By Dr. Jim Dahle, WCI Founder
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
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!
Appreciate this thread so much! Adding my own situation, with the hope of getting any input from experienced folks. I opened up a WLI policy with NWM in 2019. My monthly premiums are so high and I honestly don’t think I want this product anymore. My cost basis is about $10k and the accumulated cash-value is about $2500. I would love to do the 1035 exchange into a low-cost VA, like what’s being suggested above, but my NWM advisor said I couldn’t do a 1035 exchange with just $2500 – that I’d need a minimum of $15k. Is this true? If so, how would I go about doing a 1035 exchange? Would I have to keep paying into this WLI policy until I have a minimum value of $15k to transfer into an annuity??? Help appreciated!!
I’m not sure I would bother with the exchange at those amounts. I had put $360,000 into mine before making the transfer. You may want to just cut your losses, surrender it ASAP, learn from the mistake and move on. Especially if you are early on in your career. You have plenty of time to make that money back.
S$ – I am assuming your NWM advisor means that doing a 1035 exchange into a different product offered by NWM requires $15K.
Different providers will have different minimums. Unfortunately, the one I am most familiar with is Fidelity, and they have a $10K minimum. There may be good, low cost providers that have $2500 minimums, but I am not familiar with them.
With all of that said, your loss is $7500. Assuming you’re in the highest capital gains tax bracket, at best you’d be saving at best 20% of $7500 = $1500. While $1500 is certainly a good amount of money, it may not be worth the hassle of setting up a variable annuity. If I were in your situation, I would just cancel immediately (assuming term life insurance in place if needed).
My advice – don’t feel bad about the loss, but rather be grateful and happy you caught this as early as you have. People go many years before realizing how poor of investments these products are, and waste much more money than $7500.
I stand corrected. The lowest cost variable annuity from Fidelity that I can find appears to have no minimum – Fidelity VIP Index 500. https://fundresearch.fidelity.com/prospectus/v1/eproredirect?securityId=922175302&documentType=PROS&applicationId=FILI
It seems could transfer the $2500 to Fidelity and let it grow to $10K tax free there. I wouldn’t worry about what NWM says. I’d call Fidelity. They will likely handle the transfer for you.
hey Erik, actually I think that you are looking at a subaccount within the VA. the actual details with the minimum of 10k to open the Fidelity VA can be found here: https://www.fidelity.com/annuities/FPRA-variable-annuity/overview
and S$ as for doing the 1035 exchange, I echo what the other commentators above mentioned above that you only would be saving maybe around $1500, which is still a lot of money but not significant in the grand scheme of things. IMHO I think it’s worth it because it was so easy, I learned a lot about variable annuities and investing as I perused the subaccounts in the Fidelity VA, and emotionally felt like I was being proactive after being financially stupid. It’s your call if you want to do it or not. The most important thing is to get rid of this stupid whole life policy after having put appropriate term in place and stop losing money! And fire your “advisor”
Hi Rikki – thanks for sharing this perspective! I get that I may not be in the hole as deep as others, but I think emotionally the loss of just surrendering the policy completely and losing $7500 is too a lot for me! I’m just wondering, since there are minimums to open VA accounts, would I have to open one before doing the 1035 exchange and supplement it with my own $10k (assuming I open one at Fidelity that has a 10k minimum)? and then do the 1035 exchange and put in the $2500k that has accumulated in my WLC? I’m just confused on how to go about that.
and LOL! I too am eager to get rid of my advisor as soon as I understand my options! Thank you!
Hi Noraz123 – a little unclear on the $1500 in savings here. I would ideally like to just keep the VA until it grows to the cost basis (10k) and then surrender it. I read in a previous post here that this would be possible, and I’d be able to surrender without paying taxes on any gains (as there wouldn’t be any). Maybe I’m interpreting this wrong, but would love to understand this $1500 piece in savings. Thank you!
The $1500 is my best-guess of what you’d be saving doing a 1035 exchange vs. just canceling and putting the money in your brokerage account.
As Dr. Dahle explains below, the reason to do the 1035 exchange is to let your current cash value ($2500) grow back to your cost basis ($10,000) tax free. If you don’t do a 1035 exchange, your money still grows, but you’ll owe tax on the gains.
I was using the example of your money growing back to $10,000. In the VA example, you owe no taxes. In the regular brokerage example, you owe tax on the gains, which is $7500 ($10,000-$2500). This would be long term capital gains. I used the simple 20% rate (but as Dr. Dahle explains below it can be as low as 0% and higher than 20% when you factor in net investment income tax, known as NIIT).
20% of $7500 is $1500.
So in my estimate, you’d owe $1500 in taxes many years from now if you don’t do the VA.
I am with Rikki, Shareen, and Dr. Dahle – just cancel the policy, take your money, and be *HAPPY AND THANKFUL*. I was very upset when I learned about the policy that was sold to my wife by her financial advisor. But we caught in within a few years time, and we were able to get out with $50K loss. It greatly hurt, but it was because of that universal life policy that I found The White Coat Investor and Bogleheads.org websites. Because of those two sites, we have become very financially literate and have more than recouped our costs with better, lower cost investing and wiser tax strategies. If it weren’t for that policy, I may have never left the bad advisor, be in less than optimal investments and overpaying for financial “advice”.
I know a $7500 is painful. But if you read this website and others recommended by it (e..g, Bogleheads.org), you’ll more than make up that money. You lost $7500. But you just got many tens of thousands of dollars in free financial advice by some really enlightened people. You didn’t lose. You won.
Also, a follow-up to my question – I read on here that by doing a 1035 exchange, the cost-basis would be ‘preserved.’ Does this mean the cash value as well as the cost basis is transferred to the VA? If so, technically, wouldn’t I have enough to open a VA with Fidelity? (10k cost basis, 2500 cash value = 12500k total dollars to transfer?) Or is that not how that works?
