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!
90-99% of the commission that will ever be received for this policy is already paid out at the 12 month period of the policy. If you cancel after 1 month, 11 months of the first year commission has to be paid back (it is annualized usually whether you pay monthly or annually). If you cancel after 366 days, zero is paid back. There is a very small amount that is paid in years 2 and beyond and reaches 0% after a set number of years usually. Stinks for you but that CFP is happy that you waited until the full year elapsed.
ShadowDoc,
That is enlightening. So, when I called the CFP after being in the WL for 4 months and was considering cancelling (and she talked me out of it), I could have gotten 6 months of my money back? I am not quite at 366 days yet. If I am, say, at 363 days, would I still have recourse? In other words, could I get everything back if I am still within 1 year? She said that I would lose everything back in October and recently.
I wonder if this need to do the in-force illustration is a delaying tactic to get me beyond the 365 days….
Thanks for your response.
I’ll call MassMutual.
Hi Shadowdoc,
I did miss your point – sorry for my obtuseness. My anxiety-ridden gut wanted to latch onto anything that might appear as a beacon of light for a solution. I did figure out what you meant after I posted. Needless to say, this whole thing has made me ill, and I’m sure all the cortisol rushing through my system non-stop for the last 3 days has negated the youthful genetics bequeathed me and replaced with accelerated aging.
I hate that I hear your story every week.
No, you’re not getting your money back at 363 days. At best you’ll get 2/365 of it back.
The in-force illustration using the $20 a month payments is a good idea. I bet it’ll show you get $2-10K back after 7 years, not $46K.
I think that you missed my point. Someone buys life insurance and it pays the agent 65% as a commission, as an example. This commission is for the sale of the policy. The insurance companies pay this first year commission as you might expect, over the entire first year on a pro rated basis. If the policy stays in force for 30 years then obviously the first year is earned and the agent keeps that commission.
Imagine a situation where the insurance company would be unable to recoup commissions if a policy holder canceled after a few days, policy owner pays basically zero because they only had insurance for a few days (remainder is refunded to policy holder), the insurance agent would keep the 65% annual.
To prevent this from happening, the insurance agent agrees to accept a charge back against commissions if the policy lapses in the first year. If you cancelled after 4 months, take the annual premium that you paid, 45,000 (multiplied by .65 is 29,250 for agent commission) and the agent would need to pay back 8 months of commission that were paid out to him on day 1 that you put coverage in place. This would be 2/3rds of 29,250 = 19,305.
When you made that call the CFP (cough cough, bull, means they went to college and took some classes that are paid for by their insurance company) was thinking about that almost 20k and how they could manage to get you to keep the policy…..if only you would keep it until 12 months has passed, the 29,250 that was paid back on day 1 would be their money to keep forever….maybe they would not get the small 3% renewal in year 2 but who cares, they got their money. That is what I meant…..gross, huh?
If you cancel at day 365, you get 45,000/365 back (pro rated refund for only 1 day of unused premium). The agent would be forced to pay back 1/365 of 29,250…not a big deal.
You cancel and have almost zero cash value. Agent got 29,250.
There is nothing wrong with this, assuming that you know that this is how the policy works. When you don’t know and are pushed along just long enough for the agent to get paid, then there is something wrong.
I just want to start by saying thank so much for your invaluable advice. I’ve been uncomfortable with the whole life policy NVM sold me 5 years ago, and your material has helped me pinpoint exactly why.
After 5 years, $18K annual premiums and a $22K loan against the policy (which I used to pay taxes to convert a traditional IRA to a Roth), I currently have $37K net cash value in the NVM policy. I would like to convert it to a VA, wait until the value returns to basis, and from there roll over the entire package to my 401(k), then to a traditional IRA, then eventually to a Roth IRA via backdoor conversions in manageable tax increments (assuming that’s still possible in the next few years).
Does this seem like a viable plan? Is there anything I’m missing? One thing I’m not sure about though is whether this is the most tax efficient method. Aren’t there typically withdrawal taxes from a VA? Any advice would be greatly appreciated.
There are only withdrawal taxes and penalties if your VA has been profitable. The beautiful (or much less ugly) thing about converting a WL policy to a VA is that you preserve your basis. If you paid $18K for 5 years, then you have $90K basis. If your present cash value is $37K, then you have have a $53K loss. Thus, no taxes or penalties to withdraw (cancel) the VA.
