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.
Do I Cancel My Whole Life Insurance Policy or Keep Paying In?
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 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
Yet another option is to just exchange that whole policy into a modified endowment contract. This can eliminate any need for you to make additional payments into the policy, a big reason why people want to dump their policies. Then you simply leave it alone until your death and have it be part of the inheritance you leave your heirs or your favorite charity. Note that if you go down this path, you can't use the cash value for a better use nor can you borrow against the policy later in life.
There are lots of options when you want to cancel your whole life insurance policy. Spend time evaluating them or you may make another mistake almost as big as the one that got you into this mess. But quit beating yourself up about your decision to buy it; many of us have done that.
What do you think? Have you had this dilemma? Did you cancel your whole life insurance policy or keep it? Comment below!
I’m a little late to the game. I was duped into buying a IUL from Riversource a little more than two years ago and have been paying $5000/year into the policy. Right now it says that I have a cash value of $9570 but a surrender value of negative 10k. Should I just dump this policy now and write off the $9570 as a “stupid tax”? I’ve maxed out 401k and back-door IRA. I don’t want to keep contributing to this policy and am also otherwise covered with a term policy.
Like with any of these policies I were considering dumping, my inclination is to dump it but I would get an in-force illustration and run the numbers first. Your past losses are water under the bridge and shouldn’t affect your decision making going forward. What you want to project is your return going forward.
Thanks for your response and your presence on the internet to teach all of us. Since I have about $10k cash value but a negative surrender value, I did the math and it didn’t make sense to keep paying even the cost of the insurance over the next 12 years until the surrender charge went away. So I’m going to let the $10k pay the monthly insurance premiums ($89/month for 1MM policy) until it runs out. Planning on paying down student debt with the monthly savings.
I’m not sure that’s a good option. Are you aware of how cheap term insurance is? For example, a 10 year level premium policy for a healthy 30 year old is $18 a month. When you have a permanent policy the cost of the insurance is much higher because it must pay out eventually, unlike most term policies. Run the numbers, but I bet you would be better off taking your cash value, buying a 10 year level term policy (as long as you’d have with your planned strategy), and investing the difference.
Is that possible with a zero surrender value? I don’t think that I have access to the cash unless I stick with the policy for 15 years.
Oh, good point. I missed the $0 surrender value. That sucks. If you want to preserve the basis you have to pay into it enough to get at least $1 of surrender value before exchanging. At what point will the policy have a positive value per the in-force illustration?
I have a question here too. I am in an identical situation and intend to perform a 1035 exchange. However talking to the Vanguard rep, I found out that the cost basis of the whole life insurance policy will not be preserved. So the tax benefit explained in this article of preserving the cost basis may not work.
Are there only particular VAs that work for this exchange if one wants to preserve the cost basis?
Why wouldn’t it be preserved? You mean they won’t keep track of it for you?
I have a 4M participating whole life insurance policy and am spending a ton of money on premiums for almost a year. Should I stick with it or cancel?
Not enough information to say. For example, how long have you had it, are you maxing out all your other available tax advantaged accounts, what is the guaranteed and projected return going forward, do you have a need for permanent life insurance etc
Hi there – have a question for you in terms of doing a 1035 exchange:
I am 30 years old and have 3 whole life policies that were started at different times (the first one was in 2011). I have contributed ~$30,000 total and they have a cash surrender value of $15,000.
If I were to exchange these into a variable annuity in 2016 per the 1035 exchange, and then cashed them out in 2017, would I be able to book a loss of $15,000? In addition, would I be penalized for taking out the cash from the VA since I’m younger than 59.5 years old?
Thanks for the help!
Yes. No-There is no gain to be penalized on.
Your webpage contains wonderful insight and has been very helpful for friends from medical school and myself.
In the first year of being an attending my wife and I wanted advice and a partner recommended NW mutual. We had the standard planning meeting and agreed to go forward even though I had significant reservations, just to “get something done”.
– Stupidly, we moved our Vanguard IRA’s to NW Mutual, then realized our stupidity and moved things back to Vanguard 1 year later, minus the 4% commission our “guy” got (stupid tax). I feel great about the situation now.
– We are both making maximum contributions to our 401K/457’s at both of our jobs and fund roth IRA’s yearly via back door conversions at Vanguard in the life strategy funds
– We were sold Term 80 with escalating premiums and I am in the process of securing 30 year level premium term insurance via term4sale.com, in order to replace both policies with ones that make sense.
– We were also sold 2 whole life policies, mine for 1.3 million and the wife’s for 500,000. I plan to sell both of these once I secure a new term insurance policy via the VA method at Vanguard
– I have a betterment.com account and am actively funding that and we are saving in the bank for emergencies, life, etc.
All this being said, would you still recommend selling the whole life policies? Premium for both around 2000 a month total, we have 35,000 cash value and have been in for 3 years.
Thanks for the helpful site.
Did you follow the procedure above? i.e. get an in-force illustration, calculate your returns (both guaranteed and projected) going forward and see if those are acceptable to you? If so, keep it, If not, dump it. Personally, only three years in and from a company that I felt swindled me, I’d dump it out of principle, but at a certain point, you’re often better keeping it. Personally, I think that point is usually further out than three years, but look at the numbers/returns yourself and make a decision.