You’re still a little confused on how this works. Your cost basis is the total of premiums paid. In your case, $10K. Your cash value is what you would either walk away with or 1035 exchange into a VA. In this case $2,500. The benefit of an exchange is to save the taxes on the gains between your cash value and your basis. In this case, $7,500. So you have to ask yourself, how much would the tax on $7,500 in gains cost? This depends on a lot of things. For some people it would be 0% since they’re in the 0% LTCGs bracket. For others it might be 23.8% or even higher. But let’s call it 15%. So your tax savings would be $7500 * 15% = $1,125. And you might be paying an extra $200 in fees to do the exchange. So now your benefit of the exchange is down to $925. What’s your time worth? Mine is worth more than the trouble of doing that. Now if your loss had been $150K or something I think it would be worth doing an exchange. But for $7,500? Not really. Sorry you lost money. Now you know why so many of us hate NML.
I doubt that is true (although maybe it is with a NML annuity or something), but I wouldn’t bother doing a 1035 exchange for only $7,500 in tax-free growth. I’d just walk away (as soon as I had term in place) and consider that $7500 to be, in the words of Dave Ramsey, “stupid tax.”
And you need a new advisor. Stop taking advice from the one who sold you something that you neither need nor want.
S$ – I am assuming your NWM advisor means that doing a 1035 exchange into a different product offered by NWM requires $15K.
Different providers will have different minimums. Unfortunately, the one I am most familiar with is Fidelity, and they have a $10K minimum. There may be good, low cost providers that have $2500 minimums, but I am not familiar with them.
With all of that said, your loss is $7500. Assuming you’re in the highest capital gains tax bracket, at best you’d be saving at best 20% of $7500 = $1500. While $1500 is certainly a good amount of money, it may not be worth the hassle of setting up a variable annuity. If I were in your situation, I would just cancel immediately (assuming term life insurance in place if needed).
My advice – don’t feel bad about the loss, but rather be grateful and happy you caught this as early as you have. People go many years before realizing how poor of investments these products are, and waste much more money than $7500.
Hi Noraz123 – can you expand a bit on the savings of only $1500 piece? Maybe I don’t fully understand the capital gains tax bracket piece yet. But my goal with doing a 1035 exchange into a VA would be to let the money grow in the account until I’ve recouped the $7500 lost in premiums essentially. I would then close it out at that point, so I wouldn’t pay taxes on any gains – as there wouldn’t be any. If i’m understanding this 1035 exchange to VA option correctly. So where would the $1500 come in? Thank you!
$1500 is my best guess what your savings will be with a 1035 exchange.
If you just cancel the policy, put the $2500 in your brokerage account, and let it grow. You will owe capital gains taxes on $7500 ($10,000 – $2500). I used 20% as the tax rate (but as Dr. Dahle mentioned, it can be anywhere between 0% – 23.8%).
20% of $7500 is $1500.
So if you do a VA, you can save $1500 on your taxes many years from now (the time it takes the VA to grow from $2500 to $10,000, – I’d guess about 20 years from now).
Or you can just cancel the policy, take the $2500 and put in your brokerage account. You’d have full use of those funds whenever you want, can tax loss harvest, and full choice of what to invest in.
I’d do the latter.
omg dude, I just realized- you can’t do the 1035 exchange because your cash value is too low! the fidelity minimum is $10k to open the low cost VA, and you only have $2.5k. so the discussion whether to do the 1035 is moot. Just cash the stupid thing in once you get term life insurance in place. btw, if your term is with NWM, then it likely is “Term to 80 convertible to whole life” which is way to expensive term. Please shop for the term insurance that you actually need.
don’t feel bad man! I lost $50,000! I made it back tax free, but I would trade situations with you anyday! $50,000 is much more than $7.5k. And don’t even mention the opportunity cost of my loss and cash value not being invested in a low cost index fund, paying off debt, or just having me and my wife blow it on ourselves.
Try not to think of it as a total loss. I like to think I just over paid (a lot!) for life insurance over 7 years. makes myself feel better psychologically like a Jedi mind trick. You luckily only overpaid for half that time. Also, use my loss as an anchor- I lost $50,000!!! They say comparison is the thief of joy, but in your case it is the bringer of joy when you compare yourself to a big stupid financial sucker like me!
also try not to lose the forest for the trees. forget the whole life mistake. sounds like you might be early in your career and are getting super financially literate, which is going to bring you opportunities to change jobs, FIRE, spend more time with kids and spouse instead of work, paydown debt, buy great vacations and make memories with your friends and family, all because you started early. My $50,000 loss means I missed out on those opportunities, and my life is much worse off with years of memories and vacation and more time spent at work to meet financial goals, time me and my wife will never get back. You are on the way to maximizing happiness for the rest of the time on this earth through early financial literacy!
Wow, wow, wow! I am truly blown away by this forum and all of the amazing advice and encouragement I’ve gotten from it. Thank you to everyone who took the time to share their recommendations and experiences and to explain all of the nuances of a 1035 exchange and capital gains tax to me (@Noraz123 and @WCI @Shareen, @Rikki – you guys rock). It gave me the strength to reframe my ‘loss’ of $7500k and to pull the trigger on closing my WLI policy. I notified my NWM advisor about it today after reading and re-reading all of your comments, which truly gave me the confidence I needed to do it.
And @Rikki Racela – you’re totally right, my term life insurance is also with NWM and is in fact a Term to 80 convertible to whole life type of policy. Although my monthly premiums for that are only about $16 for a $500k death benefit. Is this considered overpriced? I had read elsewhere that term life is generally around $15-20 so this seemed reasonable to me, but maybe I’m wrong on that. It’s open enrollment season at my work so I’m thinking I should also look into seeing what options are offered through my employer as far as life insurance goes, now that I’ve pulled out of my WLI plan.
You should get term in place BEFORE cancelling your whole life policy.
When comparing term life insurance policies, you have to compare apples to apples. A policy that goes up in price every 5 years like the NML Term 80 product cannot be compared to a policy where the price stays level for 30 years for example.
I got the Term to 80 and WLI policies from NWM at the same time, so I figured since I had TERM still in place, I was okay to cancel my WLI policy. I actually didn’t realize that the Term to 80 policy’s premiums increase every 5 years but looking at my statement now I do see that disclaimer “Premiums can increase annually on the policy anniversary date.” Should I start shopping for other TERM policies and have one in place before also cancelling my Term to 80 with NWM?