I (or more precisely, my wife – who is an ER physician who got suckered into purchasing a universal life policy from her financial adviser) went through the exact process this past year. And thanks to WhiteCoatInvestor, we were able to make sense of how best to handle it. We moved the universal life policy to a Vanguard variable annuity.
Once you have a VA, you have a couple options that will take some of the sting out of losing money with the insurance policy. You can:
(1) Leave the VA as is, and let it grow back to the value of your original basis ($90K), tax free. You can then cancel the VA (make a full withdrawal), and you will owe no taxes on the growth and there are no penalties either since your basis=value.
(2) Cancel the VA (make full withdrawal) immediately after the VA is set up. This will allow you to write off a loss on the $53K. Please consult some of the above comments as well as a tax advisor, as there are some caveats of how and how much of a loss you can claim. Depending on your tax bracket and situation, it may be worth more to take the tax loss now (even with some of the limits) than to let it grow tax free in the variable annuity.
If it weren’t for this site or Bogleheads.org, I would have been completely lost. This information is invaluable.
Thank you so much!
It was a viable plan right up until the point where you rolled a VA into a 401(k). You can’t do that step.
You are taxed on any gains above basis in the VA at your full marginal tax rate. However, if you just waited until the value returned to basis and then sold, there would be no gains.
Thank you again, I REALLY appreciate it. Can I ask a rather dense follow up question? So what can I do with my money after withdrawing from the VA (assuming no gains and thus no taxes). If I can’t add it to my 401(k), I assume I could just use it to open a traditional IRA?
It’s basically taxable money at that point. You can do whatever you like with it. You can put $5500 of it per year into an IRA, but you can’t just move it all into an IRA, there are rules on annual IRA contributions.
Whole life insurance (and variable annuities) are terribly confusing to the uninitiated. At least they were for me when I was going through this process last year. It took me forever to understand how whole life and universal life insurance work, and all the vernacular that goes with them!
The simple answer is that once you withdraw from the variable annuity, the funds can be invested in a taxable account (or spent, or whatever), but you cannot invest them in an IRA, 401(k) or Roth IRA.
I was confused by this distinction as well when we withdrew from my wife’s variable annuity. The variable annuity is a tax deferred saving investment, so you’d think you could rollover to another tax deferred investment, like an IRA. But that is not the case.
Like a tax deferred IRA, if you withdraw early from a variable annuity before 59 1/2 years old, you pay a penalty. However, in this your case, you can withdraw the entire amount and not pay any penalty or taxes because you lost money. Moreover, you can claim a tax loss (subject to some limits, see above) . However, you cannot rollover the funds to an IRA or other retirement account.
The simplest approach would be to leave the money in the VA until it grows back to the basis amount (~$90K), and then withdraw and owe $0 in tax. Then you can invest in a taxable account (or go on vacation, buy something, etc.). Pros: Easy, tax-free growth in the VA until it reaches $90K.
Or, you can withdraw from the variable annuity and claim a tax loss now. And then invest in a taxable account. Pros: Claim a $53K tax loss now (subject to some limits), and full choice of what you invest in (whereas variable annuities can limit what funds you invest in, and have higher expense ratios).
Good summary. I’d favor taking the loss. You can use $3K a year as a deduction against your regular income for many years.
Can you take $3k/year loss? I thought this is a miscellaneous loss, and that you took the loss all at once. And that it was limited to the amount over 2% of your AGI (as you mentioned above).
No, I think it’s like any other capital loss. No limit against capital gains but only $3K a year against earned income.
[Update: This comment is an error- it is not a capital loss, see comments above and below in this thread.]
OK. In this thread earlier (April 18, 2014), your exchange with Harry Sit had me believe that this is a loss that is subject to the 2% floor, but could be applied against all income, not capital gains.
I will review again. But at the end of the day, I will take whatever the larger deduction is, and then will let the IRS determine if they should accept it or not.
Maybe I’m mistaken. Here’s an article about it:
http://www.thinkadvisor.com/2011/12/06/year-end-tax-planning-are-variable-annuity-losses
Looks like you, Harry (and the earlier me) are right, but per the article, it may not be subject to the 2% floor (gray area), which is the best of all worlds- fully deductible this year without losing 2% of your income worth of it.
