I don't actually post about whole life insurance (WL) all that much, but the comments on WL posts number in the thousands and go on for years and years after the post is written. Most of the posts address whether or not you should buy a whole life policy (or its cousins, Universal Life and Variable Life). I generally recommend against them, and the insurance salesmen who love to post comments longer than the post itself not only recommend them, but feed their children and pay their mortgage from the commissions (50-110% of the first year's premium) on the sales. They're not happy when WCI readers actually have responses to the myths they're using to sell them. Today, however, I'm going to address a different question that I get in my email box far more often—how to cancel a whole life insurance policy.
Should I Keep or Cancel My Whole Life Policy?
Long-time readers will recall I was once the proud owner of a whole life insurance policy from Northwestern Mutual (NML). It was sold to me as a medical student by a very dear friend who happened to be interning with NML that summer. He subsequently went into another line of work. The policy was not only inappropriate for me, but it was just a terrible policy. What I really needed was a $1 Million, 30-year, level-term policy. What I got was a convertible $280,000 term policy whose rates would go up every 5 years until long after I would be financially independent coupled with a $20,000 whole life policy.
This tiny whole life policy was something like $21 a month. The annual policy fee was relatively huge compared to the premiums, not to mention the premiums were being paid on a monthly basis (even a poor medical student could have come up with $240 all at once if he had known it would improve returns). The policy had a terrible return. After 7 years, I cashed it in for something like $1,100. I had paid in something like $21 * 12 * 7 = $1,764. That's a loss of 38%, or something like -12% per year. It didn't quite track the minimum guaranteed returns in the original illustration, but my returns were pretty darn close to the minimum and a long way away from the projected illustration. The in-force illustration I obtained (just for fun) prior to surrendering it indicated I was still many years away from breaking even.
For a few hundred dollars of ill-gotten profit, NML is partially responsible (along with a mortgage lender, a realtor, and a mutual fund salesman) for unleashing The White Coat Investor on the world. I wonder how much they would love to pay now to get me to take down the whole life posts on this blog given that over 12 million people have visited the site in its first decade and some of the most popular posts are about whole life insurance.
The question we will be addressing today, however, is not whether you should buy a policy. It is what you should do with the one you already have. There are a number of points to consider.
Do You Want or Need a Permanent Life Insurance Policy?
Although 75% of those who purchase whole life policies eventually surrender them, there are a select few who want them and even a tiny percentage who actually need them. If you are one of these people, you should keep your policy.
Examples of people who need permanent life insurance include:
- Someone who will never actually become financially independent (working until death) and will always have someone depending on their income financially
- Someone with an estate tax problem
- Someone with a liquidity problem
- Someone with some legitimate business issues that are best solved with these policies
Even if you don't need a policy, you might want one. Perhaps you can't stand the volatility of higher-returning investments like stocks or real estate. Or perhaps the 3-4% returns you reasonably expect on the policy are adequate for your needs. Or perhaps you're into the whole Bank on Yourself/Infinite Banking thing. If any of this describes you, then you may want to keep your policy, assuming it is actually correctly designed to do what you want it to do. You might be able to improve it by paying annually, changing dividends to offset premiums instead of paid-up additions, or even by purchasing additional paid-up additions, but you probably shouldn't get rid of it.
Keep Your Whole Life Insurance Policy If You've Had It for a Long Time
Whole life has low returns when held for decades. It has terrible returns if only held for a few years. That means that, after a while, the returns GOING FORWARD may not actually be too bad. The terrible returns are heavily front-loaded, and generally follow the period for which commissions are paid to the salesman. If you're past those years, you probably want to keep the policy, even if you don't like it. I think 15-20 years is about the turning point, but one could argue this occurs by year 10, or even sooner. It varies by policy and how much you hate it.
Certainly, you can't argue it is a good idea to keep it just because you've had it for a year or two or five. If you don't want to pay the premiums anymore, then change dividends to offset premiums. If you just want to maximize the return, then purchase paid-up additions up to the modified endowment contract (MEC) limit and make sure you're paying annually. If you don't want to hire someone to evaluate the policy, this post may help you to evaluate your own whole life policy.
If You're Going to Cancel Whole Life Insurance, Do It Now
Whole life insurance works out best when you hold it until death. Once you have decided you are going to cancel a whole life insurance policy, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. You may want to wait until just before your next premium is due if it means the cash value will be a little higher, but you certainly don't want to pay more premiums on a policy you will drop at some point between now and your death.
Consider the Alternative
Remember that you cannot just consider the policy on its own merits. You also need to compare it to what you would do with the money if you were not using it for life insurance premiums. If you're going to be using the money to max out a 401(k), or even better, get a match in a 401(k), then it is a no-brainer to get rid of it. Likewise, if the alternative is something like maxing out an HSA or a personal or spousal Backdoor Roth IRA. If you, however, are comparing it to a taxable account, especially invested in low-risk assets, or to just spending the money, then it will compare a little more favorably. I often see agents selling whole life policies to doctors that still have 6-8% student loans. That's financial malpractice in my opinion. Heck, paying off your mortgage, even one with a relatively low-interest rate, may provide a better return than whole life, and it's guaranteed.
Get Term Life Insurance in Place First
Does your whole life policy belong in the trash? Probably.
It should go without saying that you should never cancel a permanent life insurance policy unless you already have sufficient term life insurance in place to meet your needs and wants. It usually only takes a couple of weeks to buy a term policy, but don't leave yourself exposed even for that long. Besides, you might be surprised by something found during underwriting.
Don't Worry About Tiny Policies
When you start talking about getting rid of a policy, the first thing to consider is any possible tax penalties or tax benefits of doing so. For a teeny, tiny policy like the one I had, that just doesn't matter much. My loss was only a few hundred dollars, and the tax benefit on that would be far outweighed by the hassle factor and the actual costs to claim that. If you have a tiny whole life policy, just cancel it.
You may have had one of these purchased for you by your parents, who dutifully paid a few bucks a month on it for two or three decades before presenting all $2,000 of cash value in it to you (and asking you to take over the payments). Be sure to thank them for their thoughtfulness, then cash it out and use the money to fund a Backdoor Roth IRA. You might not want to mention that you did that during Thanksgiving dinner, by the way.
Evaluate Your Options Carefully on a Large Policy
However, if you have paid tens of thousands of dollars in whole life premiums, you probably want to spend a little more time deciding what you wish to do with this policy. If your policy has a large gain, you've probably had it long enough that you should keep it. But if not, you can avoid taxation of that gain (typically taxed at your regular marginal tax rate) by exchanging it into a better cash value life insurance policy, a very low-cost variable annuity (VA), or even long-term care insurance.
The best of those options, in my view, used to be the VA, since buying another cash value life insurance policy most likely entails another fat commission, and most doctors reading this site ought to eventually be able to self-insure any long-term care needs. However, it is not so easy anymore to find a low-cost VA, so even that isn't a great option for a policy with a gain. Unfortunately, you can't even use losses from tax-loss harvesting to offset the gains since gains in a life insurance policy are not considered capital gains.
Preserving Your Loss
A much more likely scenario for someone who has only been paying premiums for a few years and now realizes they bought a “pig in a poke”, is that you are way underwater on your “investment” at this point. Perhaps you've been paying premiums of $20,000 per year for five years, and now have a cash value of $75,000. You could just surrender the policy, take your $75K to invest elsewhere, and consider the $25K a “stupid tax”. Or, you could have Uncle Sam share your pain a little bit.
Another Option If You Want to Get Rid of Your Whole Life Insurance
Yet another option is to just exchange that whole policy into a modified endowment contract. This can eliminate any need for you to make additional payments into the policy, a big reason why people want to dump their policies. Then you simply leave it alone until your death and have it be part of the inheritance you leave your heirs or your favorite charity. Note that if you go down this path, you can't use the cash value for a better use nor can you borrow against the policy later in life.
There are lots of options when you want to cancel your whole life insurance policy. Spend time evaluating them or you may make another mistake almost as big as the one that got you into this mess. But quit beating yourself up about your decision to buy it; many of us have done that.
What do you think? Have you had this dilemma? Did you cancel your whole life insurance policy or keep it? Comment below!
I’m planing to cancel/surrender all of my NWM whole life policies we have for myself, my wife, and each of three young children. 7 policies in total. 2 for my wife with about $260k total insurance, 2 for me with about $300k total insurance, and then $75k for each of the children.
The cost basis (total premium paid) is about $72k for all policies combined and cash value is about $57k for all policies. ($15k stupid tax) None of the polices have broken even yet. I’ve been paying into them anywhere from 2 years to 12 years depending on the policy.
I don’t think it makes sense to go through the hassle of 1035 exchange and setting up a VA for each policy to grow back to the cost basis but recognize I’m losing maybe $4k of tax advantage.
However, I’m planning to fund back door Roth IRAs for my wife and I in the future and also increase the money we direct to each of the kids 529 plans. I’m maxing out my 401k and HSA as of this year.
My thought was to take the whole life cash value of $57k and do backdoor Roth IRA for 2020 ($6k in each) and then same for 2021, that’s $24k. Then I’d put the rest in the kids 529plans. Since the 529plans grow tax free isn’t it kinda like the VA route where I’m getting the benefit of it growing back to cost basis tax free and also any growth beyond that?