Does anyone have any thoughts on signing up for TERM life ins. through an employer? My employer offers a few different supplemental life insurance options – one of them being Term Life Cov – it looks like it’s through MetLife, and the employee rate would land me at about $9/month for 300k of coverage. I also have regular life ins. through my employer for about 225k so if I added the TERM option, I’d have about 525k of life ins. coverage. There is a note that says if I leave my employer, I could continue my term life ins. coverage as an individual policy and that MetLife would bill me directly – competitive rates apply but will likely be higher than my current rate. Not sure if I should enroll in this or just get a TERM policy outside of my employer that stays fixed. Appreciate any insights!
Two main problems with employer provided life insurance:
# 1 It doesn’t go with you when you go
# 2 You can’t buy very much, usually no more than 2X your salary.
Two benefits though:
# 1 It is often pretty cheap and maybe even subsidized by the employer
# 2 It is often easier to qualify for, so it may be the only option for someone with bad health or dangerous hobbies.
Why not take it as part of your coverage but also shop for an individual policy?
dude yes!!! buy individual term life policies on top of employer coverage. as per the great Jim Dahle: https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
for myself, i calculated my liabilities I need covered why I die- the biggies were my mortgage, kids college, and my wife taking off work to watch the kids- so I needed 4 mil, and I used term4sale.com to get the cheapest policies laddered so as I build wealth what I don’t need drops off. I got 1.5mil for 10 year, 1.5mil for 15 years, and 1mil for 20 years.
Another question I had – is the cash value from a WLI policy taxed when you surrender the policy? As a reminder, I had about $2500 in cash value accumulated (premiums of about $10k). I’m expecting a check in the mail for the cash value, but is it going to be taxed as income/or capital gains? And therefore probably be a much smaller amount? Just trying to brace myself
If there are gains. For most that means you’ve owned it for 5-15+ years. If you’ve owned it less than 5 you likely have a loss, so no taxes due.
Ok that’s good to know. I’ve had mine since Sept 2019 so I don’t think it would qualify as “gains.” One of my friends pulled out of NWM WLI recently, she’s had it for much shorter time, since 2021. Her cash value was around $400 and her check after surrendering the policy was only like $130 so I’m not sure how that could have happened. Is it worth her contacting her NWM rep to understand why the cash value amount was slashed upon surrendering? That’s why I initially asked about my own.
I sure would ask.
Another victim of NWM here. My husband and I (both physicians) were sold whole life policies in 2021 with 18k each in premiums per year. After hearing from multiple people that whole life is no bueno I have been scouring the internet for solutions to get out of this. I’ve read so many good things on this comments section. We are considering a 1035 exchange into a Fidelity low cost VA. So far we have paid (total for both of us) 72k in premiums and our cash values is around 48k. Does this seem reasonable? My goal is to get out of the WL policies before premiums are due again in May. I brought the 1035 exchange up with our NWM advisor at our last meeting and he seemed fine with it (surprisingly). On a second note, I was reading through the Fidelity annuities products to see if there was a penalty on their end for withdrawing your money (early) once my cash value grows back to the premiums paid. I understand I wouldn’t be paying any taxes when I withdraw because there was technically no gain.
JSS – sorry to hear that you and your husband also “fell victim” to this.
In your case, I assume you would need to create two VAs – one for each policy (ie, one for you and one for your husband).
You would have $24000 of tax free growth. Assuming 20% capital gains, that would be $4800 saving in taxes in the future. Unlike $S above, in your case I’d probably deal with the hassle of setting up a variable annuity.
Your “advisor” is likely OK with the 1035 because s/he already made (most of) their commissions. That missing $24K had to go somewhere, namely to NWM and your advisor.
There is no penalty withdrawing early from the VA because you won’t have gains. You’re just trying to get back to your basis. Once the VA grows to $72K (or likely each VA grows to $36K assuming they are equal), you can cancel. No penalty from Fidelity, no tax or penalty from the IRS.
Assuming you don’t need the life insurance aspect, I’d pull the trigger ASAP. If you do need the life insurance, get term life in place, then pull the trigger.
Thank you for the advice. This is probably how we will proceed. We both have term (80) life policies in place (we were sold these by the same NWM folks when we were in residency to cover our student loans). Uncertain if we need to up the amount of term coverage- I think currently they are 250-300k each. We do not have any dependents/children. It’s a bit embarrassing how little we knew/know about all of this but we have certainly learned our lesson.
dude you are well on your way to recovering from this mistake. don’t be embarrassed! as I mentioned in other comments, I lost $50,000, and was financially stupid.
yes! after the 1035 exchange to Fidelity low cost VA for you and hubbie whole life policies, assess your need for life insurance. do you have student loans your spouse needs to cover when you die? you guys have a mortgage that your salary is covering the payments of? get that amount of coverage. here is how Jim Dahle says to do it: https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
How much money do you want if your partner dies? Probably a lot more than $300K. The usual amount I recommend to the high income professionals on this site is a 7 figure amount, $1-5 million. Not just a few hundred thousand. Lots of readers spend that much in a single year. Certainly I wouldn’t expect $300K to last more than about 3 years if there is no other income. But it comes down to your plan in the event of death.
Hi again!
Spoke with our NWM advisor about doing the 1035 exchange and he was adamant that I would get taxed after I withdrew my money (after it grows back to basis) from the annuity (and thus it would be smarter to keep the money in whole life). Given all I see here and your post, I am thinking he is wrong…I am also considering calling fidelity and discussing this with them as well. He basically said even though we’ve paid in 72k to our policies, the value that the annuity will recognize is only 42k and any growth above 42k will get taxed when we withdraw. I am sincerely hoping he is mistaken….
Update: Just spoke with a fidelity representative about the 1035 and he also stated that anything earned above the 42k (21k each) cash value in the annuity would be taxed like income if you withdrew.
Slowly losing hope…
They’re both wrong. Sorry. Why would you expect an insurance agent and a Fidelity phone bank employee to give you good tax advice? Call a CPA if you want a second opinion. Or just look it up online yourself. It’s probably in here somewhere:
https://www.irs.gov/publications/p575
If you just think about it logically…why would you pay tax on basis in an annuity if you don’t on any other basis in your life? Agreed? Okay, what’s the basis in your annuity that you’ve just exchanged into? That’s right, the same as the life insurance policy. What’s the basis in the life insurance policy? Premiums paid.
