I don't actually post about whole life insurance (WL) all that much, but the comments on WL posts number in the thousands and go on for years and years after the post is written. Most of the posts address whether or not you should buy a whole life policy (or its cousins, Universal Life and Variable Life). I generally recommend against them, and the insurance salesmen who love to post comments longer than the post itself not only recommend them, but feed their children and pay their mortgage from the commissions (50-110% of the first year's premium) on the sales. They're not happy when WCI readers actually have responses to the myths they're using to sell them. Today, however, I'm going to address a different question that I get in my email box far more often—how to cancel a whole life insurance policy.
Should I Keep or Cancel My Whole Life Policy?
Long-time readers will recall I was once the proud owner of a whole life insurance policy from Northwestern Mutual (NML). It was sold to me as a medical student by a very dear friend who happened to be interning with NML that summer. He subsequently went into another line of work. The policy was not only inappropriate for me, but it was just a terrible policy. What I really needed was a $1 Million, 30-year, level-term policy. What I got was a convertible $280,000 term policy whose rates would go up every 5 years until long after I would be financially independent coupled with a $20,000 whole life policy.
This tiny whole life policy was something like $21 a month. The annual policy fee was relatively huge compared to the premiums, not to mention the premiums were being paid on a monthly basis (even a poor medical student could have come up with $240 all at once if he had known it would improve returns). The policy had a terrible return. After 7 years, I cashed it in for something like $1,100. I had paid in something like $21 * 12 * 7 = $1,764. That's a loss of 38%, or something like -12% per year. It didn't quite track the minimum guaranteed returns in the original illustration, but my returns were pretty darn close to the minimum and a long way away from the projected illustration. The in-force illustration I obtained (just for fun) prior to surrendering it indicated I was still many years away from breaking even.
For a few hundred dollars of ill-gotten profit, NML is partially responsible (along with a mortgage lender, a realtor, and a mutual fund salesman) for unleashing The White Coat Investor on the world. I wonder how much they would love to pay now to get me to take down the whole life posts on this blog given that over 12 million people have visited the site in its first decade and some of the most popular posts are about whole life insurance.
The question we will be addressing today, however, is not whether you should buy a policy. It is what you should do with the one you already have. There are a number of points to consider.
Do You Want or Need a Permanent Life Insurance Policy?
Although 75% of those who purchase whole life policies eventually surrender them, there are a select few who want them and even a tiny percentage who actually need them. If you are one of these people, you should keep your policy.
Examples of people who need permanent life insurance include:
- Someone who will never actually become financially independent (working until death) and will always have someone depending on their income financially
- Someone with an estate tax problem
- Someone with a liquidity problem
- Someone with some legitimate business issues that are best solved with these policies
Even if you don't need a policy, you might want one. Perhaps you can't stand the volatility of higher-returning investments like stocks or real estate. Or perhaps the 3-4% returns you reasonably expect on the policy are adequate for your needs. Or perhaps you're into the whole Bank on Yourself/Infinite Banking thing. If any of this describes you, then you may want to keep your policy, assuming it is actually correctly designed to do what you want it to do. You might be able to improve it by paying annually, changing dividends to offset premiums instead of paid-up additions, or even by purchasing additional paid-up additions, but you probably shouldn't get rid of it.
Keep Your Whole Life Insurance Policy If You've Had It for a Long Time
Whole life has low returns when held for decades. It has terrible returns if only held for a few years. That means that, after a while, the returns GOING FORWARD may not actually be too bad. The terrible returns are heavily front-loaded, and generally follow the period for which commissions are paid to the salesman. If you're past those years, you probably want to keep the policy, even if you don't like it. I think 15-20 years is about the turning point, but one could argue this occurs by year 10, or even sooner. It varies by policy and how much you hate it.
Certainly, you can't argue it is a good idea to keep it just because you've had it for a year or two or five. If you don't want to pay the premiums anymore, then change dividends to offset premiums. If you just want to maximize the return, then purchase paid-up additions up to the modified endowment contract (MEC) limit and make sure you're paying annually. If you don't want to hire someone to evaluate the policy, this post may help you to evaluate your own whole life policy.
If You're Going to Cancel Whole Life Insurance, Do It Now
Whole life insurance works out best when you hold it until death. Once you have decided you are going to cancel a whole life insurance policy, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. You may want to wait until just before your next premium is due if it means the cash value will be a little higher, but you certainly don't want to pay more premiums on a policy you will drop at some point between now and your death.
Consider the Alternative
Remember that you cannot just consider the policy on its own merits. You also need to compare it to what you would do with the money if you were not using it for life insurance premiums. If you're going to be using the money to max out a 401(k), or even better, get a match in a 401(k), then it is a no-brainer to get rid of it. Likewise, if the alternative is something like maxing out an HSA or a personal or spousal Backdoor Roth IRA. If you, however, are comparing it to a taxable account, especially invested in low-risk assets, or to just spending the money, then it will compare a little more favorably. I often see agents selling whole life policies to doctors that still have 6-8% student loans. That's financial malpractice in my opinion. Heck, paying off your mortgage, even one with a relatively low-interest rate, may provide a better return than whole life, and it's guaranteed.
Get Term Life Insurance in Place First
Does your whole life policy belong in the trash? Probably.
It should go without saying that you should never cancel a permanent life insurance policy unless you already have sufficient term life insurance in place to meet your needs and wants. It usually only takes a couple of weeks to buy a term policy, but don't leave yourself exposed even for that long. Besides, you might be surprised by something found during underwriting.