Which carrier is the agent that you found at term4sale using for you?
Drop me a message. We would love to help you find the lowest possible cost for the term insurance.
[email protected]
Thanks for the great dialogue. First time post, although I have been a WCI voyeur for several months.
I am 48 years old, and would anticipate another 10 years of voluntary employment. I have a 20 year old NWM VCL policy that has cash value of 340K, 70K greater than basis. I am no longer paying premiums, and the policy is not at MEC limits. All other tax deferred vehicles have been maximized, and I have ample term insurance. I’m still coming to grips with deciding if I’d rather keep the funds tax free, or move the gains to a VA while investing the basis elsewhere. I’m not to keen on paying increased taxes if I surrender. If I choose to hold on to the policy, is it sensible to take it to a MEC limit? Does the current condition of the market play any role in current decision making? Are these dim questions? Any thoughts would be appreciated.
I’d give very serious consideration to keeping a whole life policy after 20 years. However, that’s not what you own. You own a VUL, and I doubt it’s a good one. This is a tough decision whether to drop it or not, but I probably would. But first I’d learn everything I could about the policy and have it illustrated in various ways and maybe even pay $100 to have a pro evaluate it and give me some advice.
When you go to a variable annuity, I don’t think you can just take the gains. The whole thing goes. Even if you do some kind of a partial exchange I imagine it’s pro-rated. Tough decision. Worst case scenario, you bite the bullet, cash the whole thing out, pay $30K in taxes and invest the other $310K in investments you actually want.
Thanks for the insight. Naturally, when it was sold, the variable was touted as “more powerful” for cash accumulation etc. In retrospect, it has been more of a piggy bank. What is the risk of holding it/funding it and what makes it less trustworthy than a whole life policy? I will have someone take a second look at it as well.
Well, a VUL is the ultimate mixture of investing and insurance. It’s basically mutual funds inside an insurance policy wrapper. So you have the downsides of the insurance (additional costs etc) and the downsides of the investments (investment costs etc.) As a general rule, most of these have terrible investments. I’ve got a post coming up about one that Larson Financial uses with its clients which has DFA funds in it. I think a case can be made for using that for the right person. But I can guarantee this one from NML doesn’t have any DFA or Vanguard or similar low cost passively managed funds in it. It’s likely chock full of expensive crappy actively managed mutual funds (usually called subaccounts) in it. So you’re locked into crappy investments for the rest of your life unless you get out of the policy. The reason it hasn’t grown much in 20 years? Because you’re paying too much for the insurance and you’re paying too much for the investments.
https://www.whitecoatinvestor.com/what-happens-when-ogres-and-trolls-mate-aka-variable-life-insurance/
https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/
Thanks for the insight. Can you explain the change in approach to holding a variable life policy. Naturally, when it was sold it was touted as “more powerful” for cash accumulation etc. In retrospect, it has been more of a piggy bank. What is the risk of holding it/funding it and what makes it less trustworthy than a whole life policy?
I just came across your site while doing some research on my whole life policy after it started to seem a little fishy. I was sold a whole life insurance policy from NW mutual 3.5 years ago and have been paying around $215 a month for a total of around $7500 in premiums, with a current cash value of ~$4300. Reading some of the stories above, sounds like I got lucky compared to some of the premiums you all are dishing out- guess they realize that they can’t squeeze as much money out of veterinarians 🙂 My husband and I are also in underwriting right now for term life insurance (although it is Term 80, and from what I’m reading here that seems like it is also a bad idea). I’m 32 and my husband is 28, and we plan to have kids within the next couple of years so term insurance seems much more in line with what we actually need. I’m pretty ignorant when it comes to investing (obviously), so what would be the best option going forward? It sounds like converting the whole life to a VA is what is being recommended, but then do I leave it there until it reaches the $7500 I’ve paid in or cash it out and take a loss? My husband and I are also currently maxing out our Roth IRA’s (which are both through NW mutual) and I am contributing 10% plus matching to my employer 401k. My husband is still in school so his only investment currently is the Roth. Should we be getting our Roths out of NW mutual too? Are they just a shady company in general? And what should we be doing with term insurance? I feel completely stupid that it’s taken me this long to look into what’s really being done with my money, but a college friend set me up with my current financial advisor, so I unfortunately blindly trusted them.
Welcome to the club. Most of us, including me, have been there. You got smart in half the time it took me to dump my NML policy; I had mine for 7 years before cashing it out at a 30% loss or so. Luckily, my premiums were lower than yours because my policy was sold to me as a medical student by a great friend who just happened to not be any smarter about financial stuff at the time than I was.
Here is my advice to you.
# 1 Now that your eyes have been opened, learn as much as you can about this stuff. Read the blog, participate in the forum, read a few good books. It really isn’t that hard.