Good point. We are going to discuss with our accountant next week.
yeah dude, your NWM advisor and the Fidelity rep are both wrong and Jim is right. You have cost basis of 72k and cash value of 42k. when you do the 1035 exchange into low cost variable annuity, the growth from 42k to 72k is tax free because you lost that 30k to whole life insurance. the government doesn’t tax you on money that you originally lost and then you made up. that’s the whole point of the 1035 exchange!
Your NWM financial salesman is biased to not understand this stuff ala Upton sinclair’s famous quote: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
I am very disappointed in Fidelity rep however. You think they would get this right so they encourage you to do the 1035 exchange and get your money.
Where would you place the money in the annuity with Fidelity? They currently placed it in a monkey market account automatically. I know this isn’t the best product out there to make my money back the quickest. Any suggestions on which funds to invest in?
I would go with your chosen asset allocation. for me my overall asset allocation was 65% total US, 25% total international, and 10% small cap value. The total US subaccount in the annuity was only 13bps, and then total international was 17bps, so I invested my money in those subaccounts and I would suggest those. I believe the total bond fund was cheap as well as 14bps I think. anyway, just have it align with your overall asset allocation of your portfolio.
I’d probably invest it in stocks. More risk there but a higher expected long term return.
Even though we are trying to get to cost basis; then withdrawing? We might use that money towards real estate or possible pool in the future. We are not looking to keep the annuity long term.
The more you earn, the faster you get back to cost basis. So yea. It’s your call of course, but that’s what I’d do.
I’d choose their total market fund. The most diversified and lowest cost fund. Likely with the best expected growth as well.
https://fundresearch.fidelity.com/annuities/summary/FTMJC
My husband and I have had a whole life policy for the last year and 3 months. I am a PA and we are paying $500 monthly into this account. What would be the best route for cancelling this policy and is there any chance we would get some of the money back?
I’m sorry you are in that situation. For the relatively small amount of money you have contributed it probably makes the most sense to just surrender the policy and learn from your mistake. I know it’s painful, I’ve been there too. Make sure you get term life insurance policy in place ASAP (before you cancel whole life). Before you get the term in place simply stop contributing to the whole life policy.
Per Shareen’s comment – get term life in place before canceling. Absolutely do this if you need life insurance. However, I’d be willing to be that you were *sold* this whole life insurance policy as an investment, not as life insurance.
You may not need life insurance, or you may already have enough (typically through work).
15 months? I can’t imagine the right move isn’t going to be cancelling that sucker. Yes, you’ll get some money back. Perhaps as much as 2/3 of it. Get an in force illustration to see. And of course if there is a life insurance need, get term in place first.
You could just replace this whole article with “Don’t buy a hedge as an investment”.
so true! though I would add “especially if being recommended by an advisor.”
Another unfortunate IUL victim here with a very similar story as many others. Was looking for a little advice here regarding if I should just take the loss and cut bait on this disaster.
Pacific Life Xelerator IUL: 5.5 years in, $2000/per month premium
Total Premiums Paid: 128K
Total Value after Surrender Fee: 103K
Net loss: 25K
I ran the inforce and the guaranteed returns look awful even by year 20 I would be taking a big loss, the best return case scenario amounts to approximately a +200K profit by year 20 (I’m skeptical), while the intermediate projections have about a +20K profit by year 20 (Probably more reasonable).
My 401K/IRA have been maxed out every year for a number of years. I also have two separate brokerage accounts and 529s for my two kids. Med School loans are all paid. Already have Term Life Insurance.
We’re currently renting our house (bad decision but in retrospect somewhat justifiable based on life circumstances) but we’re looking at buying a house in the very near future and need to get out of this rental which is an obvious money drain. Thus my question, do I just cut bait with the policy, take the 103K for a home down payment and move on? The 25K loss is hard to swallow but honestly I really just want to be done with this policy and given the anticipated upcoming home purchase having that money for a down payment would be a huge bonus as opposed to having to wait around for the 1035 Exchange to grow and help me break even. Am I making another huge mistake paying a $25K stupid tax and taking the remaining $103K for a mortgage down payment?
Thanks for your suggestions!
Andres,
You’d save capital gains tax of $25k. I am guessing that you are in the top bracket for capital gains and ignoring state taxes, so that would be 20% of $25k, or $5k.
Not an insignificant amount but not a huge amount either.
I think that for your scenario, taking the loss for the immediate access to the funds is a good option.
Hey dude, i’m sorry you got screwed like I did, but at least your loss was half of mine. I would actually disagree with Noraz (despite their brilliance) in that not only is $5k a lot to save on taxes, but also it seems to me you had thought of this whole life policy and it’s long term structure as money earmarked for retirement, right? I would do the 1035 exchange and keep the money invested for retirement, and when the money grows back to cost basis then nix the low cost VA and invest that money in taxable for the sole purpose of retirement. i like to try and use mental accounting to my advantage, and breaking that advantage of mental accounting/earmarking this IUL money for retirement and diverting it to buy a house might set you down a dark path and eating into your previous retirement funds in taxable to buy a house, which is a consumption item and does not build wealth, but kills it. I would disagree at looking at renting as a money drain. I have spent more on landscaping, fixing, and property taxes on my stupid house than when I was renting. Buying a house has sent me back financial, and my interest rate is 2.9% fixed!!!! buying a house is a poor financial investment, and it is only worth it to the personal joy of having space away from my kids or gives them space to run around in the backyard.
The housing industry has planted home ownership as part of the American dream to screw us into thinking buying a house is a good financial decision. It is not. It is for the housing industry’s profit. Please prioritize retirement first as that is grossly underfunded by most of us. If you run the numbers and you can meet your retirement goals without this IUL money, then have at it hoss! But be realistic with your numbers. for my 1.2million house, I pay $24,000 in property tax a year, $30,000 in mortgage interest (not paying down principal of the loan and building equity!), and $40,000 in annual maitenance/heat/electricity/repairs like the stupid HVAC breaking or my duct work causing duct sweat causing stains on my freakin ceiling (I don’t do my own lawn, landscaping, or do any of these repairs).
Can’t you tell I hate being a home owner!
I’d move on once I had term life in place. Whether to do the VA exchange or not to get $25K in capital gains tax-free is your call. A little higher fees and a little more hassle for about $5K in saved taxes.