Don't Worry About Tiny Policies
When you start talking about getting rid of a policy, the first thing to consider is any possible tax penalties or tax benefits of doing so. For a teeny, tiny policy like the one I had, that just doesn't matter much. My loss was only a few hundred dollars, and the tax benefit on that would be far outweighed by the hassle factor and the actual costs to claim that. If you have a tiny whole life policy, just cancel it.
You may have had one of these purchased for you by your parents, who dutifully paid a few bucks a month on it for two or three decades before presenting all $2,000 of cash value in it to you (and asking you to take over the payments). Be sure to thank them for their thoughtfulness, then cash it out and use the money to fund a Backdoor Roth IRA. You might not want to mention that you did that during Thanksgiving dinner, by the way.
Evaluate Your Options Carefully on a Large Policy
However, if you have paid tens of thousands of dollars in whole life premiums, you probably want to spend a little more time deciding what you wish to do with this policy. If your policy has a large gain, you've probably had it long enough that you should keep it. But if not, you can avoid taxation of that gain (typically taxed at your regular marginal tax rate) by exchanging it into a better cash value life insurance policy, a very low-cost variable annuity (VA), or even long-term care insurance.
The best of those options, in my view, used to be the VA, since buying another cash value life insurance policy most likely entails another fat commission, and most doctors reading this site ought to eventually be able to self-insure any long-term care needs. However, it is not so easy anymore to find a low-cost VA, so even that isn't a great option for a policy with a gain. Unfortunately, you can't even use losses from tax-loss harvesting to offset the gains since gains in a life insurance policy are not considered capital gains.
Preserving Your Loss
A much more likely scenario for someone who has only been paying premiums for a few years and now realizes they bought a “pig in a poke”, is that you are way underwater on your “investment” at this point. Perhaps you've been paying premiums of $20,000 per year for five years, and now have a cash value of $75,000. You could just surrender the policy, take your $75K to invest elsewhere, and consider the $25K a “stupid tax”. Or, you could have Uncle Sam share your pain a little bit.
Another Option If You Want to Get Rid of Your Whole Life Insurance
Yet another option is to just exchange that whole policy into a modified endowment contract. This can eliminate any need for you to make additional payments into the policy, a big reason why people want to dump their policies. Then you simply leave it alone until your death and have it be part of the inheritance you leave your heirs or your favorite charity. Note that if you go down this path, you can't use the cash value for a better use nor can you borrow against the policy later in life.
There are lots of options when you want to cancel your whole life insurance policy. Spend time evaluating them or you may make another mistake almost as big as the one that got you into this mess. But quit beating yourself up about your decision to buy it; many of us have done that.
What do you think? Have you had this dilemma? Did you cancel your whole life insurance policy or keep it? Comment below!
I am a 53 year old and I currently have a Flexible Premium Multifunded life policy from Metlife.
I have it since 2001 and have been paying $3500 per year. The face amount is 500,000 and current cash value is 62000 with zero surrender charge. The latest statement shows at least 2400 being used up for cost of insurance + expenses.
The policy states the following :
Death benefit option C: Specified face amount plus date of death cash value is paid to anniversary age 65.
At a policy anniversary age 65, death benefit is calculated (specified face amount plus cash value) and remains level thereafter.
Does the above mean i can stop paying premiums at age 65 and my family is guaranteed 500000 + cash value ?
Do you advise that I should surrender ?
Thanks
What does your agent say? He was paid a great deal of money to sell you this policy. He should at least have to answer your questions about what it says.
It seems to be saying what you’re saying, but you’ve only quoted 2 sentences out of an entire policy, so I’d be pretty hesitant to take a serious stand on an interpretation there.
Should you surrender? Well, why did you buy the policy in the first place? Does that reason still apply? Are you happy with what you’ve had out of the policy? I calculate the return on your cash value for the first 15 years at 2.05%. Is that acceptable to you?
I have two whole term life insurance policies that were passed on to me from my grandfather and my parents (I’m around 30), but I’m trying to decide if I should cash out on my policies as I will be incurring significant debt to go to grad school (150K). I do not have any debt or other student loans currently.
The policy initiated in 1985 (Whole Life Premium Payable to 90), and the expected return is about 1.5% to 6.1%, and my student loans will likely be slightly higher than that (6.84% for Grad PLUS). The total net surrender value is around 4,300, the dividend value is around 2,500 and the rest is guaranteed cash value. The insurance amount is 10,000 and the death benefit is 18,000.
The policy initiated in 1994 (Whole Life Premium Payable to 65) the expected return is higher, ranging from 4.3% to 7.3%. The insurance amount is 50,000 and the death benefit around 70k.
Initially my financial adviser recommended I surrender just the first one prior to committing to school, but now thinks I should surrender both, to reduce my student loans & corresponding interest payments. I don’t want to borrow against them and deal with another loan, so I would prefer not to do that.
Should I surrender both? My company currently has a long life insurance, but that will obviously go away once I leave the company, so should I get another life insurance policy that is cheaper? Thanks for your time.
6.84% student loans huh….I’d give serious consideration to cashing out. But run the numbers using a current in-service illustration to be sure you’d rather use the money now.
The truth is these are relatively tiny policies, so no big deal whatever you decide. Take a look at the tax bill (if any) when you surrender and make sure you take it in a year when the tax consequences will be minimized.
I would like to cash out this tax year (2016) if possible. Do you know of any major tax implications other than a probable 25% tax on the gains, or any reasons to keep the larger policy? Or cashing out on both and recommendation on a super cheap long term life insurance policy? Thanks!
I don’t have enough information to give you truly personalized advice. But in general, the only tax implications on surrendering a policy are paying taxes at your marginal tax rate on any gains. Remember gains are the cash value minus the total of all premiums paid. There can’t possibly be much of a gain on this $4300 policy.