I agree. I’m sorry this happened to you. Be sure you have any necessary term in place prior to cancelling of course. I agree that buying WL as an investment before funding Roth IRAs and 529s is likely a big error and bad advice.
And yes, it would provide similar tax free growth without the VA hassle. Good perspective.
I just did this 1035 exchange of a variable universal life policy to a low cost annuity at Fidelity. Cost basis was $360,000 and cash value was $270,000. HUGE “stupid tax” but better than paying the crazy high fees for decades in the future. Just so you know, there was no “hassle” at all. I contacted Fidelity, they asked me some questions over the phone, I signed a Docusign contract and within 10 days the money was in the Fidelity account and then invested in a very low cost index fund of my choice. So when considering your options just know that the process was easy and seamless and the Fidelity rep helped out a lot. Also, if you haven’t gotten term life insurance yet, I highly recommend Matt Wiggins with Pattern. Him and his team made that process very easy and sent me an email update every so often until the insurance plan was in place.
This is great to know. A few year ago when I swapped my wife’s variable life policy to a variable annuity at Vanguard, it required manual paperwork and a decent wait for it all to transfer.
Being that Vanguard no longer offers variable annuities and (in my opinion) Fidelity’s superior customer service, seems like transferring whole/variable life insurance to a Fidelity variable annuity is a no-brainer.
Glad to hear Fidelity has a decent option for folks like you.
Thanks for your help. Your site really helped me out things in perspective.
I’ve requested the surrender now. Since the surrender value is less than the cost basis I know there is no taxable gain but I want to understand what tax implications I have for taking the cash value in a lump sum and then repurposing as I mentioned above. Will my AGI increase or will I pay taxes on that cash value at all because I am taking it as a lump sum and then putting it into the 529s?
Chris – if there is any “good” news here, it is that you will not have any taxes. You have no gains, only a loss. So no taxes to pay and no impact on your income. Think of this as similar to selling a stock for a loss – only that you don’t get to claim the loss on your taxes.
Using the money from the policy to fund backdoor Roth IRAs and 529s are excellent options for using the funds. If you use the money for education, 529s are a much better vehicle than variable annuities. Fees are cheaper, and as you correctly noted, you will have tax free growth beyond your costs basis.
No. There’s no taxable income there. It’s like you bought a house for $100K and sold it for $90K. No tax due.
Hi, my girlfriend has a WL policy, gifted to her from grandmother at an early age, starting with 5K of coverage. I don’t know how old she was when received. I’m 54, she’s 52, we are not married yet but plan to tie the knot this year. We have no kids and that is not in the cards at our ages. Not sure what I should have her do with this policy. She needs more cash to invest in her IRA etc as her savings are good, but not great. Was thinking of surrendering the policy, and taking the cash value and put it to work in the stock market.
Here are the numbers.
Basic Policy Coverage $5,000.00
This Year’s Paid Up Additional Coverage 501.47
Prior Years’ Paid Up Additional Coverage 13,791.64
_________________
Total Coverage Amount = $19,293.11
FINANCIAL INFORMATION
Policy Cash Values:
Basic Policy Cash Value $2,407.05
This Year’s Paid Up Additional Cash Value 285.66
Prior Years’ Paid Up Additional Cash Value 7,856.27
_________________
Net Cash Value = $10,548.98
Premiums run about $50 a year so its not a big expense by any means. Should I just keep it since its been held for so long? Thanks for the advice.
Not enough info to really say much, but if she’s had it for 50 years it could easily make sense to keep.
More info here:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
But with a cash value of just $10K…I’d probably cash it out and walk away and thank grandma for her generous gift.
The Nationwide/Jefferson National VA that you mentioned is still a good product. Nationwide hasn’t changed it since they purchased JN. I think WL/UL/IUL still has a place if you are using it for legacy purposes. In that case you should consult a fee only insurance consultant who is trained as an actuary and can design a policy that has very little or zero commission built in. I have used such a service in the past and been very satisfied.
That’s good to hear. It wasn’t as good as the Vanguard one IMHO, but it’s better than most.
hey dude Dave Graham at FI Physician went deep into low cost VA’s and actually Nationwide has a lot of high fee subaccounts and the actual amount of the fees are buried:
https://www.fiphysician.com/investment-only-variable-annuity/
still seems Fidelity is the best to do the 1035 exchange.
I’m so glad that Ernst & Young ( BIG 4 accounting firm ) recently wrote an 18 page White Paper on how combining investments, income annuities and whole life insurance improve retirement distributions by nearly 40% so we can put this argument to rest. Some whole life insurance is a perfectly fine LONG TERM planning solution, it should never be about the SHORT TERM.
Jeff do you have a link to the white paper?
https://www.ey.com/en_us/insurance/how-life-insurers-can-provide-differentiated-retirement-benefits
Jeff,
I never really know what to do with these analyses that assume investment expenses are 1.25% or higher. The investing time lines in this study seem to be 30+ years and my current weighted expense ratio in my portfolio is 0.18%. What kind of difference would you expect to see in these models if the assumptions for investment expenses was changed to 0.25%?
I don’t see if they factor in interest paid on loans taken out against policy? Can you comment on this as well?
Maybe I’m too dense to understand some of the graphs but the charts make the retirement income differences look like they are only a couple thousand dollars apart. Can you point me to where you concluded improved retirement distributions by “nearly 40%”?
Thanks
I did a 1035 exchange of my VUL into the low cost variable annuity at fidelity. It was easy and the fees are very low. I never needed this type of investment product and it was definitely sold to a much more naive me. There are so many other great long term investments that have much lower fees. I don’t think there is a place for whole life policies in most physician retirement plans. Please be careful before buying a policy like this. You will likely regret it, surrender it and lose money.
https://www.ey.com/en_us/insurance/how-life-insurers-can-provide-differentiated-retirement-benefits
That EY article seems like a crock of sh*t. Namely this – “although there are distinctions to consider depending on whether more retirement income or legacy value is desired.”
In other words, if you want to be wealthier, avoid permanent life insurance. If retirement income is the goal, single premium immediate annuities will outperform the strategies outlined in that EY article. And yet they were conveniently left out of their analysis.
I am quite concerned about this article. It very much feels like EY was paid by the insurance industry to write this.
The same study also shows that investment strategies that are investment only (stocks and bonds) or investments and term life insurance generate more wealth and have higher rates of return. And yet, that’s not the headline.
Any fiduciary reading this article would come to the latter conclusion and avoid whole/universal /permanent life insurance.
You seem very angry, any reason not to rely on a 3rd party opinion? There are other PhDs from American College that write the same thesis, chill out.
I am angry, because articles like this can cause a lot of FUD and end up costing unsuspecting and naive folks thousands and thousands of dollars by buying bad investments like whole life and permanent life. Which is exactly what permanent life insurance salespeople want.
And I do rely third party opinions – I would encourage anyone reading that EY article also understand that about 75% of those who purchase whole life policies eventually surrender. Why? Because they were lousy investments to begin with.
Let me make this clear for anyone who might be reading this chain. Whole/universal/permanent/cash-value life insurance is almost always a terrible investment. If you are one of the few, rare situations of needing permanent insurance, I second what FBN said above. “[Hire] a fee only insurance consultant who is trained as an actuary and can design a policy that has very little or zero commission built in.”
I think we can agree that whole life is not an investment. It has no variable component so we should never compare it to investments. Pure investment advisors do the same thing on their end to advise people to buy term and invest the difference. How does a 20 or 30 year term policy help someone w/ estate or ordinary income tax in their late 70’s & 80’s when those policies expire? This study and other PhDs would agree that if you want more predictable outcomes ( not the biggest balance ), that a little bit of everything is a better strategy than just buying an S&P500 index and hoping for the best… That’s all, no need to get all uptight. I know plenty of T.Rowe Price “professional” money managers that use the above strategy, are they all dumb?
Most people won’t owe estate taxes. Many who would otherwise owe estate taxes don’t need whole life to avoid them.
Classic whole life sales technique. It even earned a place in my myths series.
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
“I think we can agree that whole life is not an investment. It has no variable component so we should never compare it to investments.”
Of course whole life has a variable component. When selling life insurance, they always focus on the projected return. The guaranteed returns are awful, so they pretend they are not there.
I totally agree Noraz123! We are ANGRY because we are smart people who somehow got the wool pulled over our eyes. Of course insurance agents love these products, they make huge commissions! Doctors who practice medicine like that end up in jail. Let’s keep teaching our students and residents to stay far away from these products.
That’s intelligent, referring to folks who sell life insurance as criminals. You are giving a ton of educated individuals a lot of faith for not being able to make an informed decision on their own. Again, you are stating that CFAs and professional money are dumb.
I DO think it’s criminal how these policies are sold to young doctors and there have been law suits settled that prove my point. We work our butts off for years in school, many are left with hundreds of thousands in debt so that we may spend our lives taking care of others. Just as we enter residency and stand to make a bit more money we are preyed upon by insurance agents. Thank goodness people like Jim Dahle have brought this issue to light.
I think you would agree Jeff, that surrendering a whole life policy generally results in a worse financial outcome than never buying one, correct?
Yet 75% of purchasers surrender them prior to death. 3 out of 4 people who buy this product regret it so much that they dump it. That’s not exactly a ringing endorsement. I’ve surveyed my audience about it as well. 3/4 of those who bought a policy regretted doing so.