Thanks everyone for your insight and responses, I’m greatly appreciative! WCI, Definitely already have a term policy in place, so I’m good to go in that regard. And Rikki yes I definitely sense your beaming pride of being a home owner haha! I think I’ve had the opposite view of watching all these rent checks disappear and thinking “I’m just lighting this on fire with nothing to show for it!” The IUL was initially meant for retirement purposes but I think we’ve gotten a very good infrastructure in place with our existing investments that the IUL seemed expendable from a retirement viewpoint.
I guess kind of the way that I was looking at it, we ended up being in this rental for much longer than we thought we would be, and so I viewed using the funds from surrendering the IUL as a way to not only cut my losses on that investment, but also to help towards a mortgage down payment so that more money won’t be spent on renting without building any equity. I think ultimately my plan was to split up the 103K from surrendering the IUL, say for example, 53K I would invest back into my brokerage account geared more towards retirement, and the remaining 50K I would add into the mortgage down payment. I would essentially be trading an IUL and rent checks for a mortgage and more money in my brokerage account. I thought that sounded reasonable but then again at one point I thought the IUL sounded reasonable so I could definitely be wrong!
cool man. sounds like you on your way to be mad successful financially saw yeah man, use that IUL money half taxable and half down payment and forget the 1035 exchange annoyance.
In my case not only did I have a $50,000 loss, but the 1035 exchange was extremely cathartic, and I had already bought my house and didn’t have any other use for the money as it was earmarked for retirement so made sense to put in low cost VA b/c otherwise I was just going to put it into taxable to invest in retirement. so my situation was definitely different from yours from an emotional perspective and in order to achieve my goals.
I’m a big fan of home ownership when the time is right. That time is generally when you’ll be there 5+ years. Whether you use money that came from an IUL or somewhere else or a doctor mortgage is a separate discussion.
I had a couple of thoughts reading about your situation and the replies.
1. I don’t know how old you are or how far into your career, and I know $25,000 loss seems absolutely horrible now. But… We are fortunate as docs to be high earners. I never thought I would think this or say it but there will likely come a time where $25,000 doesn’t seem like it’s as much money to you as it does now.
2. I have the opposite view as Riki. My husband and I (we have 4 kids) bought our home in south Florida in 2007 and we couldn’t be happier. Over the years we have renovated it to make it perfect for us. We turned our backyard pool area into an oasis and every time we are out there we talk about how happy and at peace our space makes us. We’ve had numerous family events here instead of renting a different venue. I love my home and it’s been a stable, beautiful place for our kids to grow up. I don’t think I would have felt the same in a rental. Our youngest goes to college in 4 years and we will be selling the house at that time as it’s too much space for just the 2 of us. The house has appreciated significantly and we look forward to benefiting from that. Also, since we fully paid off our mortgage a few years ago, we were able to secure a HELOC which allowed us to offer cash to purchase a waterfront home that will be our primary residence once our youngest leaves home. With the active Florida housing market, if we didn’t offer cash they would have taken someone else’s offer. I wanted you to hear the opposite perspective regarding home ownership. Good luck with your decision!
Ha Shareen god bless the house sounds like you made it what you want! Yes, Andres while renting you are not able to make the house the way you want. However, any updates on your newly owned home does add more cost. Also sounds like Shareen and her husband are much handier than me and my wife! Like they say, personal finance is personal, but I know for myself and many docs they usually live for the now and spend all their money on a home with no plan to save for retirement and then retire where 20% of docs are 65 and don’t even have a million dollar net worth! Sounds like Andres though you want be making that mistake 🙂
All very good points for sure! I guess that brings me to a follow up question. So say I just cash out the IUL and take the 103K now, what would be the most appropriate and beneficial use of the funds, just reinvesting it into a diversified brokerage account? Index fund? Half brokerage/half mortgage down payment? All of it into a mortgage? I guess I just wasn’t quite confident in what to do with those funds once they’re out of the IUL and would certainly appreciate any insight. Homes we would be looking at would be in the 800K-1.2M range.
For what it’s worth I’m 38, have been an attending for 7 years, married, two kids. Like I had mentioned above 401K/IRAs have been maxed for 7 years, our kid’s 529’s I feel are very well funded, and we have two other brokerage accounts that we fund. Have term life insurance in place. No debt at the moment since Med School loans are paid off and we’re renting out home.
I would love any guidance or suggestions!
Holy crap dude, you are dominating!!!! I should not really be giving you advice, since 7 years into attending hood not only did I lose more money than you in whole life, but was still in med school debt, $31,000 of credit card debt, and had a $1,000,000 mortgage debt! you are killin it!
My answer to your question would be (as Jim Dahle always says) is: What does you written financial plan say? If you don’t have a written financial plan, get one, either by reading blog posts or take the WCI course that I took. In the meantime while you do that, going back to my original point, what was the point of that IUL money? If you bought the IUL as an investment for retirement (like I bought my whole life policy), then just take that money and put in taxable as per your chosen asset allocation. For myself, I am 100% equities broken up into 65% total US, 25% total international, and 10% cap value, all in low cost index funds in a Fidelity brokerage account. The average expense ratio on my index funds is 0.04%!!!! (I use ITOT, VXUS, and FISVX). I am 100% equities as during the coronabear and this current bear market, I hardly flinched, and was pissed that stocks didn’t fall more so I can buy more on sale!!!! also my wife doesn’t even have the password to look at our accounts, so she has a higher risk tolerance than even me!!! Needless to say we our risk tolerance is high.
again, I am a fan of not using the money for a down payment on a house. the housing market has gone bonkers and prices are high, and mortgage rates have also just recently risen so housing prices still have not had time to come down. Now I know you can’t time the housing market, but if you can I would wait to save more money until you can put 20% down on a house. by the time you get the money for 20% down without utilizing the IUL, hopefully housing prices have normalized (or even crashed in price!) and then you wouldn’t be compromising your future self for the short term gain of getting the house a little sooner.