[NOTE: At this point, I am replying for the sake of people like my earlier self who knew nothing about variable annuities and was exceptionally confused rather than for the sake of belaboring the minutiae.]
I believe historically this has been a gray area, and if you wanted to be aggressive, you’d take the entire loss. And if you were more conservative, you’d claim it as an ordinary loss subject to the 2% floor. There are many articles on the internet circa 2002-2006 that talk about this exactly. For example:
http://www.fool.com/personal-finance/taxes/2006/08/11/deducting-annuity-losses.aspx
Quoting that article:
“It’d be nice if the IRS could give us firm guidelines for claiming losses from variable annuities, but we have nothing so far. You or your professional tax advisor will have to determine how much risk you’d like to assume when preparing your return.”
However, the IRS did update publication 575, I believe in 2014, to specifically state that taking a loss on a variable annuity is an ordinary loss subject to the 2% floor.
See: http://www.irs.gov/publications/p575/ar02.html#en_US_2014_publink1000226856
To quote, “To claim the loss, you must itemize deductions on Schedule A (Form 1040). Show the loss as a miscellaneous deduction subject to the 2%-of-adjusted-gross-income limit.”
With that said, taking the full write off and then letting the IRS determine whether to accept it or not is likely the approach that I take. Worst case scenario, they disallow. Best case, it flies under the radar and I take the full deduction.
The 575 update makes it sound a lot less gray, doesn’t it.
I thought it may be worthwhile to give an update here, as I am now doing my taxes for 2015. There is one other item that I hadn’t thought about but is worth bringing up here: AMT.
I decided to go with the miscellaneous deduction subject to the 2% floor. However, the deduction doesn’t us too much good, as AMT has kicked in. These miscellaneous deductions are no longer deductible under AMT.
I am still in the process of understanding the ins and outs, but it seems that it may have been better to leave the money in the variable annuity and let it grow tax deferred back to the original basis.
It’s too late for me, but wanted to post so that others consider potential AMT impact before moving forward and planning on taking the tax loss. You may not have much of a deduction after all.
What about deducting this as a capital loss on Schedule D? Is that an option?
I’m looking to dump my WL policy using a 1035 exchange, but after 17 months I only have $553 in cash value and can’t transfer this to a Vanguard or JeffNat VA since they have a minimum ($5000 for Vanguard, not sure for JeffNat). So far I’ve paid in $6000 and I don’t want to just cut my losses. Does anyone know of a no-minimum VA that would do a 1035 for only $553 of cash value? My Plan B is to wait until I hit the 2 year mark, at which point the cash value will be about $3000, and then buy $2000 of paid-up additions, and immediately do a 1035 into a Vanguard VA. If someone has a better Plan B I’d be glad to hear it.
Won’t Vanguard just let you add $5500 to your cash value?
Thanks so much for this informative site! I’ve read through most of the comments, but would still like some advice before surrendering my policy. My father bought a Whole Life policy for me back in 12/2006 from New York Life.
Premium: $234/month ($2808 per year)
Current face amount: $403,000
Surrender value: $15,080
It’s now on “Limited Temporary Coverage” because I stopped paying the monthly premium 4 months ago.
I don’t have kids, don’t need life insurance, so I’m thinking about just taking the money out. I also have maxed out my 401k and Roth, so the money would only be invested into a taxable account. It sounds like I have a similar situation as commenter, TJ (above). Since there’s been a $5k loss, I wouldn’t have to pay taxes when I surrender, correct? But it sounds like I should convert into a VA so that I can try to get the $5k back?
Also, the insurance had been bought and paid for by my father. When I surrender, would you happen to know what tax implications would mean for me (since I’ll be keeping the money)?
Thanks so much!!
If you don’t want the policy, using the VA so you get a loss is a good idea. There certainly isn’t any tax due.
Great. Thank you!
Looking for an opinion with no “skin in the game”. I bought some NML whole life policies with all the bells and whistles about 20 years ago. The rep moved to Mass about 7 years ago and convinced me to convert my policies to Mass. DB currently 3.5 mil, cash value combined is around 150K, but I took 200K out for a DBC 2 years ago that has yielded about 50K return minus taxes on the dividends. Recently I have had a little trouble covering my premiums and have looked for an alternative path. The fee-only investment firm I consulted with advised me to dump all the Mass, get a term policy and let them handle my retirement which is at least 13 years away. They are definitely anti whole life insurance. They also took issue with the way my IRA was set up that currently has about 225K in it citing the annuity fund was like wearing a rain jacket inside. I admit I didn’t understand that analogy. I’m deciding whether or not to dump all the Mass (currently 3 policies of around 1 mil each), some of the Mass, or stay the course. Any opinion would be welcomed. Thanks for the hard work and a very informative site.