The obvious conclusion is that the vast majority of whole life sales are inappropriate. So even if there were a few people who understood how whole life worked, actually wanted the policy, and were happy with how it performed, it would still be appropriate to warn everybody about how the policies work and how the industry that sells them works.
Even if whole/permanent life insurance is an appropriate investment – and it almost never is – the vast majority of whole/permanent insurance salespeople are not selling the best policies. Rather they work for a specific company, and get a huge commission, which is why returns are so terrible. If my agent gets 110% commission for my first year premiums, I am off to a terrible start.
So I am quite comfortable calling them “criminal” in the vernacular. Do agents disclose the commissions they are earning? Do agents work on a fee-only basis and sell no-commission policies? If they don’t, then yeah, most people would use the word “criminal.”
Agree, but there are always exceptions to every rule. One bad cop doesn’t mean ALL cops are bad, does it? So let’s lock everyone up who earns a commission then? Realtors, investment folks who sell A shares, mortgage lenders, car sales, travel agents, advertising, lock them all up? Sales=criminal activity is your summary? How does a firm like Northwest hold AAA status and maintains its postive outlook through the pandemic, I think it was them and Microsoft ( that’s it ) something doesn’t add up?
“One bad cop doesn’t mean ALL cops are bad, does it? ”
Nope, but all bad cops are bad cops. And all bad insurance salespeople are bad insurance salespeople.
How many permanent life insurance policies have been sold with by reps on commission who only sell their company’s policy vs. sold by independent, fee-only agents? Greater than 90%. Are there are some good salespeople out there? Sure, but there are very, very few of them. And they aren’t working for the insurance companies.
So, I will stand my statement. Almost all commission-based permanent life insurance agents are CRIMINAL.
The difference between WL/permanent insurance agents and mortage lenders. Mortgages are bought. Permanent life insurance is sold.
I think what we mean is that this behavior SHOULD BE criminal. Unfortunately, it is not.
As for the comparisons to other sales jobs, YES, I think that selling A shares should be criminalized.
Most docs I have know have had a bad experience with a NML representative, not sure I’d trot them out as a “good” example.
The problem isn’t that there is “one bad cop.” The problem is the vast majority of those in the industry are “bad cops.”
But the person from the American College is also about selling life insurance. That is what the American College is for.
Pfau did a similar analysis to this one, with even higher advisory and investment management fees.
When challenged, he repeated the study with no advisory fee and management fees that, while still high by DIY standards, were a lot lower than those used for the initial report.
Even at that price, which bogleheads would refuse to pay, the results favored investment over life insurance. This was also using the best deal Pfau could find for the insurance product as compared to what he claimed were average fees for investing. In other words, a biased comparison to start. But it still showed buy term and invest the difference was better than life insurance unless one grossly overpaid in fees for the investment part.
In the E&Y comparison, they have the person paying term insurance premiums until they retire at age 65. This locks in high cost years when they no longer need life insurance but they are still paying for term.
The EY “study” doesn’t have the underlying details to show how they came up with their computations. The details that are shown are heavily stacked in favor of the permanent insurance options.
– Investments are always begin at 50% equity / 50% bond, whole life, etc. regardless of age
– Investments assume a fee of 1.25%
– Annual equity turnover is 25%
– Investor purchases Annual Renewable Term until 65
Basically garbage in – garbage out
Yes, I’ve already written an article about it to be published later this year. It’s not a study, it’s glossy sales brochure.
Reading the comments on the EY article bring up all the painful memories of my misadventures with NWM. Sure there are some bad actors in life insurance, but the lack of transparency is the awful part. No, most are not truly criminals in the sense that they willfully mislead people, but most are well compensated for the plans and unbeknownst to most they are extremely compensated. After I purchased the policies the agent called many times a year with the usual purpose of harvesting more names of fellow physicians. Had I known how much the agent selling (yes selling) the product (not an investment) was compensated I would have immediately hesitated and searched for a better suited plan. People should make commissions, but any honest agent would disclose the amount. Had the salesman selling my car told me he would get 12-25 times my monthly payment as a bonus I would walk away. My two cents as a physician burned by an unscrupulous NWM agent.
So when you prescribe your treatment plan and I’m your patient, you are disclosing exactly how much I’m paying for medications, procedures, etc as a part of your total salary? I’m trying to understand how you disclose your fees to your patients? Sounds like health conditions are exempt but wealth conditions get scrutinized? When my mom gets discharged from the hospital, was she supposed to be told how much all of her procedures were going to cost? Life insurance from what I understand is on the decline and if it were not “sold”, people wouldn’t buy it. I think we are moving towards a GoFundMe society where people are asked to “donate” because that family or person clearly didn’t plan. I keep hearing NML are the bad guys but they have a 96% satisfaction rating from what I can tell, something doesn’t add up. If 96% are satisfied, were you just one of the 4% that got shammed? Sounds like “you” didn’t ask enough questions when you made “your” purchase, or should I say when you were “sold”? I’m in a commssion based business and I sleep very well at night knowing what I get paid in relation to the quality my customers are receiving. I admit, most of my customers don’t even realize or appreciate the value I bring, not until long after my services are rendered. None of them ask me how much I make as a part of my annual earnings.
Aren’t doctors sanctioned for knowingly prescribing unnecessary treatment ?
Jeff, to answer your question, YES, fees are disclosed. I am an eye surgeon and there are portions of cataract surgery that generally are not covered by insurance (use of laser, vision-correcting implants, for example). When patients are contemplating cataract surgery we have a very detailed conversation about fees. What is covered, what isn’t, how much gets paid to me, how much gets paid to the surgery center…that is all very clearly stated to the patient. In addition, they get a printed piece of paper with all of that information on it. Some patients decide to “shop around” which is their right. Most trust me and decide to proceed with surgery with me but they certainly have all financial info before making that decision. I certainly had no such conversation with the advisor who sold me a VUL. Shame on me for not asking. I think as physicians we generally believe people are honest and give us all info just like we behave with our patients. There is no standard for this honesty in the financial services industry which is why I fired my advisor, learned about my finances and how to manage them myself. I’m done being taken advantage of. I tell every student who comes through my office to avoid whole life policies and to be very careful when dealing with a financial advisor.
You’re “in a commission industry”? Well that’s true. You’re a NML whole life insurance sales rep. You’ve been there your entire career (16 years) and are clearly a believer in their model or you would have left years ago. I’m not sure why you’re trying to hide that fact.
Read this thread: https://forum.whitecoatinvestor.com/insurance/1728-inappropriate-whole-life-policy-of-the-week
If you can still sleep well knowing your firm did that to so many doctors, I worry about your conscience. It certainly doesn’t reflect a “96% satisfaction rating”.
Medicine and health care have tons of problems. I suggest you start a blog to help people navigate them. But it isn’t going to keep me from pointing out the problems with the way your industry, your company, and you work.
Not hiding anything, isn’t this an open forum for opinions? Your experience w/ Northwestern sounds like it was for only a few hours from 1st mtg to implementation and perhaps some calls for introductions. My experience is 16+ years with the firm and a designation RICP in the retirement planning space. I do as much insurance as I do w/ investments & tax planning. Former Deloitte guy. I’m the expert, you are not. You are the 4% that is not satisfied w/ the firm and how your premium gets filtered. How do the folks that sponsor your site get paid? I paid 2 death claims due to Covid in 2020, those were not term policies and those folks were in their 60’s. Those families were grateful for the benefits that they recieved, calculate the ROR on that transaction? Cash value: “Credit quality of a AAA Bond, yield of a junk bond, tax treatment of a muni bond” ~ T.Rowe Price CFA. Also, listen to Ed Slott, a natl known speaker on taxes… I’m done here w/ your axe to grind w/ NM
I find it amusing that, after all these years and many multi-hundred comment blog posts, still the only people who think whole life is a great product are those who get paid to sell it. It’s almost as if the financial incentive affects people’s judgment, but I wouldn’t be so cynical to say the salesmen are biased.
Many insurance salespeople (especially new hires) are naive, too. They think they are selling a good product, and don’t understand how bad of an investment it is.
As for any salespeople who understand the wretched returns on these policies and continue to sell them, are very biased.
No fiduciary would allow her clients to purchase 99% of the policies sold. And for rare use cases where permanent life insurance is needed, no fiduciary would allow her clients to buy most of the policies sold, because of these fees.
A T.Rowe Price CFA doesn’t sell insurance, they buy it because of the dozen or more benefits ( Pros ) that come along with it vs. soley focusing on the 1 or 2 Cons & yield. It’s funny that the more income someone makes, the more they see value in this part of their planning. Fortune’s Most Admired for decades and running…
” It’s funny that the more income someone makes, the more they see value in this part of their planning. ”
Not funny at all. The very few use cases where a permanent insurance makes sense is often for the ulta wealthy.
For someone who is 1.) not maxing 401K (mega backdoor if available), 2.) not maxing IRA (backdoor if necessary), 3.) not maxing HSA (if applicable), 4.) not contributing to 529 (if applicable) and 5.) in debt (credit card, personal loans, etc.), then permanent life is not the right investment. PERIOD.
Ask yourself – if you had fiduciary responsibility for your clients, would you sell them whole life policies?
And as far this, “…those families were grateful for the benefits that they received, calculate the ROR on that transaction?”
