69, so we’ve paid $8,806.14 so far. Cash value is 1,048.02

    After I heard your podcast I asked our financial advisor about this product and he said that he whole heartedly agrees that most whole life is crap, but that the legacy 20 is better in that you only pay in for 20 years and then the rest of your life the investment grows. At the time this satisfied me, but I wanted to check with you all first.

    My wife and I are both 1.5 years into practice so our medschool debt is not paid off (6.8% rate) nor is our mortgage (4.4%).

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #200046 Reply

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