# 2 Fire the commissioned salesman that you mistook for a financial advisor. While there is no huge rush, you’ll eventually need to dump the whole life policy. Move it to a VA at Vanguard, then sell so you can capture your loss but make sure GOOD term life insurance (by definition not sold by NML) is in place first. Here’s a post on how to buy life insurance the right way. Then move your Roth IRAs to Vanguard. You don’t even have to talk to the “advisor.” Either go online or call Vanguard and they’ll walk you through the paperwork and move the money for you. Next, if you still need financial advice, hire a real financial advisor to get it. Realize financial advice is expensive stuff, so there is great incentive to learn how to do it yourself.
It isn’t so much that NML is “shady” but more so that neither the clients nor the salesman know all that much about personal finance and investing, especially as it relates to doctors. Their training is primarily in sales and your training is primarily in medicine (veterinary medicine in your case.) If you had read and understood the contract put in front of you, you’ll see they fulfilled their end of it.
Let the fact that you “feel stupid” motivate you to learn. Much better to feel stupid while young and broke then when old and losing much more money on dumb mistakes.
Thanks for the reply! I’m a little confused about how moving the whole life cash value out to a VA would work- does it somehow track that I lost $3k coming from NW mutual? And if I cash that out are there any fees or drawbacks, or will it basically allow me to write off the loss on my taxes? Would there be any benefit to continuing to contribute to the VA at the current premium rate I’m paying to NW mutual and then cashing out once it breaks even? Also, is there a reason you specifically recommend Vanguard for investing over any other company? Thanks again for the advice.
Yes, the basis is tracked. So if you sell the VA immediately you get a tax loss you can use to offset some of your earned income. If you prefer, you can let it sit in the VA until the value = the basis, and then sell for no tax consequences. There’s no real point to making additional contributions to the VA. If you’re going to cash it out rapidly, I think Vanguard is the best place. If it were a large amount of money and you were going to hold it for a while, Jefferson National’s fee structure is a little better.
Just spoke with my NW mutual “advisor” and he is NOT happy with me. Told him I did not want the annually renewable term 80 insurance (thankfully not through underwriting yet) and that I had gotten a rough quote from an independent advisor (Joe Capone) for ~700-800/yr for a $1.2 million level term 30 policy. He told me verbatim that he thought it was an “extremely dumb idea” to switch to the level term policy and that the benefit of a level term policy would not surpass the term 80 until year 25 (despite the policy documents showing at the guaranteed max premiums by year 20 are $73k and average scheduled are $47k). Also told him that I thought that my whole life policy was completely inappropriately sold to me and that I would be exponentially better off taking that money and investing it elsewhere. Discussed that I had been taking the time to learn some things about investing (read some of the books recommended on this site and have been reading a lot of things on the forum). He was borderline rude and told me he found it frustrating that people that have done a few hours of research think they know better than someone who has had to pass a multitude of tests, and that it was the equivalent of him reading some blogs online and telling me how to medically treat his dog when it is sick. He even admitted that 99% of the time whole life insurance doesn’t make sense for people but that with the right company and the right situation it does (which apparently he thought I was going to agree it was for me?!). He asked me what was going to start happening when my husband finishes school and we make too much money to qualify for a Roth IRA- he just started stuttering when I started talking about backdoor Roths, HSA’s, and 529 accounts. Asked for him to tell me my current cash surrender value on my policy and he just said that he would email me a copy of my policy documents and I could figure it out from there, then for all intents and purposes hung up on me. Talk about a sore loser!
Well done! You’ve done yourself a huge favor by greatly educating yourself. And doing it so quickly. Many aren’t so lucky, often taking years (if ever) learning that whole life insurance almost NEVER the right investment.
In my opinion, I think you made the right decision to get the cash back (vs. doing a 1035 exchange into a variable annuity which would give you the tax loss). Depending how how you claim the loss (and how risky you are with your taxes), it is likely that you have very little to no tax benefit with variable annuity.
Well, I haven’t actually done it yet. I’m waiting until I get a good term life insurance policy in place so I’m not left without insurance. But after today’s conversation I’m looking forward to cancelling it even more!
Hi Julie B. Just came across your comment after someone called me and said that they had a similar situation and had found my name in this post.
I hope you are in a better place with your financial situation now. So sorry to hear that. Makes us all lose our minds. The internet is changing the business of insurance. Transparency is breaking down what was once a closed off “sales” industry. It was sales and it was private information so people could not really share their opinions or the outcomes. Those days are gone.
Yes, much better now. We have life insurance and disability through a plan we got from you. Won’t make that mistake again!!
Sorry to hear you had to go through that. Some people simply avoid that conversation by going directly to NML and surrendering or exchanging the policy without involving the agent.
I wanted to make sure to actually talk with him to make clear what we wanted done, since we are currently in the middle of underwriting for the term insurance policy with them. I figured he would be less than thrilled, but was honestly pretty surprised at the unprofessional way he acted.