Actually, if I were a fiduciary for your clients, I’d likely have advised to them buy term life insurance and invest the savings. Not only would they have been grateful for the benefits they received, they would have been even more grateful for the additional money I would have given them from the additional investments.
So yeah, you can calculate an RoR. Term + invest the difference is higher.
The overwhelming consensus opinion of experts (CFPs, CFAs, and the like) who do not profit from the sale of whole life is that buying term life and investing in traditional investments inside retirement accounts is a far better way to insure income and save for retirement than any whole life policy. I’d be surprised if even that CFA you quoted disagreed with that. But you can find wingnuts and contrarians in any field who have legitimate credentials who espouse all sorts of things. The best metric is the consensus of unbiased experts, and on this topic, the consensus is crystal-clear that whole life is only appropriate for rare situations, not for insuring income or saving for retirement generally. Now, I’m definitely NOT saying that the profit you and other commissioned agents get from selling this product biases you toward recommending this usually-inferior product to your clients. I’m merely saying that there seems to be a really strong correlation, which should be further investigated.
The benefits of whole life are, relatively, more valuable to those with very high income who have already used up all their tax-advantaged space and don’t need as high rates of return. But we’re talking $1MM++ income, not your average doctor earning $300k/year who can put $58k/year into a a Solo 401k.
You’re all assuming that I don’t do all of the things that you rattled off. The majority of CPAs ( I’m married to one ) don’t do tax planning, they prepare returns and give advice “after the fact”. CFAs know how money works, that’s what their high level of training teaches them. You’re missing the point, I’m not disagreeing that investments will outperform insurance in the long-run. In fact, insurance is not an investment which you all keep referring back to. I do max out Roth IRAs, 401k based on matching, Non-qual accts, ETFs, manage debt first, etc. You act like all that NM does is sell insurance, look at the stats on year over year growth of independent broker dealers and where we fall? All of the other wirehouses are paying brokers to move their clients money from one place to the next based on the advisor getting paid lump sums. Our net new assets ( not bought ) and new client acquisition last year alone dominated the market. People want a PLAN, not a cookie-cutter “Buy term & invest the difference”. Nick Murray sang our praises at a Morgan Stanley conference over a decade ago. NM Is the rare exception of who’s doing it the right way, I agree that 99% of the other stock based and low budget insurance firms are slinging policies, no doubt! If I sold a 1M term policy for $20 per month vs. a Banner Life policy for the same cost, why does it matter what they pay those who bring the solution to bear? In fact, our “cost of insurnace” is lower than the majority of our competitors and that’s why we pay record dividends year over year, 3-4X more than our next 3 competitors COMBINED. 2 trillion of in force coverage from an exclusive ( yet not captive ) distribution system. That’s incredible! So I guess were just out to fool eveyone and it’s been going on for over 160 years. Doesn’t make sense to me….
Jeff: the issue is that you are selling life insurance packaged with an investment vehicle. I’m not saying that a WLI is the suboptimal choice for everyone, but:
1) Most people are better served by a term life insurance.
2) Most people need to take on more risk (and corresponding higher expected return) than a WLI offers.
3) WLI are rather opaque and inflexible. If the investor’s conditions change and a remodulation of risk/return is required, they can do that rather easily with a traditional bond/stock portfolio, but can’t do it at all with a WLI.
I concede that most people are completely hopeless as my point 3) is concerned, so perhaps a WLI can be classified as a suboptimal investment choice that removes the risk a naive investor has to make terrible investment choices.
How many whole life policies have you sold that HAVEN’T been for either one of the rare recognized cases where they’re appropriate (eg. paying estate tax on an illiquid estate) or to the ultra-wealthy who know they are getting a high-fee low-return product? We both know the answer is nowhere near zero. “Buy term and invest the difference” isn’t “cookie-cutter”; it’s broadly good advice that the overwhelming majority of experts agree is best in almost all cases. (That plan can and should be customized, by choosing the appropriate size and length of a term policy, appropriate AA, appropriate traditional/Roth split, etc.) NWM may be a big company, but they have a terrible reputation because they pitch garbage policies to marks who don’t fully understand what they’re buying, and have better uses for the money. I was pitched a WL policy by a NWM agent years ago, when I was single and earning $50k/year in my first job. He pitched it as a “savings account” – hilarious! Thank goodness my BS radar was calibrated enough to realize it was a scam. Seriously, rather than arguing with a guy who you’ll never sell a policy to, go spend an hour reading WCI’s list of “inappropriately sold WL policies.” Then try really hard to see the point that people like me make when we say that there are serious problems with way the industry in general, and NWM in particular, sells whole life. You can report your findings back here.
Like I said, Fortunes Most Admired, 96% satisfaction rate, AAA w/ positive outlook (only 2 US firms fit that category)! I have more term insurance on the books than whole life, get your facts straight. Sure, we have a terrible reputation ( in your mind ). Go listen to an Ed Slott talk, an expert who doesn’t sell anything you or I are squabbling over, post one of his videos and tell me where he’s missing the boat. I pay claims, so I know reality…
I recommend anyone thinking of buying a whole/universal/permanent life insurance review this decision tree/flow chart –
https://www.whitecoatinvestor.com/wp-content/uploads/2015/03/Permanent-Life-Insurance.jpg
The EY “study” doesn’t have the underlying details to show how they came up with their computations. The details that are shown are heavily stacked in favor of the permanent insurance options.
– Investments are always begin at 50% equity / 50% bond, whole life, etc. regardless of age
– Investments assume a fee of 1.25%
– Annual equity turnover is 25%
– Investor purchases Annual Renewable Term until 65
Basically garbage in – garbage out
And even with those garbage inputs that are stacked against the investments, the study still showed that investments strategy was more likely to generate more wealth than insurance products strategy.
Not just garbage in. But cherry picked garbage out.
I have a whole life policy for $100k that I opened in 1995 (my ex’s father was an insurance agent). I pay $1200 a year for the premium and I have a cash out value of $43k. My kids are grown, the house is paid off, and I maximize my retirement accounts. Should I cash it out for a VA or would you recommend continuing to maintain the policy?
Thank you for any guidance!
Why did you buy the policy? Does that reason still exist? What is your return likely to be going forward? Are you okay with that or do you have a better use for the money?
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
I don’t see a reason to do a VA as you have a gain in the policy. If you cash it out, take the money, pay the taxes on the $10K or so in gains and use it elsewhere.
Gretchen – once you have kept a policy this long, you likely DO NOT want to exchange it to a variable annuity. You usually only do that in the early years when your cash value is less than the premiums you have paid.
I have no idea if your premiums have remained constant over the years, but assuming they did, you paid about $1200/year x 26 years = $31,200. Your cash value is greater – $43K.
So I believe your options are either cash out or keep the policy. If you cash out, then do as you see fit with the money. Invest in a low cost mutual fund, buy a new car, whatever.
There is not enough information to say whether to keep the policy or not. While whole life policy is a TERRIBLE investment from the start, it gets less awful over time. You’ve had the policy for 26 years, so going forward it could be an OK investment.
But this is another challenge with the insurance industry. It is darn near impossible for the average person to figure out if it is a good investment going forward or not. You would need to ask for an in-force illustration, and see what the guaranteed returns are going forward. Even that can be hard to ascertain. I had to hire a professional to analyze my wife’s policies. If you read the much earlier comments you’ll see many people recommend James Hunt of evaluatelifeinsurace.org, who I used to analyze my wife’s policies. A few years ago, I believe that I paid $100 per policy to analyze.
As much as I hate whole life insurance, and as bad of an investment as this has been, it actually may be a decent investment going forward.
Buy a car? That’s your advice? “It might be a decent investment”? Very confusing. Here’s a link that might educate Meredith better:
https://paradigmlife.net/blog/cash-value-and-whole-life-insurance/
I agree, it is very confusing! The insurance industry has done a tremendous job of making permanent life insurance a very opaque, difficult to understand product. If this were a mortgage – we ‘d ask what the APY is, the term, and if there are any points and fees. Then it would be really easy for anyone to comprehend if it is a good mortgage or not.
Unfortunately, the permanent insurance industry has intentionally made it difficult to understand. Trying to figure out the guaranteed return going forward from an in-force illustration is not for the fainthearted. In your sales cycle, do you show clients their breakeven point and their guaranteed return?
As for “educating” Meredith, a much better resource is here:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
And yes, buying a car is likely a much better option than investing in permanent life insurance. Because if a buyer doesn’t like after a year, she can sell it and gets a year of driving out of it. After a year of whole life insurance, you got one year of life insurance that you could have bought for a fraction of the cost.
Noraz123. Good attempt at trying to explain that Guardian policy, you missed a few keys points. I don’t offer Guardian except on occasion for female specialist in the medical space. No wonder people are confused because you even don’t understand what you’re looking at… So I assume in addition to buying a depreciating asset like a car you would also say that a 30 year mortgage is a good idea as well?
Jeff – agree. I probably missed a lot of points in that policy! And I have spent years years reading and re-reading this blog post, all its comments as well as many other articles. And I still don’t fully understand all the ins/outs of permanent life insurance! And if after all that study, *I* still don’t understand it, there is no way the average investor will.
“So I assume in addition to buying a depreciating asset like a car you would also say that a 30 year mortgage is a good idea as well?”