There are reasons to keep policies and explaining them all would take 3000 words. I suspect in your situations the upsides of surrendering the policy outweigh the downsides of doing so, but again, not enough info to give specific advice.
Here’s how to buy term life insurance if you need it:
https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
Would the actual cost basis be available from the insurer on surrendering the whole-life? I was thinking that the cost basis would be less than the raw sum of the premiums given the life insurance component that was active during the time the insurance was held.
Then as discussed the insurance would be replaced with say a new 20 year loan so the the sum of those premiums would factor in to the math of cashing out.
No, that’s not the way it works. The basis is the total of the premiums paid. That’s good for you. And yes, if you don’t know that, the insurance company keeps track of it.
Thanks for the insight. Appears the difference between my cash value and cost basis will be $40k ish(ouch). This is the first year I have a cash value. To avoid. Plan is to do the 1035 exchange but then keep it going for at least 1 year before taking the loss above the 2 percent AGI (to avoid it appearing as the dreaded 2 step transaction). Several sites still consider this method of taking the loss as inviting IRS review.
I then have to factor in the cost of a new 20 year term to keep insurance unchanged.
Sorry typo above – replaced by 20 year term not 20 year loan
Hi, i am one of those that buys and have not idea what i just bought. 1st of all no one taught me these grown up stuff. 2nd, I was 22 years young fresh out of college and got my 1st job experience in the US. So now i was sold a whole life at 23 y.o.. of course they showed me that million dollar money on paper along with that specific age. 5 years later i cancelled it and i got $500 back because i was sold term life instead. i do not have a house, no kids, married for a year when i got the term life. Was it wrong that i cancelled my Whole life Insurance? I literally feel pain in my chest from anxiety thinking i did something wrong. good or bad news i’ll take it.
I’m not hearing a need for you to have a whole life insurance policy, so you probably did the right thing.
WCI- curing chest pain since 2011 (actually since 2001 I suppose.)
I have a small whole life policy(25k value) from NW Mutual that my parents purchased for me 20 years ago. I took over paying it a couple of years ago. At this point the cash value is $6k, which is actually a little less than the total premiums paid by my calculation($6,300). Seems like that’s pretty pathetic. I was pretty much decided on canceling it recently and putting the money elsewhere, but then came across this article. I’m going to request an inforce illustration for more detail. The place where I’d likely park the money if I cash out is a Roth via backdoor contribution(401ks are maxed).
I agree, that’s pathetic. Since the difference is only $300, it seems no big deal to just surrender and walk away. It might be interesting to look at the in force illustration, but with amounts this small it makes sense to me to just simplify your life.
Great post WCI and really appreciate your detailed responses on the comments.
I’m one of the many scapegoats who fell into the whole life by a close well wisher and friend. I’m a 33 year old male, married with 2 kids below the age of 3.
It was a 500k face value 30 year custom whole life with New York life and I have actually broken even after completing the 5th year. Each year for the past 3 years I have been thinking about cancelling it, but of course never could pull myself together to take a loss. This year after I reading your post I decided enough is enough I m going to cut my losses and take out a 1M$ 30 year term for 65$ a month and call NY life to surrender my policy and to my surprise I paid $31,250 in premiums and my cash surrender value is now $31,017. So $233 for 5 years of 500k coverage seems like a pretty decent price to pay.
NYL’s customer service agent asked me the reason for me wanting to cancel, I said I didn’t feel like it was really a good investment as I lose the cash value if I hold on to my policy and I feel ripped off to pay interest to them to borrow my own money and on top of that I couldn’t afford the premium payments now with 2 kids and the agent tells me I will only see the compounded growth on the policy going forward and that I already broke even and from this point it’s all profit and that based on the current dividend layout my policy premium should be paid for by itself with dividends from 2024 (14th year since the start of 30 year payment period policy). I have asked for the in force illustration to verify that, however the customer service rep also gives me the option that I can reduce my face value to 350k, without making it a MEC reducing my annual premium to $4400 which will force $7100 cash back to me which he said I could use to pay the next 2 years premium and offset the premium burden. And mentioned that once I have the policy active for 7 years I can drop the face value to any amount 50k or 100k and just leave it as a whole life policy for the rest of my life. He is not my agent so I know that he is not making any commission on me keeping my policy.
I know now that whole life is not a good investment now and that I would never take a loan on the cash value and pay them 5% interest on it (I could just do that on my home equity loan and pay tax deductible interest). However, I’m tempted to reduce the policy for the next 2 years and then after 7 years further reduce and get more cash out and keep the policy active at 50k or 100k just to act as a funeral expense policy if I only have to pay the premium for 50k coverage (~60$ a month) for another 7 years, but be insured for life. Please let me know if I am missing something or making a mistake again?
Also I saw an agent Russ posting to contact him to sell whole life policy’s at a better rate than surrendering, however I can’t seem to find his contact address on the comments.
Appreciate all your inputs to help me make a decision.
It sounds like your policy is working out about as well as any of these do. However, it appears you bought a bigger policy than maybe you should have. You should get the in-force illustration for all your options before making a decision. There are obviously several options and what is best really depends on you. But you should be aware that assuming you can max out all your other tax-protected savings and meet your other financial goals, that it isn’t insane to keep this thing. But if you want to be rid of it, well, you lose $233 and the use of $30K for 1-5 years.
I can’t endorse Russ’s firm (it’s not even a firm but a group of his friends) but if you’d like to be put in contact with him, send me an email and I’ll do so as long as you let me know what your experience was like afterward.