Most of us have more uses for money than we have money. Here are common ones:
Max out retirement accounts
Invest in taxable mutual funds
Invest in real estate
Beef up an emergency fund
Pay off credit card or auto loans
Pay off student loans
Pay off mortgages
Go on a nice trip
Replace a beater
Do Roth conversions
But that question can’t be answered in isolation without looking at your overall financial plan. If you made an extra $103K this month from practicing medicine, where would it go?
Rikki,
Haha thanks for the confidence boost! But yeah, the initial point of the IUL was geared towards retirement just as in your case. But yeah I agree not having to use the IUL funds to get to 20% of a down payment would be ideal for sure, so maybe waiting a little longer before buying would be the move.
WCI,
That’s a good question, honestly I guess if I made an extra $103K this month I would probably invest 50% in taxable and since the whole buying a home situation is kind of the major aspect going on in our lives right now, I would probably put the other 50% into a down payment. Retirements are already maxed, emergency fund is good, and no real debt to pay down at the moment so that’s kind of why I was thinking may as well put it towards a down payment.
There you go. This stuff isn’t so hard after all eh?
Holy crap dude, you are dominating!!!! I should not really be giving you advice, since 7 years into attending hood not only did I lose more money than you in whole life, but was still in med school debt, $31,000 of credit card debt, and had a $1,000,000 mortgage debt! you are killin it!
My answer to your question would be (as Jim Dahle always says) is: What does you written financial plan say? If you don’t have a written financial plan, get one, either by reading blog posts or take the WCI course that I took. In the meantime while you do that, going back to my original point, what was the point of that IUL money? If you bought the IUL as an investment for retirement (like I bought my whole life policy), then just take that money and put in taxable as per your chosen asset allocation. For myself, I am 100% equities broken up into 65% total US, 25% total international, and 10% cap value, all in low cost index funds in a Fidelity brokerage account. The average expense ratio on my index funds is 0.04%!!!! (I use ITOT, VXUS, and FISVX). I am 100% equities as during the coronabear and this current bear market, I hardly flinched, and was pissed that stocks didn’t fall more so I can buy more on sale!!!! also my wife doesn’t even have the password to look at our accounts, so she has a higher risk tolerance than even me!!! Needless to say our risk tolerance is high.
again, I am a fan of not using the money for a down payment on a house. the housing market has gone bonkers and prices are high, and mortgage rates have also just recently risen so housing prices still have not had time to come down. Now I know you can’t time the housing market, but if you can I would wait to save more money until you can put 20% down on a house. by the time you get the money for 20% down without utilizing the IUL, hopefully housing prices have normalized (or even crashed in price!) and then you wouldn’t be compromising your future self for the short term gain of getting the house a little sooner.
Given somewhat higher interest rates now, you certainly wouldn’t be faulted for using it all towards a down payment. Figure out how much you want to spend on a home without overdoing it. I would put as much down as possible and pay more than the minimum each month for the mortgage. You are paying less interest that way. It’s a nice feeling to have a paid off home.
WCI,
Haha yeah I guess you’re right, thank you for the useful thought experiment!
And thanks everyone for all of the useful suggestions and insight!
Hi! Need opinions on my whole life policy that a NWM person sold me into… Please share advice on if I should cancel or not and how.
policy start date is 4/23/2020
Initially my annual premium was $6,706
I learned more about it and tried to cancel, after one year, but was told I would lose $4,000. So I lowered annual premium to $2,905 on 4/20/2021. And the rep added a term life portion (I’m still confused by what was done ). Statement says total death benefit includes $50k in whole life plus blended term protection consisting of $347,226 and $2,774 paid up life additions, plus paid up life additions of $13,811 to increase death benefit.
Right now death benefit is $413,000
Accumulated value is $4,307
Annual dividend in 2022 was $565 used to increase accumulated value and death benefit.
Cash available for loan is $3,672.
2022 dividend was used to increase the accumulated value and replace $2,774 of blended term with paid up life additions.
The annual premium consists of the whole life insurance amount of $796 (including waiver of premium benefit), Blended term premium of $1,109 plus $1,000 of additional premium to purchase paid up life additions to increase death benefit.
I don’t get my annual statement until this April 2023 and that’s when my premium gets taken.
Please give advice!
You lost that $4K whether you kept the policy or dumped it that first year. It’s water under the bridge.
Personally? I’d dump the whole life policy, take whatever I can get out of it, and shop around for a better deal on a term policy (and probably buy a larger policy, but I don’t know what you really need.)
Without waiting until April, you can order an “In force illustration”. Suggest that you order it now.
It sounds like you have a small amount of paid up whole life insurance. If so, you should (I think) be able to keep that paid up insurance at no further cost to you. Check it out before you cancel.
Don’t worry too much about the loss. Consider it a sort of tuition or “stupid tax”.
Come back and let us know how it all worked out?
I saw in previous comments a 1035 or Variable Annuity as options – I don’t know much about those but would that fit my situation i described above? Thank you for the advice btw!
HI craig sorry you lost money 🙁 you didn’t mention your cost basis but sounds like you lost $5k to whole life, but at least not the $50,000 that I lost! the 1035 exchange at least to do the variable annuity at fidelity will need a cash value of at least $10,000, so your cash value is so small it would not qualify. also would take a long time for $4k to grow and make up that $5,000 loss, and really you are only saving long term cap gains tax which is about 20% so doing the 1035 exchange saves you only about $1k in taxes. Not really anything to stress over, just get out of the policy.
Thank you for the compassion!
If I am understanding my April-2022 statement correctly, my cost basis is $9,620 and Accumulated Value is $3,067. Not sure what those mean-can one explain?
I was just reading this… “If you exchange an annuity while it’s still in the surrender period, you’ll have to pay a penalty (often a hefty one), so it’s important to confirm your surrender schedule with the insurer prior to making any decisions”…
No idea how to tell what my surrender schedule is by reading my Inforce Ledger. But seems I would not qualify.
Hey Craig so cost basis means how much you have paid into the policy so far, and the cash value is how much money you have in the policy if you surrender today. So $9,620 – $3,067= $6,053 that you lost. Sucks, but again thank god you are now financially literate and not losing any more money to this beast!
You actually don’t have an annuity so there will be no surrender charge for giving up your whole life policy. Get out of there!
I agree with Rikki. Get a good term policy in place and dump the whole life policy. You’ll make up the loss in other ways.