Impossible to give advice without more details. Sounds like the original guy not only hosed you once, but twice. Switching policies was purely to make another commission off you. You were almost surely better off with the original ones.
However, dumping a policy is different from buying one in the first place. Why not hire one of the guys listed above to evaluate your policy and give you a professional opinion?
And get inforce illustrations to see what return you can expect going forward. If it’s crappy, well, time to find a way out of these things.
Feel free to email the details and your thoughts and we will put an analysis together for you. [email protected]
Just for your own knowledge: What do you see when you look this person up at http://brokercheck.finra.org/
If there have been any issues with complaints in the past, you can find them there. You could also have any grievances heard there as well.
It’s scary to see some of the disclosures that people in the financial industry have in their FINRA BrokerCheck profile. Thankfully, there is at least some oversight board for these guys and gals.
Good luck.
Have a 2 million policy with mass mutual. Been paying $2051 per month …for 11 months now. I want to get out now! Especially after reading this. Will I take much of a hit? I guess anytime you lose money is a hit!
Yes, you’re going to lose a lot of that $22K. Get an inforce illustration and you’ll see just how much and can consider your options. Expensive lesson. Be sure to get term insurance in place (if needed) before cancelling.
Is it wise to switch that over to term with the same company? I’m not sure it the agents get commission from that as well. Any recs on who to use for the Inforce illustration??
Yes, commissions are paid on term life too. The inforce illustration comes from the company whose policy you own.
Or would decreasing the death benefit be a reasonable option, to lower monthly payments??
Love the blog! Thanks. Even for a PhD doc ;-D
I’m considering the $100 fee to James Hunt but thought I’d take a shot here first.
I have Variable Universal Life with a death benefit of $155,000 ($65,000 in face value and $95,000 rider). Yes I’ve been hosed twice. I need the $155,000 death benefit.
Had the policy 13 years so there is no surrender value anymore and have roughly $11,000 in account value. I pay $71 a month so have paid roughly $13,000 in premiums.
Do keep or dump is the question?
Wondering if its best to buy term for the $155,000 death benefit and “cash out” the rest into account for kids college coming up in about 10 years.
Wow! 13 years, $13K in premiums and only worth $11K. That doesn’t sound like a great VUL. Does it have good investments? (i.e. Vanguard or DFA funds) If not, that’s a pretty easy decision in my view. Be sure to buy term insurance prior to cancelling.
So I would
1. Buy level term w $155,000
2. “Cash out” into vanguard annuity til when?
3 is It’ a loss on taxes?
You could surrender the annuity after a short time period and claim your loss.
Is $155K in level term really all you need? I generally recommend much more.
Thanks for the reply WCI
I need $600K in total and have $25K free from work and the rest of the balance thru a term life policy. I plan on on holding the life insurance until retirement at 65.
Quick searches on internet for $150K of term for 48 year old male seem about $50 a month. Dunno the other investment options, but I’ve been in the “fixed”category all these years. Have not worried about it as I have a defined benefit pension, SS, and wife and I max out 403b and even more in Vanguard index fund.
Again, $600K doesn’t seem like much unless you spend very little, have a really big stash, or you’re okay with your spouse supporting the family for the most part after your death.
But if that’s truly all you need, and you already have it, then there is no need to replace this permanent policy with a term policy.
One more question: this WL policy is $71 a month and it is $155,000 of life insurance coverage which I need. you’re saying I should just keep it for 17 more years which will make me 65 years old?
Thanks in advance
No fixed return investments
I have a 30 year old Whole Life policy that was originally started by my grandfather when I was about 5. The premiums are currently charged as automatic premium loans and taken out of the dividend for that year. The total cash value is about 120K and I’m not sure if my money is better used elsewhere (VA, VUL, etc). My goal for the money is to use it later on in life for retirement. I’m not in need of any life insurance, but I would like to minimize the tax incurred. I’m currently leaning towards a 1035 to Vanguard VA. What do you suggest? Thanks!