That’s a good point about the opportunity cost. I guess I was just surprised I was even close to breaking even in 5 years. I need to either surrender the policy or lower the value drastically as I don’t believe in the whole life model. I was sold on having the cash value and death benefit (which was inaccurate) and on the other inaccurate notion that the interest I pay goes back to me like a 401k. I really can’t keep paying this and invest on a Roth, so I was planning to move the money on this over to a Roth. The only issue is they won’t provide me an in-force illustration for the lower face values, but only for the current 500k value. I know I will never recommend anybody to get a whole life policy, but just thinking since I already got it should I lower it based on my age and health as of 5 years ago and keep it for funeral expenses. I honestly don’t know if that is even something I should worry about.
Unfortunately, we also were given the “speech’ by a NWM rep and of course bought into it. Our policy is an Adjustable CompLife and premiums are $3000 per month. The cash value is $377,328.02. The policy date is January 1, 2005 so I am assuming payments were started on that date, which would mean we have paid in $408,000. Please tell me I should get out of this and what is the best way to do this. My husband is a physician and has a retirement/pension account with AXA Equitable, a variable annuity. Can we transfer the cash value to this account? Any suggestions would be helpful.
Wow! $36K a year whole life policy. I wish I could tell you this wasn’t a common issue. No, you can’t move the money into a retirement account. When you get this sorted out you could also look into fixing the retirement account which is also almost surely less than ideal.
So should we cash out, take our losses, and invest elsewhere. Can we just tell them we don’t want to pay the premium anymore, leave it there, get term life somewhere and cash in later? Where can we put it? What do you mean by fixing the retirement account? What is your best choice for us to do?
1. Life Insurance policy
First, figuring out what the best thing to do with the insurance policy is not the simple unfortunately, as it depends on many specifics of your policy. You will likely need to do more research to see if it is best to keep the policy or not. The best decision would have never been to buy it in the first place, but that is now “water under the bridge.” You suffer most of the fees in the first few years, so now that you are passed those, it *could* be beneficial to keep it.
When I was trying to see if it made sense to get rid of my wife’s universal life insurance policies, I was recommended to James Hunt (see http://evaluatelifeinsurance.org/), both on this website and Bogleheads.org (another good, financial resource for investors). He helped me decide that one was worth terminating and one was work keeping. I can highly recommend his service (and low cost, believe it was $75).
If you do decided to get rid of your policy, you have a few options. As Dr. Dahle mentioned, you cannot move your life insurance money to a retirement plan. You can either just invest it in a plain, old taxable account. Another option, and you can read more about this above, is to move the funds to a variable annuity (I *highly* recommend using Vanguard for a no fee, low cost variable annuity). Once your money is in the variable annuity, you can either leave it there to grow back to your basis (ie, let $377,328.02 grow to $408,000). At that point, you can terminate the variable annuity, and you would owe $0 in taxes.
Another option is to move the $377,328.02 to a variable annuity, and then immediately cancel it. If you do that, you would have $30,671.98 tax loss (=$408,000-$377,328.03), which would save you some on your taxes (subject to some limitations, read more above).
2. Retirement Account
Variable annuities are usually not great investments. The only reason to use one above is because of weird IRS rules with life insurance that let you exchange a life insurance policy to a variable annuity and preserve the basis. Variable annuities often have higher fees than basic funds.
Your retirement accounts are likely tax advantaged (ie, you are investing pretax dollars now to pay taxes later or like a Roth IRA, you are investing after tax dollars but will never pay any tax on the gains). Why pay the extra fees of a variable annuity in this case? I am very much of the “Boglehead” mindset – that you should be investing in simple, low cost, broadly diversified funds. In lieu of a variable annuity, your husband should invest in stocks and bonds funds in his retirement account.
Again, I am biased, but I highly recommend checking out http://www.bogleheads.org. It’s a website/forums/wiki setup by fans of Jack Bogle, the founder of Vanguard. I found that website and White Coat Investor when I was doing the same thing as you – trying to educate myself on what to do with my spouse’s insurance policies. Those policies were sold to her by her financial advisor at the time. Once I educated myself properly, not only did I get rid of (one of the) insurance policy, I got rid of the financial advisor.
This website, Bogleheads.org, and James Hunt from EvaluateLifeInsurance.org are excellent resources, and they helped me tremendously. Hopefully they can help you, too.
Thanks for taking the time for that comprehensive answer. I can’t add much to that.
My husband and I bought into a VUL 3 years ago (prior to finding this site!). I was never fully comfortable with the decision due to the length of commitment. However, I thought it did make sense given our financial situation as follows:
My husband and I are both physicians, and are currently maxing out on our 401K/401a, HSA, 457, backdoor IRA, 529 etc. We are also putting in $4200 a month into a DFA taxable account through our advisor. We have a marginal tax rate of 39%. We both have some term insurance as well and I have no need for a permanent whole like insurance or the death benefit. Not interested for passing down money. Main purpose is to be able to get loans tax-free for retirement. Timing wise, we were planning on funding it at $36K annually for 20 years, hold and do nothing for 10 more years, and start taking out loans after that (30 years later and around age 65), with the loan at 0% interest. We have funded it for 3 years so far and if cashing out, will have about 30K loss.
My main concern is that until death is a very very long time and no one can predict the world and I do not want the risk of needing to pay large premiums at the end of life when other resources may be dwindling, or facing the tax consequences of letting the policy lapse and owing money for all the loan’s taken.
I had the policy evaluated by James Hunt a few months ago, who actually gave a favorable review (at least from what I can interpret). Just trying to figure out if it makes sense to keep the policy financially if my only true concern is fear of commitment and long term uncertainty.
Did you read this post?
https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/
Hello.
I’ve read a reviews and very helpful so far and I’d like to ask for advice for my case.