Good Evening,
My wife and I did convert our whole life into a VA with Fidelity. How long did it to take you for those who had already recuperated their cost basis? My second question is what is a good mutual fund to put that money in? I have mine in FXVLT but not sure if it a strong fund to also place my wife’s funds into.
Hi Danny!
My thoughts/answers to your questions
1. How long did it to take you for those who had already recuperated their cost basis?
This is really dependent on what % of surrender value was your cost basis and how quickly your VA grows going forward. Let’s say you invested $50,000 and you surrender value was $25,000 (ie, you lost 50%). You now need your money to double ($25K –> $50K). Assuming 7% returns, it would take approximately 10 years to get back your cost basis.
2. My second question is what is a good mutual fund to put that money in? I have mine in FXVLT but not sure if it a strong fund to also place my wife’s funds into.
FXVLT is Fidelity’s S&P 500 mutual fund. It is a great, diversified fund and low cost. Excellent choice. I would think you should look at your total portfolio across you and your wife and see what makes sense. If investing in more US domestic stock does, then this is a great fund.
In general, I would recommend investing your VAs in 100% stock, as that in general grows faster than bonds or some combined fund. While Fidelity’s VAs are cheap, investing directly in their mutual funds and ETFs are in even cheaper. You’ll want to cancel the VA as soon as you reach your original basis.
Hey Danny! I echo Noraz123 who is spot on! for myself, it took me a year and half to grow 25k tax free with an original cash value of 68K on my wife’s whole life policy, and a few months more for my policy to grow 25k at an original cash value of 53k. This was starting mid 2019 to the end of 2020. the ability for it to grow back to cost basis will definitely depend on how much of the cash value you are investing. As for your second question I agree with Noraz as well that FXVLT is excellent given it’s the lowest cost subaccount in the Fidelity low cost VA. the others that you can do FTMJC, FEMJC,FFIQC, depending on your asset allocation. i would not use any other subaccounts within the Fidelity low cost VA as they get too expensive. I had originally been 80/20 in my stock/bond asset allocation so I had originally had 20% in FBIQC, the total bond index subaccount but then the coronabear hit and I found that I had high risk tolerance so I sold the total bond index subaccount and bought the total stock market index when stock were low and that serendipitous timing also accelerated the growth back to cost basis. If you think being 100% stocks would make you want to sell within the Fidelity VA, then by all means add some bonds but again echo Noraz where you might want to put your bond allocation elsewhere in other accounts you have available, most likely your work traditional 401k/403b.
Thank you for the feedback. Pardon my simple/dumb questions as I am not financially savvy. I basically got rid of our FA because of WCI. I have about 47k in my VA from my whole life and I believe my cost basis is around 75k. Of course preferably I would like to make the money quicker if possible. When you say invest in 100% stocks, does that mean invest certain percentages of my cash value in different stocks? Is there a fund that at is considered stocks?
Making your cost basis in a year and half is fast!
when we say invest in stocks, it means a low cost stock index fund within the Fidelity VA. These include FXVLT (S&P500 index), FTMJC (total stock market index), FEMJC (small to medium size company index),FFIQC (total international index). all of these are fine choices and I would say while you are getting financially literate, just stick to FXVLT and DON’T SELL into cash if the value goes down!!!!
Hi
Does a whole life or variable annuity make sense after
1) You paid off debt
2) You maxed HSA, 401k, Traditional IRA, 529, 403b
or is it better to grow the money in a brokerage account? I am wondering if a whole life policy with investment options vs a variable annuity is a better instrument. I understand that these are meant to be sold first but just curious what you would recommend after the above for tax free growth. I don’t want to pay the high monthly fee for a defined contribution plan
Thank you
Jeremiah,
Don’t dismiss the wonders of a regular brokerage account. While not considered a tax advantaged account, it has some great benefits that will make it better than any variable annuity or whole policy. Consider the following
– gains are taxed with capital gains tax rates, much lower than regular tax rates (and can be as low as 0%)
– you can invest in ANYTHING, including incredibly low expense etfs or mutual funds.
– any assets that you still have when you die get a step up in basis and are tax free for your beneficiaries (up to $5.5M if single or $11M if married)
– should you experience any loss, you get to tax loss harvest
– you can access your funds any time at any age without any penalty
In other words, after you have exhausted IRAs, 401ks, HSAs, etc., don’t waste your hard earned dollars in variable annuities or whole / universal life. Embrace your brokerage account. Just because it’s not labeled a tax advantaged, doesn’t mean it doesn’t have tax advantages. It’s a pretty excellent way to invest
Nope- no use for whole life unless you need the insurance your entire life (disabled child, huge estate taxes, “Keyman” insurance and no use for VA that I can think of. Wade Pfau in his “RISA” score would argue a VA can be used if you are “risk wrap” type retirement income style where you are probability based in maximizing returns yet commitment oriented and don’t want too many options. I think his argument is BS.
If you want to invest to make the most money, don’t buy whole life or a VA.
Make sense for what? As an investment? You know you can never max out a taxable investing account, right? So you’ve got to compare these sorts of insurance products to that at a minimum and in most respects, they fall short. There are some niche uses for both. The whole life ones are discussed here:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
More info on annuities can be found here:
https://www.whitecoatinvestor.com/what-about-cheap-variable-annuities/
https://www.whitecoatinvestor.com/the-case-against-annuities/
https://www.whitecoatinvestor.com/should-you-invest-in-variable-annuities-and-non-deductible-iras/
https://www.whitecoatinvestor.com/8-reasons-why-you-should-invest-with-mutual-funds-instead-of-a-variable-annuity/
My policy is 20 yrs old. Death benefit 277k (but I really don’t need this). I am 58.
Premiums are 4800 a year and dividends pay almost all of that today (8k left out of pocket lifetime for me)
Contributed about 70k – cash value 86k. Cash value grows about 6k per year.
Is this a good investment or should I withdraw and and buy a bond fund etf or a CD? (Assume I don’t need the insurance but I would leave any cash I have to my kids)
Hey Mark, looks like your bad returns for the whole life policy are behind you, and despite you not needing the insurance the whole life can be borrowed against used as a “buffer” asset when you retire, or leave as a little bit more inheritance to your kids. No need to can the policy, and seems you only have 8k more until policy is fully paid. also cashing in the policy would leave a 16k tax bill. I would probably just keep it. is it whole life, or VUL or IUL?