We’ve successfully gotten rid of all of our Northwestern Mutual policies and have good term life insurance and disability in place for me, but are now in the last stages of getting life insurance in place for my husband. We used your recommended advisor (Joe Capone) and he is recommending a universal life policy through Protective rather than term insurance, although it is supposedly the same as term since there is no cash value. Have you heard of doing this? I’m a little nervous about signing up for a universal life policy after reading everything that I have, but also know that this is an advisor that you trust and that maybe this type of policy is an exception to the rule. I can post some screen shots of the policy itself, but this is the email I got about the policy….any thoughts? Thanks in advance!
“It’s a zero cash value policy that is guaranteed to be in place for no less than 30 years. Exactly same as term. We are not fans of cash value insurance either.
If you run a quote at our site you will see that this is Protective Life’s term policy. Since there’s not one penny of cash value and the death benefit and premium are fixed for 30 years, it ends up being the exact same thing. Exactly the same. Protective sells this as their term.”
I’m not familiar with enough with Protective to comment. Is the price competitive with the term from other companies? Unless there is something unusual about your situation, why not just tell Joe you’re uncomfortable with the universal life issue and ask whether he can get you a plain vanilla 30 year term policy for a similar price. You probably can as term life is a pretty competitive market.
He said that this was the least expensive option for insurance…my husband has type 1 diabetes so did have more trouble getting coverage even though it is well-controlled. He said that there’s no penalty or fee for cancelling and that none of the premium goes into investment since it’s a zero cash policy. It sounds like it is probably our best option but just not something I’m really familiar with so wanted to get opinions. Just didn’t want to end up going down the same type of road we did with Northwestern Mutual, but sounds like this is an ok deal.
Ahh…there’s the key detail. DM can nail you when it comes to life insurance. I imagine he shopped that around quite a bit to find coverage. All the more reason to reach FI as soon as possible so you can cancel it. I suspect the underwriting criteria for that particular product is a little looser than for a more vanilla policy.
Hi, WCI,
So, I am a NWM 65 to life policy holder since my parents purchased the insurance for $2,750.00 for in 1973. The Death Benefit is worth $16,500. So, the policy premiums paid to date are $1,482.00. Cash value is almost $6100.00.
However, I have 2 kids 7 and 3 years old, and would like to kick up my college savings for them. I have purchased term life policies to fit our family needs. I know it’s making money…but I really don’t need the insurance and would like to convert it to something to use for Private education or even secondary education monies. It’s not easy letting go of so much of my hard earned dollars to insurance, where my true love, my children, could benefit in there future. Can you inform me how to avoid paying a huge penalty on that policy to withdraw? I don’t know if the 1035 and into a V.A. will help me? Thank you very much for the great financial insight on this blog.
There’s no “penalty” to withdraw the money, but you will have to pay taxes on the gains. So $4600 * your marginal tax rate is the cost to just cash it out. The 1035 into the VA isn’t going to help with your goal. If you want to avoid the tax hit, you’ll need to borrow out of the policy and then pay interest according to the terms of the policy. Personally, it’s such a small sum, I’d just cash this out to simplify my life, but if you run the numbers, it’s quite possible you’ll be better off keeping a 45 year old policy.
HI WCI, First time posting. What a useful website you have here. After reading as much I could, I feel so stupid because of what I have already done
As a new licensed MD, 22 months ago I got a financial advisor (for a $ 100 monthly fee) who specializes in MDs. With him I opened a broker account (down -3.5% since inception), 529 plan, got disability insurance and a VUL insurance face amount 450K.
For the VUL I pay $1000 monthly premium and $40 goes to the life insurance and the $960 difference to the investment part so after 22 months I payed total $21120 but my accumulation value is only $16700.
The difference of $4420 is gone, probably in fees. That is 20% of the total amount I put during these 22 months. I do not think the return of this investment will make up that 20%, right?
To make things worse, if I want to cancel now I will have to pay a surrender charge of $12000, so I will get only $4700
If I cancel the VUL now and take the loss, would I need to pay taxes in the $4700?
I read about the option about moving it to a VA, can I do that?
For what I calculated and what I read here, I do not think this FA had my best interest in mind.
Robert – yes, focus on the VUL. If you have other insurance questions, I highly recommend checking out WCI’s website. It feels to me that other posters may be targeting you to sell additional insurance.
First, welcome to WCI! And while you may “feel stupid”, rest assured that many brilliant doctors have succumbed to the same problem – being sold life insurance from a financial advisor who doesn’t have your best interests at heart, but rather their commission. Moreover, the fact that it only took you 22 months to catch on puts you well ahead of the pack. My wife (an ER physician) paid almost $60K into a VUL for a few years, but getting with $30K.
By coming to WCI, you are in the right place. Moreover, if you haven’t already, checkout Bogleheads.org. Another great financial resource, and Dr. Dahle (the owner of WCI) is also a frequent contributor.
Second, you will not owe any taxes. You lost money. You would only pay taxes on your gains. So if you were cancel now, you’d get your $4700 and owe no taxes.
Next, yes you can move your VUL to a variable annuity. If you do cancel, I highly recommend moving the money to a variable annuity. I recommend Vanguard, as there are no fees to setup (and cancel). There are tax benefits of moving to a variable annuity – more details in this article and earlier comments. Basically you have two options if you cancel your VUL:
1 – Move money to VA, let it grow tax free until it reaches $21,120. You can then cancel the annuity and owe zero taxes (because you have no gain).