Yes. I need a car to commute. It’s a necessary part of my life and well being. So buying isn’t a good idea – it’s a great one. Same goes for a place to live. And what is great about those items is that purchasing them are very transparent transactions. Consumers can easily understand what they are buying, how much it will cost, and how to comparison shop.
The same cannot be said for permanent life insurance. It’s intentionally cryptic investment that that almost 80% of people who buy it, give it up.
PERMANENT LIFE INSURANCE IS ALMOST ALWAYS A TERRIBLE INVESTMENT.
Northwestern Mutual has made me a worse person and doctor. I wrote a guest post of how my NWM high school buddy of mine screwed me: https://www.whitecoatinvestor.com/finsmart/
Jeff, I hope you are not like my buddy. He thought he was doing me right, but 7 years after buying a $1mil policy paid to 65 on me and the wife, I was in $31,000 of credit card debt and rushing through patients to generate enough money to pay the $28,000 yearly premium.
One of the brain cancer patient’s family members sent an e-mail to me lambasting me for rushing through a visit. I went into medicine and I swear to god I put in 110% of energy and focus to provide great patient care. Which is why I was financially illiterate in the first place. My brother has cerebral palsy. yet I forgot that as I was trying to rush through patients to pay for that expensive Northwestern mutual policies.
I will never forgive myself for compromising the care I deliver to patients to line Northwestern Mutual’s pocket. My wife has not forgiven me as she is a doc too and had to work harder, spend less time with our kids, to keep up with the WLI premiums. And you know what, Ed Slott, nor the AAA ratings care about my patients, the time away from my kids, and the seething anger of my wife in my marriage.
Wade Pfau is not a doctor- he uses life insurance for a specific purpose as a buffer asset in order to delay SS to maximize income as well as not drawing on equities to mitigate SORR. My buddy and many other Northwestern Mutual agents are trying to maximize commission- he never told me about Wade Pfau, or other appropriate uses of WLI as Jim Dahle outlines.
I am in a bad place because of Northwestern Mutual.
I agree. The ONLY reason I’m not ruined financially due to the VUL I had is because I didn’t have student loan debt, I’m in a high paying specialty and I discovered the White Coat Investor after only 5 years of owning the policy. I have daydreams of getting all of us docs together and suing the unethical advisors who sold us these policies. There have been lawsuits settled in this arena. But I’m trying to look forward, be positive and happy that I’m still young and can recover from this.
Rikki,
How much were you earning when you committed 28k to premiums? Were you maxing out a 403/401 at that time, just curious?
Jeff
Wife and I were making total 400k/yr. And yes, was maxing out both me and the wife 401k’s, which at least my buddy said I should do. Unfortunately, there was other bad advice of rolling our residency 401k money into an IRA, and then buying a VA within the IRA 🙁 and then when I asked him about the backdoor Roth, he said can’t do it because I had an IRA! used this to sell me the whole life policy. also sold me non true own occ disability and term to 80 convertible life insurance, WLI policies on my 2 kids when they were born, and expensive advisor led 529’s.
It wasn’t until my kids were born and bought a house that the financial strain took it’s toll, on top of still having student loan debt payments just couldn’t keep up. I think Northwestern was able to have many docs in the past get through the terrible returns in the start of these policies because student loans were much lower, so it was not a problem paying high WLI premiums. And once these older docs got halfway through the policy, you start getting a return on your premiums. But with such high debt burdens, whole life has high change of failure like me.
It is totally inappropriate for 99% of docs, as docs have such high debt burdens and better use of their money. Medicine is not the cash cow it used to be before given the high student loan debt and our salaries have not kept up with inflation, and it’s caught up and uncovered Northwestern Mutual’s predatory tactics.
Thank you for the details, how much was your home purchase for and mortgage pmt when you started to feel the squeeze on the life policies @ 5% of your income?
Home was 1.2mil, and put 20% down. Payment 6700/month escrow. Didn’t feel the squeeze until 2 things happened- my practice had a bad year and my $350k income became $250k; and my wife took 3month maternity, so her 200k income became 150k. This dramatic loss of income uncovered the problem with WLI- have to keep feeding the beast, and if you don’t the whole policy doesn’t work. I borrowed against the policy and could not keep with the 8%interest on the loan :(. Getting out of my policy would be a 25k loss on each policy. Would have been no problem doing term and investing the rest.
I’m sorry you are going through that. I had a huge loss ($70,000 when taking into account the cash value loss plus the surrender fee) on my whole life policy but now it’s growing back to basis in Fidelity’s low cost annuity option. I’m so glad I got over the hump and just got rid of it because thinking about my poor decision to buy it and the potential future losses if I were to have kept it were creating significant anxiety for me. Have the policy evaluated (an expert from the bogleheads forum offered to do that for me at no charge) and if the right thing to do is surrender it then do it ASAP. Interesting that even with the huge loss it STILL made sense to surrender it! This shows how bad these products are for most docs. I was putting in $6000/month into it when I should have been paying off my mortgage! Now we will have our mortgage paid off in only 3 more years bc I’m putting those extra payments into it. Not sure if you attended the WCI conference this weekend but if you can get access to Jim’s talk on investment/retirement combined products I think you would find it very informative. He also has several blog posts on the topic but the lecture brought every detail together in one place.
Glad you enjoyed the talk! It’s nice to be past the stress but the conference turned out better than my highest expectations.
Unfortunately, this is an often-underappreciated problem with whole life when used for retirement savings – you can’t stop paying the premiums! Unlike with IRAs and 401k’s, which you can suspend contributions anytime, if your financial picture changes. Yes, I know you can pay WL premiums with policy dividends, but this is only possible in some circumstances without the policy eating itself and collapsing, usually only for policies that have been held for decades. Shocking that an agent who would get a large commission from the sale of the policy wouldn’t point out this disadvantage compared to normal retirement accounts.
I think a permanent policy is appropriate for legacy purposes. A guaranteed UL policy with minimum cash value can be designed to fulfill legacy if that is important to you.
It should be obvious, but since life insurance salespeople keep bringing up the “permanent” nature of cash value policies:
Few people need permanent life insurance.
People who don’t need permanent insurance should not pay anything for the permanence feature.
People who don’t need it certainly should not pay high costs to get permanent insurance.
When people no longer need their earned income to achieve their financial goals, they are ready to retire. They may decide to continue working but they should drop their disability insurance and their life insurance.
When they stop driving they should drop their auto insurance.
If they no longer own a home, they should drop their homeowner’s insurance.
Paying huge premiums to have a policy that one could keep throughout old age is a waste of money. Unless one is of the very few who actually need life insurance at age 65.
I agree. Last year I did the 1035 exchange into Fidelity’s low cost annuity. The total fee is 32 basis points. They waived any other monthly fee. That was cheaper than the Jefferson National.
Hey Shareen, I believe it was you who asked the question about whether to keep the Fidelity VA or not now that is has grown to cost basis. I asked the same question when my VA grew to cost basis, and I believe your answer should be the same as mine- just surrender it. You likely have no need for an annuity, and you are now financially literate where your money is best used elsewhere like maximizing retirement accounts, and hell, even a taxable account has long term cap gains treatment compared to ordinary income of a VA.
Also, I believe Jim was wrong about dividends not being taxed in a VA. The subaccounts I believe have no dividends! so you are missing out on the dividends while you are investing in a VA subaccount. Dividends have been a huge part of stock market growth that you will be missing out on as well. I do not believe these negatives outweigh the minimal benefit of asset protection of the VA.
Just surrender the annuity and invest the money in retirement accounts/taxable.
congrats man on your VA growing to cost basis! It fees great, doesn’t it 🙂
They may not have “dividends” in a traditional sense, but you should still get the portion of earnings that would be attributed to dividends in the form of a share price increase in the subaccount.
oh yeah, also there is no surrender fee for fidelity’s VA 🙂
I am scheduled for a physical exam next week for a WL policy. I am worried that I may not be able to afford the policy over the long run. I’ve already paid $6000 into it. If I cancel it now will I be able to get the entire $6000 back or are there fees?
dude get out of there!!!!! You have what’s called a “look free” period where, depending on your state, there is no penalty. Call right now!!!! Is it Northwestern Mutual? As much as I hate that company, they do everything legally and they will verify the rules in your state, and you don’t have to call your “advisor” that sold you the policy- I called the general Northwestern Mutual number.
Even if you can’t get the $6000 back, just cancel the policy anyway. don’t fall victim to sunk cost fallacy- do not keep throwing away good money after bad.
also, if the advisor sold you a variable annuity as well, usually within an IRA, you have the same “look free” period as well
I’m glad you are getting out early- 7 years into my WL policy for me and my wife we lost $50,000!
I wish I could be in your shoes right now rather than where I was in 2009. Please stop the process immediately. If you lose the $6000, don’t fret and see it as a stupid tax -that mine was 9 times larger. My wife and I were sold NM policies as well as loaded MF with high loads, even though we told our advisor that we wanted to pay down high student loan balances, fund 529s and pay down our mortgage. Over the course of 7 years our family grew from one child to three and we couldn’t afford all of the NW policies and brokerage accounts.
We eventually switched to year term policies, saved a ton of money, paid down our loans, and save in low cost index funds.