I have been paying close to 600/month for for my wife and myself for whole/permanent (saving) life insurance w/ Transamerica. (for my death $500,000 and for my wife $250000) recently I deposited about $20K in January for i was told it was a good time to invest (indeed it was because stock dropped?). I paid more than $40K for the savings. After reading a book written by Dave Ramsey and talked to my friend. I think it would make much more sense for me to just have a 20yr term policy for my kids will be independent by then (well most likely). I do not want to lose all of money for cancelling the policy.
What would be the best option for me? I want maximum finance plus I want to protect my family. Are you familiar w/ Transamerica?
Thank you so much for your help in advance.
Yes, I’m familiar with Transamerica. I consider them one of the “bad guys” out there who sell whole life insurance to people who don’t want or need it once they understand how it works, like you.
If you just want out, then either surrender it or if it’s worthwhile, exchange it to an annuity to get a tax loss. If you’re not sure if you want out, follow the steps in this article (get an inforce illustration and decide if the prospective return is acceptable to you.)
Mike – I, too, was very confused on how best to proceed with my wife’s whole life policies. One recommendation on this blog (and on Bogleheads.org, another financial website that I find very helpful), was a small firm called EvaluateLifeInsurance.org. It is run by James Hunt. After getting the in-force illustration, I was still not sure how to evaluate it if it was worth keeping. James Hunt was able to quickly evaluate them and help me understand what to do. He is also very affordable, I believe that I paid $75/policy, albeit that was a couple years ago, and his prices may higher now.
Also, once you determine if you want to get rid of the policy/policies, you have three options. The simplest is to just cancel the policy completely, take your money and invest it somewhere. Presuming you have a loss (most likely you will unless you policy has been in effect for many years), you can consider the cost of learning about finances.
If your policies have significant enough of losses (say $5K or more), I recommend transferring them to no load, low fee variable annuity/annuities (I strongly recommend Vanguard for this). This will allow you to preserve your basis (for example, you invested $100K in the policies, but your cash value now is only $70K). At this point, you have two other options:
(1) You can put the $70K in the variable annuity and leave there until it grows back to $100K, your original basis. At that point, you cancel the variable annuity, and owe zero taxes, since you’ve not gained anything.
(2) Immediately cancel the annuity. You can then claim a $30K loss* on your taxes. Because of weird IRS rules, you can just cancel the whole life policy and claim the loss. You have to transfer to annuity, and then do it. You then are free to do whatever with the money (recommend investing in low cost, diversified mutual funds/ETFs, such as Vanguard Total Stock Market and Vanguard Total Bond Market).
* Please talk with a tax advisor or evaluate your tax situation. The loss is subject to some constraints, which can limit how much of a loss you can claim, or subject your to AMT. I went with option #2, and I didn’t take AMT into consideration when I canceled my wife’s policy. In retrospect, it may have been better to leave the funds in the variable annuity.
I am in the process of trying to decide what to do with my policy. It currently states that cash value is 22k and surrender value is 1600 … That being said vanguard is telling me that I need min $5k in there for a transfer should I put in the difference to get the 5k cancel the policy and then be able to claim the losses on my taxes? Are my losses based on the 22k which is the cash value or the total amount which I have physically put in which is 31k
Also in vanguard she asked me if I wanted money market …fixed ..variable..stocks.. bonds etc? What is advisable when going this route.
Any advice would be appreciated
You might also try Jefferson National. They may have a lower minimum. But yea, to get that $31K-1600 loss you should be willing to put in some money.
So asking 2 financial planners now both say there is no such thing as claiming it as a loss. I asked them guidance on how to go about doing finishing the VA exchange I have started and both told me there is no such way to do this and that to get out but no way to actually claim it as a loss. If I went through this on the VA end and put in the difference $. Would I put this in to a money market…mutual fund..bond etc? And then once I transfer it over do I just say I would like to close it and then will that $ be returned to me?
Obviously the FPers don’t know what they’re talking about as noted in the post and numerous comments above. There is some debate about how and where to claim the loss, but not whether there is a loss. At worst, everyone agrees that at a minimum you can invest it in the VA, wait until it grows back to your original basis and then surrender it for no tax consequences, essentially getting your original money back.
But if you want to try to claim the loss (which many others have done) then yes, you exchange it to the VA, then surrender the VA and claim the loss. It doesn’t matter what fund it is invested in in the meantime. Read all the fine print on the VA so you know what will happen when you surrender it, especially any possible fees.
Do you have a recommendation of a FP who can help me navigate this and help to clear up the questions I have. I am having James who is recommended on here quite a bit evaluate the policy as well but he too seemed skeptical of the way to claim it as a loss so it would be nice to talk to someone who has done this and can help me navigate it properly
Here’s my list of recommended advisors: https://www.whitecoatinvestor.com/financial-advisors/
I know Larson has definitely done this with clients and claimed the loss. I’ve never queried the rest of them on this particular subject however.
So about 17 months ago I bought life insurance. A $1mil 20-year term policy. I also feel like I got pushed into a Variable Universal Life policy as well. I dropped down to $250,000 for the VUL, but I still feel like I shouldn’t have bought it in the first place. I pay premiums of $120/month and even though I’m maxing out my wife and I’s 401k/403b, and backdoor roths I feel like this money would be better invested or put towards my wife’s outstanding student loans – or actually towards a disability insurance policy which I’ve been putting off getting.
I’ve probably put $2000 into the policy. If I surrender it now I get nothing, and I guess I’m ok with that. I will be keeping the 20-year term, but should the decision to surrender my VUL policy be as easy a decision as it seems?
I agree you need disability before VUL. I also think you should probably pay off student loans before funding VUL. Luckily, your premiums are $120/month instead of $12,000/month, so even if you just walk away, you’re only out what, $2K. Cheap lesson in my view.