2 – Cancel the VA and then claim a tax loss of $16,429 (= $21,120-$4700). Note that there is debate of how much of this you can deduct. Read more above in the comments.
As awful an investment as this, there is a possibility that it is best to keep the policy, at least in the short term. This is due to the surrender charges decreasing over time. I *highly* recommend James Hunt, at http://www.evaluatelifeinsurance.org if you need assistance. He is recommended both in the above comments and at Bogleheads.org. I used him to evaluate my wife’s policies sold to her by her now ex-financial advisor.
Last, I recommend dumping your financial advisor. Anyone who is selling you a VUL is likely not a fiduciary. You can find a much better financial advisor (WCI has a list of recommended ones). Or if you read up on Bogleheads.org, you will likely be able to do much of it yourself. I wouldn’t blame your advisor being -3.5% in your brokerage account if he has you invested in low cost, index funds. If, on the other hands, he has you in high cost funds that generate commission for your advisor (my wife’s ex-adisor had her invested SEI funds – awful!), then even more reason to get rid of him/her.
Chances are you either want to keep the VUL for life or get rid of it. Keeping it “short-term” is usually not the right choice.
Thank you Noraz123 and WCI. Definitely I will talk formally to one good advisor from the websites recommended, to handle this issue. For my FA, I honestly cannot trust or talk with someone who sold me such bad investment, no matter for how I see ,the VUL will not give me any benefit. To be tie to a contract (the VUL) that you can not leave without losing money is something I would have never done. My fault on that for taking a poor decision.
There’s another way to think about this – that you have only invested 22 months into this policy. And just by coming to WCI, you are getting greatly educated on many topics. Many people go a lifetime without ever learning about investments and personal finances as much you already have. You may have lost $16K, but the knowledge you are gaining now about vetting investments and investment advisers will gain likely bring tens/hundreds of thousands of dollars more in your lifetime.
Don’t think of it is as a stupid tax, but rather the admission fee to financial intelligence club.
Good luck. And in addition to the Bogleheads site I mentioned, there are also forums on WCI now. Before buying/changing any investments, getting an adviser, or any making other financial decisions you are unsure of, ask questions on these sites. There is a wealth of knowledge, and I’ve never seen two internet sites that are so dedicated to helping people without an ulterior motives that are not in your interest.
I don’t have all the details. It sounds like this advisor did some things for you that were helpful, and perhaps did some things that were not helpful. It’s really hard to say without the details.
The fact that your taxable/non-qualified/brokerage account is down 3.5% is no big deal. The market is down right now so that may not be any kind of a bad sign. Not enough info to say.
The VUL is MUCH more concerning and your lack of commitment to it is downright awful. It is possible that a really good VUL would be helpful to you. However, I don’t know if this is a good VUL, nor do I know if in your particular situation it is a good idea. It is possible, however.
The $17K is long gone to fees/commissions. That’s water under the bridge. Your only decision at this point is what to do going forward. If it indeed is a good VUL and indeed you are a good candidate for a VUL, then press onward. Buying a VUL is like getting married, until death do you part. Only if you end up married to the wrong person or don’t want to be married at all do you go through a costly or painful divorce. The fact that you would even consider dumping it indicates to me that you weren’t as committed to it as you should have been when you bought it. Don’t feel bad, you have very good company as this has happened to lots of docs.
I have a post coming up on an analysis of VULs as a retirement vehicle. You might want to wait for that before dumping yours. But if you do decide to dump it, the VA route would probably be a good one for you to take. Then you either wait (decades) for the VUL value to equal the basis and get that tax-free growth, or you sell it immediately and use it as a tax deduction. At least Uncle Sam will share your pain. Be sure to read this post:
https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/
Makes us wonder if he also sold you a decent disability policy? What carrier did you buy? What is your specialty?..does it include the discounts that it should? Let’s explore this along with the VUL/life insurance.
Thanks for your reply.Definitely the whole package is in question now. Carrier Minnesota Life for VUL and disab insurance. $320 monthly to age 65 for own occupation (I am a 38 yo Hem-Onc), cap to 8K monthly benefit. IDK which discounts i should have.
Ohhh….this is getting ugly. Minnesota life disability insurance? Is this a Northstar advisor? I know these use a lot of Minnesota Life insurance. What are the investments in the VUL? Are there a bunch of Vanguard or DFA funds? If not, chances are you’ve just paid $17K in “stupid tax” and may need to basically start over with everything.
Yes Northstar. The VUL is invested in Index A-S&P 500 100% participation.
I want to make sure I walk very carefully with libel laws what they are. The financial advisor who pushed me over the edge, and to which The White Coat Investor eventually would owe its existence, worked for Northstar. You can guess my feelings about the firm and what I think you should do.
When you say MN Life for DI, do you mean it’s with Standard Insurance? The two are related.
Please email a summary page (snap a pic of page with policy details, premium, etc) over and we will quote all. If it’s Standard, it’s a good plan but maybe not the best “value”. Should be 3-4 others offering true own occupation for less money.