If your goal is to minimize taxes then keep the whole life and borrow from it in retirement. No taxes due ever. If you wish to have a better rate of return, even after tax, then you should look at other options and compare keeping the whole life to those.
If you have decided to sell your whole life (not universal life) policy please email me. I can connect you with a company who will be glad to purchase your policy for a greater amount than the insurance company.
You had mentioned that you need a cash/surrender value > 0 in order to do the 1035 conversion of a whole life policy to an annuity, this is something I would like to do in order to at least preserve the premiums paid as a cost basis and make a little lemonade out of lemons as it were. The only problem is that my surrender value is 0. I have not found anywhere in the IRS statues that the surrender value has to be > 0? The financial institution (one your recommend) seems to think there is no issue and is willing to do the conversion, I obviously would need to fund the account additionally to make the minimum and work towards producing offsetting gains. I was curious as to why you thought the surrender value had to be > 0?
I first heard that from a CFP advisor. Let me see if I can find a source.
This talks about it:
http://www.glenndaily.com/justsayno.htm
and also discusses some ways in which you might be able to persuade the company to give you the tiny cash value you seek.
Thanks I have seen that reference as well, but it is the only one I have found. I am about 8 months into a NWM policy with a very high premium that I am going to dump and just trying to salvage some value without additional cash outlay. I have had a scenario presented where I could convert the policy to an adjustable comp life (part whole/part term) such that my premiums paid ytd would get me to the 12 month mark and give me a cash value as I would get my first div (of course there is a conversion fee, but it is a fraction of the monthly premium). This seems like a potentially good option as it would give me the cash value encase it is necessary as well give me coverage for the next 4 month while I line up term coverage. I am working with NWM to try and figure out what will be reported as the cost basis of the policy for a 1035 conversion as it would now be part whole and part term (whole is about 70% of the premium) . Ideally I would like to report the entire amount as well as the conversion charge, not sure if you have ever seen this? I also need to run it by vanguard as well to see if I do the switch to the adj comp if they will still let me do a 1035 to a variable annuity. Even if I could only carry 70% of the cost basis over it still would be better than paying another 4 months of premiums to get a cash value…
I guess the issue without cash value is….what exactly are you exchanging? If there is no cash value, there is nothing to exchange.
Seems like a good option. Your basis ought to be every dollar you’ve paid. I’d be really surprised if 30% of what you paid went toward a 1 year term policy. That seems really high.
I got stuck with a IUL from a good friend. I paid 18 month and $288/month. Death coverage is 1M. I cannot believe how did I select 1M. According to the statement of 6 years ago, accumulate value is $1220, and surrender charge is around 17K. I am very very shocked! Serious? 17K! Actually, this insurance is not good for me. I am 30 years, single. Doesn’t need it. I am wondering is there any way to reduce loss? If I decrease the death benefit, will I pay more money?
Great friend huh? Maybe you can ask them to give you $17K.
At any rate, get an in-force illustration. It should tell you if you get $1220 if you surrender, or if you get $0 because $1120-17K < 0.
Not clear about how does surrender charge works. If I cancel policy right now. Do I need to pay anther 17K? or just 17K-6000, what I already paid?
You do NOT have to come up with another $17K. I’ve never heard of a situation where you have to come up with cash to get out of a life insurance policy. Worst case scenario is always you walk away with nothing.
I just found your blog. I’m a trucker with stocks, term insurance, CD’s ( only 2 with $2,500 in each ) Whole Life Insurance with Mass Mutual, a few rentals homes. I think we all need a mix. I think all types of assets are good to have. I’ve read some of your anti Whole Life Insurance blog. I think you have it in for a good product. You seem to only push stock market investments. I think that’s a very bad idea. My rental houses paid me when the market crashed in 2008. My Whole Life Insurance Policy did about what it was supposed to do. However I lost close to 30% of my stock value, therefore much dividends went down. My advice is investment in a little bit of everything is the best way. NEVER PUT MONEY INTO THE MARKET IF YOU CAN’T LOSE IT ALL. No joke the best investment I’ve ever made was my rental houses, not 401k, not stocks, not Whole Life Insurance either. However I’ve only ever lost money in the market. I’m a stupid truck driver what do I know? Yet I’m not a doctor peddling investments advice lol. Maybe I’ll start peddling medical advice. I think I’ll stick to trucking, rental houses, a few stocks, CD’s and my Whole Life Insurance. Maybe the good Doctor will tell me what a bad idea my insurance and CD’s are. How I might make more in the market. Key word MIGHT. I’d gladly put my rental houses income up against the good Doctor any day and see how he’s doing. Well I do Hire a Doctor form time to time, so I’ll be kind. Maybe that $1,000,000 dollar loan for medical school was a bad investment. You could have got that money and rented a lot of property. How many Doctors are on the Forbes 400 anyway? I’m thinking 0. Lol good day Doctor and good luck. 🙂
Welcome to the site Jamie. I’m glad you’re happy with your investments. I agree that rental real estate can be an excellent investment and diversifies a stock portfolio very well.