Thanks Rikki – it’s whole life (I understand this to mean I can “cash out” at anytime minus taxes on gains. I can borrow against it (.5% I think) and never pay it back if I do choose?
I would expect it to perform similarly to a bond fund or CD going froward at this point. The older the policy, the more likely it makes sense to keep it. The bad return years may be water under the bridge.
Pretty depressing to calculate your return though. $4800 x 20 = $96,000, not $70,000 by the way. So I assume you’ve been using dividends to pay premiums for some reason? At any rate, whether you’ve paid in $70K or $86K, your return over the last two decades is something like:
=RATE(20,-4800,0,86000) = -1.18% per year to
=RATE(20,-3500,0,86000) = 2.11% per year.
Hard to get very excited about that over 20 years. What is the guaranteed rate going forward on your in-force illustration?
Thank you for the review – this article (and your podcast) are very helpful to me!
Yes I have paid premiums from dividends past few years. I have 9 yrs left to get to paid up policy (at 4800 a yr). If I pay from dividends, total outlay is 8000 over 9 years.
Guaranteed amounts are about 5k per year ongoing. At current scale, estimate is about 6k increase per year.
So in 10 years, I will pay 8000 and get 50-60k in cash value back (not including taxes). In 20 years, I will pay 8000 and get 100-120k in cash value back (not including taxes.
Any guidance you can provide (to cash out now, later or only if I need it) are most appreciated!
Hey Mark really depends on your situation on what to do with this policy. If you cash out now, you pay cap gains taxes on $16k. Are you retired and drawing from your next egg? if so are you in lower tax brackets? If you are in a low tax bracket then yes, would be reasonable to can this policy, pay the taxes on $16k and invest elsewhere or spend that cash value for the year and let your other assets grow.
if you are still working and that $4800 a year isn’t a big deal for you ( I assume it isn’t) then I would probably keep the policy. I think I have the calculation right but seems if you let the dividends pay most of the premium, it seems you pay on $800 a year for 10 years until the policy is paid up, right? and in that time the cash value is guaranteed to increase by $50k, right? so =RATE(10,-800,0,50000)= 37.7% return. So the returns going forward are actually pretty good as the crappy returns are behind you. Then once the policy is paid up, keep the policy and either borrow against the cash value or draw from it as a buffer asset, can the whole thing and pay tax at lower brackets and let your other retirement assets grow, infinite banking, whatever 🙂
37% in ten years isn’t exactly an awesome return.
I can’t give guidance without the actual illustration. “About $5K per year” doesn’t mean much. On the illustration will be a guaranteed scale and a projected scale. In my experience, your return is likely to be somewhere between them. So you run the numbers using those scales and make your decision as to whether to keep it or not.
Using the dividends to pay the premiums, of course, means you’ll put less cash in and the investment will grow slower. I hope that point is clear for you.
I understand that when the value of VA reaches the original WL cost basis, one is to exit the VA.
But does one need to sell the holdings in the VA then liquidate with cash? Or can those holdings be transferred into a regular taxable account?
Hey John, it’s been awhile since I exited my VA, but I believe you don’t have to sell the holdings. whatever the value of your variable annuity I believe they just automatically put it in cash for you when you ask them to nix it transfer it to a regular taxable account. You cannot transfer these holdings within the VA in kind. If I remember corrently it took a couple of days for the money in my VA to arrive in my taxable. i did this all at fidelity, so it might take longer if you are transfering the money from the VA into a taxable under a different brokerage.
I think Rikki summed it up well.
You won’t be able to transfer the holdings, it will transfer as cash. So it likely doesn’t matter if you sell into cash before you transfer or not. The firm where your VA is will sell when you transfer.
I just surrendered my low cost annuity (Fidelity) and invested the money in my taxable account!!! I’m done and so happy and grateful for all of the help and comments from the WCI community regarding getting out of my whole life insurance policy. I had no business contributing $6000 per month (yes, per month!) to this ‘investment’ that was sold to me. Thank you to everyone who has commented on my previous posts and answered my questions. Not sure if this surrender qualifies to go on Milestones to Millionaire podcast but I definitely feel like it’s a milestone for me.
Congrats! We’ll celebrate anything with you:
https://www.whitecoatinvestor.com/milestones
If it’s a milestone for you, it’s a milestone for us.
Hello Everyone!
Like most of you, I opted for a WL policy through NML while my partner was interning with them over the Summer of 2020. I signed up for a Whole Life Plus 15 Pay on a $300,000 policy in July 2020. My annualized premium is $6,330.59 and my last annual dividend was $913.02.
Right now my policy has a net death benefit of $314,810 and net accumulated value of $11,895.86. My cost basis is $25,325.60. My fifth premium payment is coming up in a couple of months and I am curious if this policy would be worth keeping or should I ditch it?
I am 30 years old with no children and less than $40k in debt. I have a modest stock and crypto portfolio ($21k) and contribute about $500 monthly to my savings account that currently yields a 4.33% APY and a balance of $28,000.
If I missed any pertinent information, feel free to let me know and I’ll provide it. Thanks in advance!
You’re 30 with no kids? No. It’s not worth keeping. You have no need for life insurance. But if you want to see what it would be worth as an investment to you, then go through the exercise in this article:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
and consider the 1035 exchange discussed in the article you left this comment on.
No way I’d keep this if I were you though. Don’t you have something better to do with $6K a year then a crap investment and insurance you don’t even need?
I certainly would like to invest that $6k in something else! Thanks for the reply and your advice! 😁
Hi Seth I’m sorry you lost money man 🙁 $25,322.36 in total premiums minus a cash value of $11,895.86= $13,426.50 of loss! Don’t worry man, I lost $50,000 to whole life insurance.
I would recommend not paying the premiums anymore (don’t throw good money after bad) and getting rid of this whole life policy by doing a 1035 exchange so you can make that $13, 426.50 back tax free. I wrote a blog post on how to do it:
https://www.whitecoatinvestor.com/best-way-to-cancel-whole-life-insurance-the-1035-exchange/
If you need that $300k death benefit then please get TERM insurance then do the 1035 exchange.