[email protected]
What’s the relationship?
I came here interested in advice about my VUL, to dump it now or not and if i dump it how I should do it?.
That is where the money is leaking by large.
I will take of the DI later since it also came with this advisor who sold me the VUL.
The bigger problem, of course, is that you now have an advisor you now trust less than some random strangers on the internet.
Can you give us a link to the prospectus to the VUL?
https://service.minnesotalife.com/library/public/files/prospectus/pdf/PVULProspectus.pdf
I hope the link above is helpful.
What do you think?
Page 83 says your advisor got 62.1% of the premiums you paid in the first 24 months of the policy. There are two Vanguard funds available, and the ERs on subaccounts are 0.21-1.68%, so it is possible there are some okay funds in there if you’re really sold on the concept of a VUL, but I can’t tell what the ERs of each fund are from the prospectus. This is certainly NOT what I would call a great VUL, however you’ve got a certain amount of water under the bridge already here. I guess what I’d start with is figuring out if you’re sold on the concept of a VUL or not. If so, then see if this one will work for your purposes. If not, exchange to a VA and remember where the $17K you lost went.
Thank you for the reply, I do not like the VUL. Just seeing that 20% of what I give monthly disappears is not what I consider a good investment. That 20 % now is more valuable in my hand that what I could get decades from now. I can’t trust someone selling this without disclosing everything. To lose 17K is going to be painful sighh
Jim does a fantastic job of providing analysis and advice on these things. I cannot say one way or the other without more information. Feel free to email us the specifics and we can ask you questions and give you some advice.
I just tend to see the two together. Not sure of the specifics. Securian is the broker dealer of Minnesota Life.
https://www.securian.com/sites/Securian/About+Us/Minnesota+Life
If you google “Securian Standard Life” you get this:
“You are leaving the Securian web site.
As Securian’s disability insurance partner, The Standard Insurance Company provides Securian Financial Network and Independent Distribution Group advisors with access to high quality disability income products that are backed with outstanding service and support. The Standard Insurance Company’s web site provides the information and resources advisors need.
I accept I decline”
Either way, Securian reps go to Standard a lot. Maybe someone has more of the background. I don’t.
Minnesota Life and Standard are obviously both good companies. The question really is “Why does the agent go to those two companies to help a client? Did they review all possible options?”
Meant to say: If you google “Securian Standard Disability” you get this:
“You are leaving the Securian web site.
As Securian’s disability insurance partner, The Standard Insurance Company provides Securian Financial Network and Independent Distribution Group advisors with access to high quality disability income products that are backed with outstanding service and support. The Standard Insurance Company’s web site provides the information and resources advisors need.
I accept I decline”
First time to site… 3 hours of reading in… Mixed emotions right now: frustration, anger, disappointment (in myself). Thanks for the time everyone here has put in.
For the sake of everyone here, I have tried to find the complete answer to my question below…within the previous comments, but have come up a little short…
Breifly, I am 10 months into a Whole Life Policy at ~$2000/month or $20,000 thus far this year… With a death benefit of $2.8 million at age 65, and a cash value of $1.5 million at age 65. The invested premiums do not level out with the cash value until year 10…
If I drop the policy today, I have only ~$2500.00 in cash value… or roughly an $18,000.00 loss.
Again, if I cancel, moving forward that is $24,000/year that I could put into other investment strategies. Also, I already have a Term Life Policy, SEP IRA and Disability. Agent/”advisor” never mentioned Individual 401K, Health Savings Accounts, Roth IRA… : /
Thoughts??? Take the loss? Or, stay in for 2-3 more years to increase the cash value of the policy, and lessen the loss at time of cancellation?
Best Regards
I’m so sorry. This is super common. I see it at least once a week. I’m not sure why you think this hasn’t been addressed previously. The entire post is directed at you and the story is essentially the same every time.
There is little sense to staying 2-3 more years. Either get out now or keep it for life. Your $18K is gone and won’t come back whether you wait 3 years, 10 years, or a lifetime. That mostly goes to the agent, but some goes to the company and some goes to policyholders who hold their entire life.
Yes. There is extensive information regarding this topic, already posted on the site. I was simply looking for a answer that was directed towards my “specific” situation. That is all.
With that said. Do you recommend using VA method for they small ($2500) cash value that I cash in?
Thanks again for your replies .
Using the VA route is good. It shouldn’t be based on how much cash value you have, but rather the amount you’ve lost. Using the VA method, you can claim up to $18K loss (please read through comments, as there are some caveats on how to claim the loss and how much you can claim – but none of these options are available to you without using a VA).
I highly recommend using Vanguard to do the 1035 exchange into a variable annuity. There are no fees to setup and cancel.
Only you can weigh the hassle factor against the tax savings. I’d probably do it for an $18K loss (which is what matters, not the small amount of the cash value.) But I probably wouldn’t do it for a $1K loss.
I bought a Whole Life Insurance policy back in 2004, $100k whole life ($1,178) + $250k 15 year term ($300). I was a healthy non-smoking 30 year old when I made the purchase. With the two waiver riders on the above two coverage, my annual premium is $1,567.50. 12 years later, the cash value is $9,841.50 and the cost basis is $12,160.09. I’m unhappy with the agent that sold me this policy.