Our NW advisor called quarterly for the first two years (likely the time when he received a lion’s share of his commission) always asking for more doctor names to peddle his overpriced wears. After the two year period, he called once a year, if that again always asking for names. It was always asking for names to fuel this vicious cycle.
Please run away, just do a quick search on WL , but since you are at WCI, it seems like you are much smarter than I was years ago. You will save many a sleepless night if you just stop now. I would toss and turn trying to figure out how to keeping paying for them. When we had our other term policies in place and cancelled I finally had relief, but then the anger boiled(s) in me. Please don’t make this mistake. Just search for “DupedMD” and you will read my story.
Sincerely
Pure evil these NM ( 96% satisfaction rate ) folks are, the above post makes no mention of what company has him paying 6k into a WL policy but yet let’s keep piling on NM. If you want correct advice, this person can get 100% of his premium back if he’s not completed his medical exam. I thought I would chime in to give him the answer that he was looking for, not another angry response. Phsycologist suggest that folks enjoy anger and it’s a controlled response, not from something that actually happened to them. Imagine, asking someone for introductions so they can meet new clients, that’s so wrong… JSV
As a general rule, get an inforce illustration to see how much, if any, of that $6K you can get back. But I’m not sure you even have a policy yet. How have you put money into it if you haven’t even had a physical exam yet? I bet they won’t issue the policy if you don’t take the exam and so you’ll get your $6K back.
I just started practicing and purchased a Guardian whole life insurance policy for my wife and I from a “financial advisor” last year. I have paid $1,000 a month for 14 months so that’s $14k spent on it so far. Unfortunately, I am just learning that whole life insurance is not the great insurance/investment vehicle it was sold to me as being (I am trying not to think about how well that money would have done if I had just invested it over the same time period). With the riders, the current surrender value of the policies combined is $5,400 so that’s a loss of $8,600. In reviewing these posts/comments, it appears the only option I have to not lose that $8,600 is via variable annuity. However, Fidelity requires $10k minimum for their VA and Nationwide charges $20 a month in fees (roughly 5% annually of the money that would be in the VA, which would make it hard to earn money). Also, does it really make sense to set up a VA in the hopes that 20ish years from now I’ll make up that lost $8,600 and hit $14k? Thus, it seems like the best option for me here is to just consider the $8,600 a stupid tax and get out now. Does anyone disagree or is there anything I’m missing on this? Thanks!
I was in a similar situation as you and although it hurts, I ended up cancelling my policy and walk away with the cash value.
The other option is to just stop the payments and have them reduce the face of the policy and you can stop the bleeding and your policy would still be in effect but at least no more monthly payments. You can then decide to move it to a VA if you need more time.
Look at the bright side…you found out sooner rather than much later.
The money is already lost. The only benefit of a VA is to avoid the taxes on $5,400 of gains, so perhaps saving $1000-2000 in taxes. I don’t think that would be worth the hassle of the VA to me. I’d get term insurance in place and walk away and consider that $5,400 loss a “stupid tax” aka a learning experience. If it makes you feel any better, it took me 7 years, not 1, to fix the same mistake.
I agree with the other posts. A variable annuity just isn’t worth the hassle at your current loss, which is a great thing! You caught a bad investment with only a $8600 loss.
Many people go years before they learn these are such bad investments. My wife lost over $30k.
Cancel the policy (get term life insurance first if you need life insurance), take the money, and be happy that you are WAY ahead of Mos and who buy (err, are sold) whole /universal life insurance policies.
yeah dude, I lost 25k on me and 25k on my wife’s policies, 50K loss in total! Made sense for me to do the 1035 exchange. you only lost $8.6K- not bad at all I agree with the other comments consider yourself lucky and not a sucker like I was, take that remaining cash value and invest 🙂
So I dumped my NWM WLI policy and did a 1035 exchange to vanguards VA (which was sold to transamerica). This was 2 years ago, now it has increased to 12,276 whereas my initial cash value was $12,100, so I am at the stage where I want to withdraw the money from my VA.
After calling transamerica, I was told I would incur a 10% early surrender fee as I am less than 59.5 years. I thought that the goal of 1035 exchange was to avoid tax on its withdrawal ( I understand I will only be taxed on $100 the difference between initial cash value and it’s value now) but is there a way to avoid surrender charge?
I guess im not sure where the advantage of doing a 1035 exchange is as I could have withdrawn the money from WLI and just invested it and kept the gains.
Thanks for all that you do and this forum!
I am hoping for your sake there is some confusion – there are surrender charges which the issuer charges (e.g., Transamerica) and then there are early withdrawal penalties which the IRS charges (before age 59.5).
So if Transamerica is warning you about the latter (and I am guessing it is), you should be fine. The 10% penalty would be on GAINS. In your case, you have $176 of gains ($12,276-$12,100). Surrendering your VA could (will?) result in a penalty if $17.60, which was definitely worth the tax free gain to grow your basis back to $12,100.
Double check with Transamerica, but I know that Vanguard variable annuities did not have any surrender charges. I would be very surprised that Vanguard would sell them and then they would have charges.
Let me see if I understand correctly. Your friend sold you a $280k term policy that also has a $20k whole life portion for $7.91/ month?
Sounds like cheap insurance to me.
Glad you approve.
What are your thoughts on an adjustable comp life policy? Our financial advisors recommended it and set one up for my wife and she (now, we) have been paying into it for almost 6 years now. They made it seem like eventually we will begin to see positive gain on this AND we are able to take money out whenever we want in case of financial necessity which I like but not sure if we are getting hosed on this. We are definitely going to cancel our Whole Life policy but curious if there is any benefit to an adjustable comp life policy or if these two things are one in the same.
Thanks in advance!
yeah dude, you are getting hosed!!! don’t worry man sounds like you only have a policy on wifie and not both of you like when I was freakin duped. The adjustable life just mean you can go back to term, but while it is whole life you are paying high premiums and like you said, you still after 6 years having come out ahead!!! And guess what happens if you adjust it back to term- now the premiums are lower, but you are still paying higher premium in order to keep the option of converting back to whole life! And when they say you can take the money out of the cash value, this means you can borrow against it with the cash value as collateral. My NWM policy the loan on my cash value was 8%!!!! I’m sure borrowing against your cash value is going to have a similar high interest rate, and its your money! First, get appropriate term life insurance like from term4sale.com, and then get out of this stupid moneysucker by doing a 1035 exchange if you have a huge loss, or just surrender it and invest the cash value in taxable.
Sounds to me like you mistook an insurance agent for a financial advisor.
Yes, eventually you probably will have a positive gain on it. Yes, you can take the money out whenever you want. But you’re probably also being hosed. Hard to say though without knowing more about you and the policy.
My wife and I have a whole life policy. After finding this site we have been questioning our whole life policy. We are 6 years into the policy. It does have a cash value currently but would have to continue for another 8 years or so to break even. What is our best option to cancel and get our money back from all the premiums paid for 6 years? We would love to cancel now but the cash lost is too high to swallow.
Hi Danny, I am so sorry you got screwed, but you are not alone- tons of us have been as you can read from the comments above, including yours truly. The best most optimal option usually is to do something called a 1035 exchange, where you take your whole life policy cash value and transfer it into a low cost variable annuity. I recommend using Fidelity’s low cost variable annuity as it is the lowest cost insurance product to do the 1035 exchange. The reason to exchange the whole life policy to a variable annuity is that when your cash value is transferred into the variable annuity, you can then invest that money in low cost index funds and they grow back to your “cost basis” tax free! Cost basis means the amount of money you paid overall in life insurance premiums. So my example, I had $130,000 of cash value, and had paid $180,000 in premiums over 7 years. so when I transferred the $130,000 into the annuity, I invested $130,000 in a total stock market index fund, and 2 years later it went up by $50,000 so when I had $180,000 now in the variable annuity, I surrendered it and now had $180,000 without paying any tax on that $50,000.
How much do you have in cash value? Is it a Northwestern Mutual policy?
I agree with Rikki 100%. Your advisor loves these policies because of the commissions he/she makes from them. Find someone else or do it yourself. Becoming a DIY investor has been so rewarding for me in so many ways.
14 years to break even? That’s a bad sign. You could probably cancel the thing, buy a whole new one and start over, and still break even faster than 8 more years!
There is no option to get all your money back right now. While it’s kind of a rude term, some people call your loss “a stupid tax.” You made a mistake and it cost you some money. No way to get that back. It’s a “sunk cost.” It’s “water under the bridge.” All you can do now is decide what is the best thing to do going forward.
Do you need a whole life policy? If not, why not surrender it and put whatever money you can get out of it into a real investment?
If it is a substantial amount, you might consider exchanging into a low cost variable annuity until it grows back to basis and then surrender the annuity. That might help make lemonade out of lemons a bit for you. At least you’d get a little tax free growth for a while.
Where are you at? How much have you paid in premiums and what’s your cash value?
Have about 70k in cash value but maybe put in about 120k so far in premiums. It is not with NWM. Its with Guardian. Our Financial planner loves whole life insurance policies because there is no risk and the gains at the end are tax free but I don’t like being stuck with such a high premium for another 30 years! You never know what life may bring you, so I just don’t like the idea permanent premium for so long.