I appreciate that you are taking the time to respond to individual inquiries.
I purchased a IUL policy through western reserve, now transamerica, about 5 years ago (working full time, sleep deprived new mom, didn’t do my research…). I have an increasing death benefit of 500,000. Cash Value of $12,500. Surrender Value of $2468. I believe my surrender charge lasts another 5 years. I was comfortable with developing a reserve that I could pass along to my son no matter the market. However, I am now noticing that there is a “no lapse guarantee” period through dec. 2031. After this, I am told the policy cost will increase yearly (as I will be older, etc.). I feel completely duped, as I thought the point was that I would pay the same premiums until age 65 then be done and have accumulated whatever death benefit for my son. Being that I am in good health and good family history, seems very likely that I will eat away this policy in my later years and will have nothing left in death benefit (ie. either eats away cash value or have to lower death benefit to afford later policy premiums). Is that a logical conclusion?
It is certainly a possible outcome. If you want a guaranteed insurance product, whole life or guaranteed universal life would have been a better choice. Whether it will happen or not depends on the policy terms and market returns between now and 65. If the policy does really, really well, you can pay the premiums using cash value so technically you won’t have to come up with them yourself.
But since there is no predetermined premium increase, it could be raised at a rate that would eat up my cash value even if the policy did really really well… correct? So any plan to “loan to myself” would be worthless correct? I am hard pressed to figure out who should keep their IUL. My premiums are $355/month, if that helps any advise you might have for me!
I also have a 100000 increasing death benefit separate plan for my son, ~$80/month. His cash value is $2830 and surrender value is $1435. Does it make any sense to keep either of these plans???
I wouldn’t use the term worthless. There will likely be some value there. That said, I would have advised you against buying it. It sounds to me like you feel swindled and don’t want it any more. In which case, you should probably consider the options in this post for getting rid of it. If you exchange to a low-cost VA, you should have a huge loss you can use. Make sure you have term in place prior to surrendering.
How old is your son and who depends on his income? Seems like a lot of insurance for a child. I mean if you can’t afford a burial maybe you need a tiny policy, but I would cash flow that. Probably be better off putting the $80 a month in a 529, no?
Thank you for your time.
My son is 5. I think the idea was passing this on to him when he was 18 to have built a cash value, etc, you know the sales pitch. Thank you for your input and advice.
and I should mention, my husband has an auto immune disease and can’t get life insurance (many denials), so i thought if my son had a plan now at low cost, he could keep it as an adult even if he ended up having similar health issues.
The problem is few parents can afford to buy a cash value policy large enough to actually meet the needs of their child later as an adult and it’s difficult to buy a term policy on a child that lasts long enough. Especially when you consider the effects of inflation. I mean, maybe the parent buys a $20K, $50K, or $100K policy. 30 years from now, the kid probably needs a $5M policy and that $100K isn’t going to cut it. Better than nothing? I guess, but hardly a replacement.
I could pick your brain all day 🙂 Thank you for your insights.
Hello:
Thank you for taking the time to explain this all in easy-to-understand terms. Like many here, I have two whole life policies that were recommended by a close friend. I’m a few years in and have been growing unsure of whether this is the right path forward. My two accounts are:
$15,141.26 Cash Value
$21,818.84 Basis
38 months in
$14,937.27 Cash Value
$23,446.80 Basis
52 months in
I have two questions:
1. Given my situation, would you recommend the VA rollover, given the amount of time it would take for me to get back to even?
2. How does move funds out of the VA right when it gets to even? Can that be done automatically?
Thank you for taking the time to examine this.
1. For only a $17K loss each? I guess I’d probably do it, but not for a $1700 loss.
2. No, but it’s very easy to do. Just move it out of the VA into a taxable account when the value equals the basis.
Also, you don’t have to transfer when the value is exactly the basis to the penny. You can be within a couple hundred under/over with very little impact.
I commented earlier but cannot find it.. My husband and I bought in to a couple of ‘overfunded WL policies’ a year ago. We paid $20,000 each. Our next payment is due in a week and I’m sick over this poor investment. My husband is fine with it but I cannot sleep knowing I made such a dumb choice! If we get out now we are down $11440 plus any surrender fees. Do I wait? What if I just put in the minimum ($13000 for both) until I can educate myself more on my smartest exit strategy? Or is it just good money after bad? Help!
Funny how it is always a rush before the second payment!
Get an inforce illustration and calculate the guaranteed and projected returns going forward. If that is acceptable to you, then keep it. If not, then the sooner you get rid of it the better. Sounds like you have a big enough loss that it is worth a little extra hassle to have Uncle Sam share the pain by doing the variable annuity exchange thing.
But go back to the reason you bought it. Did you really understand and want what you bought? Or was it just sold to you like most of these by a commission-hungry insurance agent?
I did not fully understand what it was, as it was toted as a good place for money that was not earning much in savings after all 401k’s and Roths were maxed out. I was pressured into it, which is my fault, even though I never felt good about it. I didn’t realize that once you hand it over you can’t use it without paying interest on you own money, or close it and lose the death benefit. I think the projections show 8-10 years before I get back to even. That’s a lot of sleepless nights. Sad when the only way to win here is to die. I’m going to have home run those scenarios with the reduced payments and see what that does for the timeline. Thanks for your answer!
Sorry to hear that. The issue here is that ever payment you make for the next 8-10 years you will be kicking yourself. That alone would advocate to me to get rid of it earlier rather than later.
Dr. Dahle is right. Don’t throw good money after bad. The simplest approach is to just close down the policy, and do it now. If you want to get fancy and save some money, you can rollover your insurance policy to a variable annuity. There are some tax savings from this approach, as mentioned in the original blog post, and discussed at length in the comments above.