I’ve yet to see someone who, once they understand how their whole life insurance policy works, is very happy with their agent or financial advisor who sold them the policy.
It’s an awful most buyers, and an excellent product for the seller because of the commissions they generate.
But, as the expression goes, no crying over spilt milk. What you need to do now is to understand if it makes sense to keep the policy or not. Almost always, it is best to get rid of it. There are many notes above to help evaluate, and I can personally recommend James Hunt of EvaluateLifeInsurance.org if you need more advice.
Your current loss is than $3,000. That is (tens of) thousands less than most people – if that is any consolation. If you do decide to cancel the policy (and in all likelihood you will), can you help soften the blow by transferring the cash value to a variable annuity (see above comments and blog for more information). I’d recommend using Vanguard as there are no fees to setup (and then cancel).
Good luck!
Thank you very much for the input and advice. Reading the bigger loss from others doesn’t offer any consolidation. Rather I have sympathy for them but I am also very glad that have discovered WCI and can caulk it up to a costly learning experience.
Correction, policy was bought in January of 2007 and not 2004. So it’s been 9 years.
Thank you for all the information you’ve provided.
I bought a NWM Adjustable CompLife policy way back in ’89 when I got married.
As my finances got solid, I looked at the policy to figure out how to best utilize it.
As you said in one of your blog posts, roughly paraphrasing, “if it’s too complicated to understand, it’s probably not a good idea to own.” I came to the same conclusion two years ago, and selected the option for the premium to be paid from dividends. This had the effect of reducing the value, and value growth rate, of this confusing piece of property. Perhaps this was the initial triage.
Now, I’m wondering if I would be wise to pull some cash out and make better use of it.
We’re not talking about huge money here: the current DB is $171,700, the CV is $70,900, I think the sum of my past payments is $32,400.
Here are the two options I’m considering:
1) Take my $32,400 out using what they call a surrender of additions. They say this will reduce my DB to $101k, and reduce my estimated next year dividend from $2200 to $1500. My annual pmt is $1009, so the reduced dividend will keep this thing active with no cash outlay on my part. I like this option as I have some basic feel-good permanent insurance and perhaps I am earning about 5% on this “equity”.
2) I could borrow $70k and pay myself 8%. This option confuses me and the description of how the interest and dividends are calculated and applied I think is different than what you described in the post. Please set me straight. What you’ve said sounds more likely than what the NWM guy just explained. According to him, the entire 8% interest I pay goes into my cash value. Additionally, he explained that dividends are currently paid at 6.1% rate on the BORROWED funds! 6.1% is more than their current dividend rate. Thus, I actually make more money by doing this. This is why I can’t believe it could be correct. The only way I can make any sense of this is that this option actually increases the amount of equity I put into the policy by the amount of the 8% interest I pay.
Chances are good after 27 years that you should keep this policy. All the crummy return years and commissions are water under the bridge. Get an in-force illustration and I bet it won’t look too bad going forward. If I were you, I might just leave the money in it and then borrow it out during retirement.
Be sure to read up on direct recognition and non-direct recognition loans. I think that’ll clear up your confusion.
Wow, has this been an eye-opener for me to read through – I realize now that I am one of many who have been duped by a NWM agent into a couple life insurance policies. I’m a 25 year old healthy male, with no dependents. I have a Term-80 and a Whole Life insurance policy with NWM, and I now am pretty set on dropping at least my Whole Life policy, and would really appreciate some advice about the details. Here is a little more info on my situation:
– I’ve paid $7,226 in premiums to date on my Whole Life Policy, which has a current net cash value of $3,681 (loss of $3,545). My yearly premium is $2,409.
– My Term-80 policy has a yearly premium of $237 and coverage of $485,000.
– Other investments: I’ve maxed out my Roth IRA, and am contributing just the amount to my 401k to get my full company match.
At this point, my plan is to drop my Whole Life policy and take those yearly premiums and contribute them to my 401k. This still leaves me the question of what to do with the current cash value, though, and this is where I’m a little uncertain from the tax side of things. From what I’ve gathered, I’ve got two main options: 1) just take the cash as-is and accept the losses, but also pay my 25% income tax on the cash value, or 2) complete a 1035 exchange into a Vanguard Variable Annuity. Is the idea/benefit to exchanging into the VA that I would avoid the taxes on the cash that I would incur if I just take it right now? Since I only have current investments in a Roth IRA and a 401k, does that tell me that it would be an additional benefit to have an annuity account as well, since I don’t currently?
My other question is regarding my Term-80 policy – I guess I’m a little unsure whether a Term-80 is even right for someone like me at this point, and if not, what a better option would be? Since I’m only paying about $20 monthly premium for it, is it worth trying to find a different Term Policy?