Hey Danny yes I definitely think you should do the 1035 exchange. Those gains on the cash value are NOT tax free, its return of your premiums/cost basis. I was sold that they are tax free as well. But say at the end of your policy you had paid $500,000 in premiums and your cash value is $1mil. You can take out the first $500k “tax free”, but technically that is your initial investment! Then after that the other $500k of gains is then taxed at ordinary income. You could borrow as a loan against the cash value, but instead of paying taxes you pay an interest rate. And I was in your same situation! can you imaging the opportunity cost of those premiums actually being invested in a taxable account in a low cost index fund, instead of paying for unnecessary insurance!
First, make sure you have appropriate term life insurance before you do the 1035 exchange. go to term4sale.com and price out what you need. Then go to one of the recommended insurance agents here on WCI to buy the cheapest term policies. I myself used Bob Bhayani. Also make sure your disability insurance is appropriate that you got through your “advisor”. Luckily Guardian is true own occupation. If it’s not, then ask the WCI recommended insurance agent to get you true own occupation definition disability.
With appropriate term in place, then stop paying the whole life premiums! Ask Guardian for an “in-force illustration” of your whole life policy. if you don’t wish to talk to your “advisor” just call the Guardian general number. With this in hand it will have your cost basis and exact cash value. Then call fidelity that you want to open a low cost variable and annuity and do a 1035 exchange. They will guide you through the process. Once you have the low cost VA open at Fidelity with your cash value in it, invest in the low cost index funds within it. When I opened mine the lowest cost funds were the total US, total international, and total bond indexes. Wait until it grows to cost basis, then surrender the annuity. Success! Take that money and put in a taxable account and invest in low cost index funds.
BTW- fire your advisor/salesperson. My advisor/salesman was a high school buddy of mine and I just didn’t talk to him throughout this process. I just called the Northwestern Mutual general number.
Hello Rikki,
I’m back now and starting the process of withdrawing products from my FA. I have been doing research into where to transfer cash value via 1035. I read Vanguard no longer has VA and was taken over by Transamerica. I have other products with Vanguard and would have preferred everything in the same vehicle. However since this isn’t the case I was looking into Fidelity. I can only see retirement variable annuities on Fidelity’s site unless I need to call them to get one where I can cash out once I reach my basis. Any pointers to help point me in the right direction? I am not fiscally literate so I may need more learning.
I did this. Call Fidelity and tell them exactly what you want: 1035 exchange of a whole life policy to their low cost variable annuity product. The agent asked me a bunch of questions, made sure I had term insurance in place and then emailed me the paperwork to sign. It was not a difficult or time consuming process. Then let it get back to basis and surrender. I was just about there and then COVID. So I’m waiting it out again.
Hello Shareen,
Thank you for the response. If you don’t mind me asking, how long did it almost take you to reach your basis prior to COVID? Was your loss in cash value as much as mine?
hey Danny I would definitely recommend Fidelity as it is the lowest cost VA you can find (see comment #247 below). retirement variable annuities and variable annuities are the same thing. an annuity in general is a retirement product that is sold to give you a steady strem of income in retirement, but the cool thing about variable annuities is that although they are very horrible products for retirement, the retirement variable annuity at Fidelity is perfect for 1035 exchanges out of cash value whole life insurance. so what you are seeing on the website is exactly what you need. Like Shareen says below you need to call them to set up.
Rikki,
Is there a 10% penalty for cashing out the VA prior to 59.5 years old?
no, there is no penalty until it grows up to cost basis. The penalty would be applied to any gain on the VA past cost basis, but I strongly recommend that once the VA hits cost basis to surrender the VA and then invest that money in taxable.
Btw it seems you have the same loss as I did of $50,000, and it took me 2 years for my VA’s (one on me and the other one on my wife’s whole life policy) to reach cost basis. if you were to do it now during this bear market, you might recoup the loss even sooner!
Hello Rikki,
I have another question about the 1035 exchange. Is this process better than just cashing out the whole life policy and then placing that money into a brokerage account and let it grow? Is this an option or is it better to do the 1035 exchange into a VA? If so, can you explain why?
Transferring to low cost annuity allows your money to grow back to basis without being taxed on the gains. If you transfer to brokerage you are locking in your loss and will pay tax on the gains.
+1 to what Shareen said.
Example
You invested $50,000 into your policy. It is now worth $30,000.
One option is to cancel the policy and move $30,000 to your brokerage and invest in any way you want. Assume that money then grows to $50,000. If you sell your investment, you will owe $20,000 capital gains ($50K-$30K). Net net – you lost $20,000 in the insurance policy, and now owe taxes on the $20,000 gain (assume 20% capital gains tax, you’d owe $4000 in taxes).
Another option is to do a 1035 exchange and move the $30,000 to a variable annuity. You are must invest in the options that the VA offers (but thankfully there are good options out there, Fidelity’s FXVLT is but one). Let’s say that money then grows to $50,000. If you sell (technically cancel) the VA, you’d owe $0 in taxes. Net net – you lost $20K in the insurance policy.
The VA requires more work/effort. Everyone is different, but if my loss were less than $20,000, I’d skip the hassle of the VA, cancel the insurance policy and invest it in my brokerage account.
I have to echo what Shareen and Noraz said. It depends on how much loss you have. In my case, my cost basis was $180,000, and my cash value was $130,000. so I had a $50,000 loss!!! so by transferring that $130,000 into a low cost VA, I was able to let it grow back to $180,000 tax free, and then nix the annuity, and then I put that in taxable.
If I had just cashed out the whole life policy and put the $130,000 in taxable, then the growth gets taxed. For me was easy to save a crapload of money with tax free growth given the loss was so large. My Long term cap gain rate currently is 23.8%, about 25% so 25% of $50,000 is like$12,500 I saved from doing the 1035 exchange.
How much loss do you have in your policy?
You need a new advisor. This one is an insurance agent masquerading as a financial advisor.
A $50K loss may be worth the hassle of the VA exchange.
Nationwide/Jefferson National has a low cost VA that has over 370 funds including Vanguard and DFA. Only a $20 quarterly administration fee. I own this one and really like it because it has a stretch payout for your beneficiaries over their lifetime, similar to the IRA stretch that was eliminated by the SECURE Act.
hey FBN sounds like you are actually going to keep the low cost VA at Nationwide. when I was doing my 1035 exchange I considered Nationwide (was jefferson national at the time) given that $240 flat fee, but the subaccounts made it more expensive as I believe even the low cost index funds in the Nationwide product are more than 50bps. I eventually chose Fidelity which has a flat fee of 25bps, and the low cost index fund options within it is 13-17bps for a total cost of 38-42bps. I myself was planning on surrendering the low cost VA once it his cost basis. I do not have legacy goals like you have.
FI physician had a great article going over low cost VA’s that really hashed out the low cost VA options: https://www.fiphysician.com/investment-only-variable-annuity/
I have two Life Insurance Policies and I am considering on a cashing it out since it is becoming extremely expensive and I am on a fixed income
My Whole Life Insurance is approx $105.000 and I am charged over $3.000 with a dividend of $600.00
My next Insurance is approx $90.000 with a monthly payment of $373.00
I am seriously thinking of cashing it out
Please give me some advise of this
Do you have a need for insurance? If so, can you get term that is significantly cheaper? Those are the first two questions to ask yourself.
hey Joy I echo Jim’s comment on deciding if you need the life insurance, and if you do, then determine if you can get TERM insurance for the years that you need it cheaper. you can go to term4sale.com to see rates. Realize you also might have the option to turn these whole life policies into “paid up” policies where you can stop paying the premiums and then your death benefit is reduced, but it might be just what you need for you insurance needs and can just keep the policies as “paid up”. you would have to ask the salesman that sold you the policy
if it turns out you can get the TERM insurance that you need cheaper, then buy that term insurance, THEN consider either surrendering your policy or doing the 1035 exchange if you have significant loss going forward. You would hate to get rid of this policy when you needed the life insurance, then get denied term life insurance for health reasons or whatnot.
To really decide if you should surrender the policy or 1035 exchange it you needs all the facts, which you will have to ask your salesman for an “in-force illustration” of both policies. This should have not only the cash value, but also the “cost basis” or the amount of money you have paid in premiums so far. I was unclear whether the $105,000 and the $90,000 you have in these policies was the cash value, or the cost basis? i am assuming its cash value, and if the cost basis is higher than these numbers, then you have a loss, and I would recommend if you are a doc in the higest tax brackets doing a 1035 exchange if it is at least a 5 figure sum of money that you lost, so you can make that money grow up to cost basis tax free. You said you are on fixed income- are you retired? are you in lower tax brackets? if so then a 1035 exchange might not be that beneficial, and you might just want to surrender the policies.
if your cash value is actually miraculously higher than your cost basis, then congrats, you lived through the terrible parts of the whole life policies and you actually have a gain. in that case you might want to surrender the policy and pay taxes on the gain, or make the policy “paid up” as I mentioned above, keep some death benefit and have the cash value as almost like a savings account to draw from, or not touch the cash value and just borrow against the cash value if you need an emergency loan or something.
Hope this helps and definitely keep asking on this forum it was these comments that saved me and made the best out of the $50,000 that I lost in whole life insurance!
Hi White Coat and community/forum friends,
My next premium payment is coming up in about 10 days, and I want to be well rid of the expenses by then. It’s just too much for the current CoL I have to bear for work (another scam, but I digress).