It is extremely rare, although possible, that it can be a better investment to keep a policy in place. If you are worried about that and unclear how to properly evaluate the policy, I’d recommend contacting James Hunt at evaluatelifeinsurance.org. He is recommended many times in the comments above, including myself. I used his service to evaluate my wife’s policies. I believe his fee was $75 or $100.
Thank you! I posted a lot of detail and an in force illustration at this sight: https://www.bogleheads.org/forum/viewtopic.php?f=2&t=194659&p=2968726#p2968726 If anyone wants to tell me their thoughts on those figures, I’d appreciate the input.
Hello!
As is the case with most of the people posting on here, I was pretty financially silly. Had my first big boy job going really well and got introduced to a “financial advisor” by a former colleague / friend. He sold me on the supposed benefits and I honestly signed up because I liked the idea of having a direct deposit “investment” coming out to force me to save. Back in the real world, I’ve realized the error of my ways, and now I’m trying to figure out how to make this the least expensive lesson possible.
I have a 65 life policy with NM. Started in December 2014. I’ve dumped in $7200 to date and my cash value is $2185. Not really excited about taken a 70% hit by cashing out. The guy that signed me up is saying that my “break even” is somewhere between year 5 and 6. Do I stick it out to hit that break even? $400 a month isn’t going to break me, but I also don’t want this money tied up for an eternity if what he’s saying will inevitably ring untrue. I’m an independent contractor, so I don’t have the option of a 401k match or anything and I already max out an IRA. Any advice?
Sincerely appreciate it!
At least you learned your lesson with $5K instead of $50K like most docs.
It’s possible you could break even as early as 5-6 years. Get an inforce illustration and see what the guaranteed and projected returns are and then make your decision. If it were me, I wouldn’t make another payment. I’d exchange to a VA, write off the $5K, and be glad I only lost $3K.
As mentioned in previous posts, I would recommend requesting James Hunt for the analysis. Ironically, the analysis he sent me suggests leaving the whole-life in place at least for a few more years…
Surprised at that recommendation. Was there some huge surrender charge to avoid or something? In general, I think it’s best to either dump it now or keep it for life. Anything in between doesn’t seem to make much sense to me.
Yes, I was surprised too. The whole life I have is from Mass Mutual which he considers one of the better ones. He compared continuing with the whole life with the alternative of substituting with a term insurance and reinvesting the saved premium at 4% per year interest rate. I have until July 6th to make my final decision!
Jamal
Looking for more help.
We have a NM 1.3 million and 500,000 whole life policy in place for myself and my wife and are in the process of figuring out whether to keep or get out. All signs point to getting out, evalutelifeinsurance.org has been helpful.
Threads above very helpful for the process of moving funds via 1035 to a Vanguard annuity. Our accountant can help us with the decision about staying in the annuity until basis reached vs. bailing and claiming the loss immediately.
My question is there a certain type or class of annuity that we should establish at Vanguard? Deferred variable vs fixed deferred vs income annuity for example? I’m having a hard time figuring out the difference between each. It looks to me that one can pick different funds or make up with each annuity.
I’m sure Vanguard could help me figure this out, but thought I’d ask.
Thanks!
You’re looking for a deferred variable annuity.
You don’t want a fixed one because you want to invest it in the market.
You don’t want an immediate one because you don’t want to annuitize it.
So that leaves deferred variable.
Hope that helps. Excellent idea to enlist your accountant’s aid in deciding when to get out of the annuity.
I have 4 NWM whole life policies. They aren’t that large and I have had them from 30 years to as recent as 20 years. I am 63 years old. I do have loans that I took out on these policies to pay for my daughters’ education. They are at 8% and 6% respectively. My question is should I borrow from my 401k to pay for these loans(at least the 8% one) or simply allow the dividends and cash value increases to pay the loan payments when I stop having to pay premiums in a couple of years? Or are there other options I should be looking at. I have term insurance to take care of my family in case of death.
One reason I don’t like WL policies is the difficulty of determining what to do in situations like these. You got a whole life policy so you could borrow against it. Then you borrowed against it. Now in retrospect, that seems dumb because the interest rate situation has changed so dramatically. If I could find a guaranteed 8% investment these days I’d jump on it. That’s what you have assuming this is a direct recognition policy.
But 401(k) loans are also kind of dumb. Why borrow against the 401(k) instead of just withdrawing from it since you’re over 59 1/2?
But now you’re comparing the value of ongoing tax-deferral against a guaranteed 8% return.
Hard to give good advice without the whole picture and in this case, even if I had the whole picture!
The good news is that since the policies are small, it doesn’t matter much what you do with them. The interest cost is low, the potential gains from figuring out the very best thing to do is also low, so no big deal. But I think I’d probably pay those loans back and use these policies as part of my legacy assuming you have enough money to do that and live the life you wish.
I bought two WL policies with Guardian from what I thought was a sound financial advisor in 2012. First one I bought in Jan 2012 for 250K, life paid up at age 99, with a premium of 350 month (I am a smoker). The second one I bought in June 2012 for 213K, life paid up at age 95, with a premium of 340 month. I also put in an additional 10,000.00 using the EPUA Rider in March 2016 believing I would earn more dividends with the additions (told to me by my “advisor”). Thought I was set for retirement.
Then I met with another financial advisor through my county gov job to help me review and then rebalance my deferred comp account since I hadn’t looked at it in some time (caught up in working on my master’s and working full time). He tells me I’ve made a huge mistake with the WL and should get rid of it as soon as I can, and then he tells me he can give me quotes on term life insurance along with advice for using that money in premiums to invest in a mutual fund. Currently, I have paid 37K in premiums and have a cash value of 19K and would take a serious loss of 18K if I cancelled both policies. Should I go the VA route? Can I write off the 18K loss in the same year?