Thanks so so much for any advice you can offer!! I’ve tried to gather the most I could from the comments on this article… it’s just a lot to take in all at once…
There is no tax cost to just surrendering it and walking away. The benefit of the VA exchange is to get some tax benefit from your loss. It’s not a huge loss, so the tax benefit won’t be huge, but it might still be worthwhile to you. If you do cash it out, and you’re not maxing out your 401(k) already, that would be a good place for the money-i.e. defer more salary into the 401(k) while living on the cash value.
I’m not seeing a need for you to have anything more than a tiny policy that would pay for your burial. Once you have dependents, buy some term life insurance. It is very unlikely that someone shopping for term life insurance in an objective manner would end up with a NML Term 80 policy. It is expensive and doesn’t have level premiums and goes for far longer than most people need life insurance.
Ah okay, so the VA exchange allows me to also hold on to my current losses, which I could then get some tax benefit from in the future?
You could pretty much claim them for 2016 if you sell the VA right away.
NML Term to 80 is simply annually renewable term life insurance. The premium goes up each year. Then there’s also a guarantee column and a non-guarantee column. Most companies only use a guaranteed column and in that case the premiums are very high for that product.
SBLI is another carrier that offers annually renewable term insurance and they use a guaranteed any non-guaranteed column that just absolute beats anything in the market for this product.
The problem is that if you compare any annually renewable term product to level term 20 or 30, etc. most people buy level term because the pricing is so much more favorable and it’s guaranteed every year.
Whether you should have any term insurance in place or not is of course another question.
Get a quote from SBLI and then compare cumulative premiums to guaranteed level term products that “fit”.
Email – [email protected]
I am 3 years into into my whole-life policy. I have contributed $15K in cash value after contributing $45k in premiums – so underwater by $30k. Do I now do tha 1035 exchange for the $15k, then sell it book the $30k loss and recover 28 percent federal and 7 percent state taxes? Does that math seem right?
You can only take an amount of that $30k that is equal to your capital gains plus $3K against your regular income each year. Only the $3K goes against your 28/7 brackets. It’s possible it will all be at 28/7, but only if it takes 10 years to use the entire taxable loss.
I don’t think you deduct the loss as a capital loss. As mentioned in previous comments by Harry SIt (April 2014), he raised the point that since you don’t book gains as capital gains, you don’t book losses as capital loss.
The debate has historically been whether this is an ordinary loss or an ordinary loss subject to the 2% floor.
See my comment from June 24, 2015 for more details. I believe that the IRS has finally settled the issue, and you deduct the loss subject to the 2% loss.
The IRS most certainly does make you pay for VA gains if you surrender it with a gain (remember the 1035 is into a VA not a WL policy.) In fact, you do so at your ordinary income rate as I recall.
Why do you believe the IRS has settled the issue regarding the sale being subject to the 2% floor? Do you have a link to that? Last I saw it was still a pretty gray area as to whether you take it there or as a capital loss.
Edit: Or maybe an ordinary, not a capital loss. I’d have to go back and read.
Yes. Copying over from previous reply above:
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.”
Thanks for the citation. So an ordinary loss subject to the 2% of AGI floor. Still, beats no tax benefit.
So on say $200K AGI, 2 percent floor is $4K so on a loss of $30K, I report $26K net loss to reduce my taxable income and effective recover 35 percent (28/7) on the $26K.
Thx!
This is correct. Do note that AMT could kick in and limit your deduction.
Thanks a lot. Yes AMT curse. I’ll try the numbers in a tax software. Either way deciding to cut my losses. Very silly decision to go with whole life
If AMT ends up limiting your deduction, you have another option available.
If you 1035 exchange to a variable annuity (and I strongly recommend a low cost, no fee one from Vanguard), you can leave your money in the annuity, and let it grow back to your original basis. At that point, you can withdraw and owe no taxes (since you technically have no gain, you are back to your original basis).
If you’re going to leave the money in the annuity for a while, and it is a large sum, Jefferson National with its flat fees may be a better option than Vanguard with its low AUM fees.
I think that’s what he’s saying- deducting it on Line 23. Of course, the instructions for Line 23 don’t mention VA losses…
MY husband and I have been paying whole term life insurance for 15 years, the premiums for both of us are $680/month, which have become taxing as our income diminished greatly after we moved to the East Coast (bad move!). The problem is that we are sending our triplets to college in the fall and we are thinking about getting term life insurance and have the cash value of the term life insurance transferred into the kids’ college funds. Could this be a way to avoid paying taxes on us cashing on those policies? Thank you in advance!
Sorry, I meant “and have the cash value of the whole life insurance transferred into the kids’ college funds”.
I think taxes will be owed only on the net investment gain so in your case that is the cash value in excess of the cost basis (680x2x12x15)
You don’t “transfer” the money into the kids’ college funds. You have two options to get it there. You either borrow from the whole life policy and put it in a college fund (or borrow as you go along.) Or you surrender the policy and use the proceeds to fund the college fund.
It sounds like your main issue is paying the ongoing premiums. You have a couple of options there. You can direct the dividends toward the premiums. That will slow the growth of the policy, but will reduce or even eliminate the premium cost. Or you can get rid of the policy and obviously then you don’t have to pay the premiums. Be sure to have term insurance in place before cancelling.