How many truckers are on the Forbes 400? 🙂
WCI, I am often amazed how calm and professional you remain despite all the ignorance and animosity shown to you.
Thanks for your kind words. I have pretty thick skin, although not infinitely thick!
WCI, There are no Doctors or Truckers on the Forbes 400. We both know that. I don’t make much trucking. Never did and never will. Just like you’ll never make much selling drugs, doing operations or being a Doctor. Thinking is where money is made. Your a smart guy you know that. 🙂 Thinking correctly is the key to wealth. Example, Take a Doctor. He’s out of college and needs a house. Now what kind of home should the Doctor buy? Let’s see a $500,000 home on the really nice side of town right. Well think it over. Why not buy 10 $50,000 dollar homes and rent them out. Successful people think correctly, unsuccessful people don’t. It’s not how educated you are, or what you invest in. It’s how you think. Thinking makes you money or keeps you poor. It’s not your job or education nor lack thereof. I never went to college, didn’t need to. I thought my way through life and it works. The same is true for you. You’d be successful either way. Your a smart man. Had you never went to college you’d still be successful, just not a doctor. By the way Stock Market and Real Estate guys are on the Forbes 400. We both know that as well. Trucking pays my bills Doctor, Rental Houses make me money. 🙂 I’m sure your in the same boat my friend. Being a Doctor pays your bills, investments make your money. At some point our investments pass out employment income. Mine has, and that’s the key. Good day Doctor, I wasn’t trying to insult you with my last post. I read it again it sounded rude, that was not my intention. I’m a good Real Estate man and trucker, but a poor writer.
Actually, I know a very wealthy “trucker.” He owns a $727M company. Not Forbes 400, but there’s still plenty of money in that business.
The reason I bought a $500K house instead of ten $50K houses is because I wanted to live in a $500K house. The reason I don’t own ten $50K houses directly is because I don’t want to deal with renters who live in houses that can bought for $50K. It turns out I’m not that great at that sort of thing. If you are, it is a very viable pathway to wealth. I’ve discovered there are better ways for me personally to invest in real estate.
I have no idea why we’re discussing this on this thread, however, which is about how to get rid of an unwanted whole life policy.
Compared to other comparable investments( safe, low to moderate return ) where would you place whole life on the efficient frontier? My advisor mentioned that since there was a guaranteed balance mandated by the state insurance commission, and the returns over the life of the policy were 3-5% then if held long enough this would be a much safer / easier account to hold long-term safe dollars than a bond portfolio that is subject to interest rate risk. I know that most of my elder colleagues have used bonds to represent the safer part of their strategy, I would like to know your thoughts on the matter.
See next comment. It seems that I didn’t reply directly.
I see that as a myth used by agents to sell whole life. In fact, it’s myth # 23, found here: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
Also myth # 5 applies. https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/
It is true that the market value of a bond is affected interest rate, but if you held a long term bond to maturity, wouldn’t that be the same as holding whole term life insurance (but with greater liquidity and without any of the additional costs and fees)?
Moreover, isn’t the guaranteed return of whole life also subject to the same inflation risk as bonds?
Absolutely. What do you think the insurance companies invest in? But your cash value doesn’t go down in value. They’re just different and comparing them to one another is inappropriate. The way I look at it, if I’m going to lock my money into something for decades, I expect a much better return than bonds offer. WL might give you something a little better than bonds, but it won’t be dramatically better than bonds because that’s mostly what the insurance company is investing the cash value in.