A note to please explain to me like I’m 5 (few acronyms and simple terms/explanations please), as I’m not very financially versed in these parts — which is frankly how I got got, trusting a colleague’s now ex-husband, who is a NWM “financial advisor.”
I have 4 NWM products:
1. A whole life policy I’ve had since March 5, 2021. I’m looking at my policy statement for 2022 and it shows —
Accumulated value: $6,832.42
Less Cost Basis: $12,315.13
Taxable gain if surrendered: $0
Monthly premium: $1,035.60
Death benefit: $963,914
Annual dividend: $985.22 (auto-increased value + death benefit)
Current annualized premium as of today shows: $12,427.20
Current net accumulated value shows: $10,306.49
*If I understand this correctly, I will have given them roughly $25k for the two years, and have only roughly $10k thus far to show for it. So a loss of $15k, assuming the accumulated value doesn’t move in either direction. I’m unhappy, and want to recoup this. Also want out of this monthly payment. Unclear whether it’ll be taxable at cancellation since this year isn’t done yet, but based on the prior year’s statement, I’m hopeful that it wouldn’t be taxable. Do I just have to eat this loss? Is there a low-cost + low tax or tax-free way to recoup?
NWM product 2 —
2. Term 80, also since March 5, 2021. Now eligible for permanent life conversion (and they’ve been pressing hard in email, so I smell the scam).
Total death benefit: $4,036,086
Monthly premium: $119.46
Annual dividend: $0
*I am currently unmarried, no kids, and don’t want kids (reasonably firm on this). I can accept this roughly $2k “gotcha” tax if I can cancel this policy. I have a smaller term policy through employment that’s about $275k in death benefit and it’s about $6 a month, taken pre-tax.
NWM product 3 —
3. Guaranteed renewable DI (age 70 max), also since March 5, 2021. I don’t like what I pay for this, since dividends are pretty much no-go and it’s an “oh in case you need it” policy. I’ve kept it only because work disability only pays about 1/3 to 1/2?? (Can’t remember) of your total salary if you become disabled. It says this policy is eligible for cash dividends that’s are used to reduce premiums, and NWM can’t change my coverage. Only I can.
Annualized premium: $1,609.20
Monthly disability full benefit: $6,430
Beginning: 91st day
Current monthly premium: $134.10 (increases annually, which I really don’t like)
2022 annual dividend: $0
Optional benefits also included:
-future increase benefit
-partial disability benefit
-indexed income benefit (COLA; no idea what this is. Percentage limit is 3%)
*It says the premium reflects that I’m receiving a volume discount, so I think that means I’d need to drop this when dropping my WL policy.
NWM product 4 —
4. Brokerage account. I’ll be rolling this into a self-managed brokerage as soon as I identify which will let me keep my S&P 500, with the lowest fees. $40 a transaction is criminal so I’m getting rid of this. (I have about 4 different brokerages including this one: Stash, Robinhood, E*trade, this one).
Holdings:
-VOO (S&P 500): I asked for this stock.
-AAPL: I asked for this stock.
-NMFD: I did NOT ask for this stock. Is this illegal for the rep to do, or maybe it was in my contract somewhere? (Least important question; please prioritize insurance Qs.)
Please help with best options and steps to take, in simple terms. I’m fighting tears in how I’ve gotten got, by people I trusted to look out for me. Thanks in advance for your help.
1. Ensure adequate term is in place then I’d drop this. https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
2. I’d reshop this someone I trust and see if I can find something better: https://www.whitecoatinvestor.com/websites-2/insurance/
3. I’d reshop this someone I trust and see if I can find something better: https://www.whitecoatinvestor.com/websites-2/insurance/
4. VOO isn’t a stock, it’s an ETF/Fund. You need a plan. Once you have it, move the money away from NML.
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
https://www.whitecoatinvestor.com/how-to-fire-your-financial-advisor/
Thanks, White Coat.
1. So that I’m clear, unless I choose the 1035 exchange with a VA (and assuming I can find a low-cost VA according to the article) there’s no way to recoup/offset the roughly $15k premium loss I’ll take in dropping my WL policy. I’ve basically just handed NWM a chunk of my money and I’m out of it no matter what. Is that correct? I saw there’s mention of “a lot of options in dropping WL” and to research. I found your article in researching how to drop my policy and what I can do.
4. Yes, VOO is an etf. Typing in my wee hours on PST.
That’s right. Although I met someone recently who sent them a long detailed letter about what he had been told by his “advisor” and NML sent an NDA and once he signed that they sent all of the premium he had paid back. So you can try it!
OMG! Raven I’m so sorry but you are not alone I myself was just almost 3 years ago in your shoes, and Jim was kind enough to answer my question about how to get out of this NWM stuff just like you are asking now!
I had been screwed by a NWM adviser myself about 10 years ago, so good for you getting out earlier than I did. Worse yet I dragged my wife into this as well who is also a doc, so she has the same exact crap products you mention here. When all was said and done we had lost 50K in whole life insurance, and I am not sure how much I lost in investments in loaded mutual funds or even begin to fathom the opportunity cost either.
It seems NWM advisers all sell the same horrible stuff. It’s like there is NWM playbook for docs. I was sold:
1. A whole life insurance policy paid until 65 (seems like you got sold this)
2. Convertible, non-level term to 80 life insurance (seems like you got sold this well. “Convertible” meaning you can add this policy to your whole life policy in the future, screwing you even more. I think you might be confusing this with your whole life policy. They are 2 separates life insurance policies)
3. A adviser led taxable brokerage account (seems you have this as well)
4. a variable annuity within an IRA (make sure you don’t have this)
5. a virginia 529 plan that is adviser led (again make sure you don’t have this likely not since you are not going to have kids)
6. An adviser led traditional IRA which was opened when I rolled over when I left an old attending job (again check to make sure you don’t have this)
7. non-true own occupation disability insurance. Only the big 6 of Guardian, Mass Mutual, Ohio National, Principle, Standard and Ameritas offer true own occupation disability, which is what you want.
It seems you have analyzed your whole life policy correctly, and it seems if your term covers your life insurance needs and if that’s true then STOP PAYING THE WHOLE LIFE PREMIUM!!! You can do this by logging into the NWM website and clicking on the whole life policy and selecting to end automatic payments. But DO NOT stop payments on the term policies until you get these replaced.
The Whole Life policy I did a 1035 exchange into Fidelity, which you should do so that your cash value can grow up to cost basis (how much you paid in premiums) and you can make up your loss with tax free growth. Fidelity has the lowest low cost VA you can find. Yes, you can transfer that $10k of cash value and it can grow to $25k tax free, then surrender the annuity and that $15k of growth is all yours, and assuming higher tax brackets that’s like $7k of money saved. you should ask for an “in-force illustration” from NWM which will give the actual amount you would exchange into the Fidelity low cost annuity. Call fidelity saying you want to do the 1035 exchange. Fidelity had the cheapest fees I could find at 0.25% of what you invest per year, (aka 25 basis points which I have just learned is the lingo), plus any expense ratios within the funds you can invest in there, which the best ones are only 12-17 basis points. If you need a step by step guide on how to do the 1035 exchange, search the comments section for a comment dated “June 4, 2015 at 1:15 pm MST”. In fact, just use the “find” function in your web browser and paste in that date. The commentator’s name was TJ and gave awesome step by step instructions on 1035 exchanging an NWM whole life policy! Just substitute in Fidelity for Vanguard. I myself did not actually “fire” my adviser but did go behind his back and would called NWM general number in order to do the exchange, send me any necessary forms, etc. You’ll have 30 days to do this after you stop paying the NWM whole life premium given NWM will start eating at your cash value to pay the premium due, however this whole 1035 exchange took me only about 10 days.
Next, you should shop level term life insurance as described in the WCI blog post:https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
I myself used term4sale.com to find the cheapest rates and then asked the disability insurance agents to sell me it. Once you have level term in place, cancel the NWM term to 80 life insurance.
As Jim mentioned above, get new disability insurance, as NWM does not offer a true Own Occupation definition of disability. I used Bob Bhayani at drdisabilityquotes.com as well as Pearson Ravitz, all advertised here at WCI. After you get true own occ disability from one of the big six, then cancel the NWM disability.
Finally, just ask your “adviser” to give you back the money in the taxable account. I asked him just to send it back to my linked bank account. NMFD is just basically a cash money market fund, so no, nothing illegal that NWM did. You will find that when you place cash in many brokerages, it is usually in a money market fund. Also, I wouldn’t try to find a legal reason to get your money back from NWM. NWM is very careful not to do anything illegal. They follow the letter of the law, and the products they sell, although predatory, ares not illegal. Very interesting though what Jim mentions about the “advisor” being dishonest and getting their whole life premiums back! I think definitely worth trying his avenue first actually- maybe NWM is trying to save face???
You can always e-mail me at [email protected] as I definitely want to help out being a fellow victim myself! Or just reply in this forum.
You can do this- I did it, and had no financial knowledge at all until WCI came into my life.
And please, spread the word about these detrimental financial products and predatory insurance companies and advisors. We as doctors don’t deserve to be screwed like this. I am no longer shy or consider talking about money taboo to my colleagues and others given if I had been more open talking about money, I might have saved myself the $50,000 (likely more!) I lost to NWM. Would have been student loan debt free, had more options for me and my wife to work less, and more time with my family.