I also have a Roth IRA through PriMerica that is charging me 5.75% for every deposit of $100.00 I put in and a $15.00 maintenance fee for the account. These fees I have found are very high but seem minimal. I was thinking about transferring it to a Vanguard Life Strategy or a Target Date Fund. Your thoughts about this?
The majority of my retirement investment is in the Florida state retirement system). The Roth IRA and the Deferred Comp accounts are supposed to supplement my retirement since my Investment Plan won’t be anywhere close to my current income (another bad choice from a person I thought I could trust telling me to change from the Pension Plan to the Investment Plan so the money would be mine should I die early – guess what, I didn’t). I have been substantially hit by the stock market and haven’t earned near the money I could have if I’d stayed in the Pension Plan. Water under the bridge but I need to see what I need to do moving forward.
I need help from someone who is not a blood sucker looking to bilk me out of what little money I have left to invest for my retirement. I am 45 years old and don’t have much time left to make up for the mistakes I have made listening to “financial advisors” who I thought had my best interest. I have 350K in my state retirement, two whole life policies currently worth 18K cash value, the extra 10K I put in the EPUA rider, my Roth IRA worth 6K, and my Deferred Comp account worth 5K. What do you think I should do with the WL policies and what do you think about the Vanguard polices instead of the PriMerica Roth IRA?
Your experience is incredibly common. Yes, moving money from PriMerica to Vanguard and investing it in a simple investing solution like a Target Retirement or Life Strategy fund is almost surely a better strategy.
I tend to agree with the guy who’s telling you that you have no need for a whole life policy. I’m not hearing a need in what you’re saying. It sounds like you bought this as a retirement investment. Due to the low returns, I find whole life to be a lousy retirement investment. You’ve only got $400K. You need your money to work as hard as you do and it’s not going to do that in a whole life policy. However, 45 is hardly “old.” There is time, but you do need to make sure you’re on the right course.
If I were you, I’d probably get out of these four year old policies, but get an illustration and calculate your returns going forward and make the decision. I don’t know your tax situation so can’t say for sure whether you could deduct the losses this year, but if nothing else you could move to a VA and wait until your money doubles and then surrender the VA without having to pay taxes on the gains.
So I purchased a Whole life insurance policy for the sole reason of never using it and passing it on to my kids as an inheritance. This was probably a bad move. Now I need to have funds on hand as an emergency fund and to pay for a special needs child. The policy premium is 6K/year for a 350K Whole life policy and it started October 2014. At this point I have paid close to 10K into the fund and the value will be $100 on October 2016.
What is the smartest way to get rid of it without losing all of the money?
Since there is no value as of now – possibly it is to stop all withdrawals now? or is there another route? Can I write this down as a loss?
Wait just a second here. I’m not convinced you don’t want/need this policy. You bought it for the death benefit as an inheritance. Has that changed? It will provide you that when you eventually keel over. You also mention a special needs child, which is an instance when a permanent death benefit may be very useful to you. Read more here: https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
But if you either can’t afford to keep making the payments and pay for your child’s need now, or you simply don’t want the policy, then surrendering it now will at least improve your cash flow situation by $6K a year. But no, there is no way to get your money back. That’s mostly in the agent’s pocket. If you wait until October when you have at least some cash value, then you can do the VA exchange thing and depending on your tax situation, get a write off and have Uncle Sam share your pain. Read the post above for details.
I am 61 and own a NWM WL policy for the last 26 years. Basic Insurance Amount is 108,655 with 90,817 coverage Increases from dividends for total Death Benefit of 199,472. Due to kids being gone, house being paid, no major debt and substantial savings and investments, we no longer need the coverage. We have put around 42k in premiums into it and it has a cash value of 94k. Past year’s cash value increase was 5,951 and dividend was 2,830.
So here are my questions; 1) Take all the cash out (using 1035 for taxable portion)? or 2) Take out 42k tax free, quit paying premiums and quit using dividends to buy additional insurance, leaving the dividends to fund the policy until I retire at 68?
26 years? Why not just use it as part of your children’s inheritance? If it’s a cash flow thing put the dividends toward the premiums. The dividend is now larger than the premium.
Wow! Did you just say to keep it??! Would you say that in the end it wasn’t the worst investment in the world for this guy?
Is that the first time you’ve ever heard me tell someone to keep their policy? That’s the usual answer for someone with a 10+ year old policy. This one is 26 years old. Why wouldn’t you keep a policy that old? You need to evaluate it based on the return going forward, even if your initial returns were terrible.
+1. This may still have been a terrible investment overall, but having already suffered through the early years, going forward, it is worth keeping.
Surprisingly, when I was looking to “dump” my wife’s whole life insurance policies – she had two – I used James Hunt (of EvaluateLifeInsurance.org, as recommended in the comments of this article) to evaluate and he recommended that we get rid of one and keep the other. They policies were less than 5 years old at the time.
The best investment would have been never to have bought these policies. But once you are in it, you really do need to research if they are worth keeping. This is another reason to despise insurance products that are wrapped into investment products. If you can easily understand it, it is probably shouldn’t be something you invest in.
You mean can’t easily understand it I presume.
I dont feel so lonely, since I too have a Northwestern Mutual perm life policy. I have been paying for 15 years prior to finding your website. Now I only have 7 years left before the dividends pay the monthly premium going forward, so I have decided to keep it. Plus, I have 2 special needs kids that arguably will always need my income and help. Still maxing out 403b. Still paying off all debts monthly. Just one dumb call early on. Thanks for great article!
15 years? Yea, you’re probably making the right call, but might as well run the numbers to know for sure.