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 have put in about 28K into a whole life policy that a ‘friend’ sold me and at the time I didn’t grasp that the policy is actually not a good investment. Currently I am putting in the minimum 8K to maintain the policy…but the cash surrender value is $600 only- what would you recommend at this point just let go of the money I have put in and cut my loses?
$600 and you have to put $8K in to maintain it? Doesn’t sound like a good policy the way you describe it. I’d probably walk away, but I’d do the VA exchange thing to get the tax loss.
So I am a bit confused about how these policies work and asking my agent I feel at this point is useless since I don’t think she has my best interest in mind. So it says I have an ending policy value of $21977.65 and my surrender charge is $21356.80 leaving my cash surrender value at $620.85…and she claims that in 7 years I will be at a point where the cash value and what I put in will balance out etc. However everything I read about these policies just seems like a terrible idea. I just hate to lose so much $ in this …but continuing to put in $7600 seems like a bad idea too. So should I just let go of the $ – am I reading the policy correct it really is worth nothing and I can’t get much of the $ I put in back. If I continue to put in does it really balance out where what you put in matches with what your cash value is? I have paid it looks like net cumulative premium of $31600.00 as of now.
Get an inforce illustration and see what the guarantee is. If the guaranteed return going forward doesn’t look good then I’d quit throwing good money after bad.
I realize this thread is 2 years old and still going! It must be an interesting topic! Well, I have my own “idiot” scenario to tell. My Merrill Lynch broker got me to purchase a Lincoln Financial VLI policy. My ML broker wanted me to have this as an investment for retirement and not so much for the life insurance part. I max out all retirement funds annually. Here are the points:
-Issue date: Oct 2011 (I was 41 at the time)
-Premium: $25K/year for first 10 years = $250K (I’ve paid for 5 years = $125K so far)
-Illustrations: starting at age 65 to age 80, the plan will pay approx $83K/year
-In the 16th year of the plan (age 57), the account value = surrender value.
-current value: 120K
-current surrender charge: $14K
-current surrender value: $106K
Next premium is due in October. I’m not sure what to do. If I cash out, I lose $19K ($125K-$106K = 19K). I think I have two choices: cash out or move to VA with Vanguard. Any thoughts??
You’ve lost a lot more than $19K. You’ve lost the potential returns if you had invested this money in a simple index fund. I can tell you what I would do with an investment that has given me returns of -5.5% a year. =RATE(5,-25000,0,106000,1,0%) = -5.45% First I’d calculate the returns going forward to make sure I’m not giving up some guaranteed good return, and if I don’t see that I’d do the exchange to a VA, then probably surrender the VA and claim it on this year’s taxes. The other approach is to stick the $106K in something like the Vanguard REIT VA and when it equals $125K, surrender it with no tax consequences for those $19K in gains.
Is there any reason you like the Vanguard REIT VA if you had to choose one from their lineup?
This assumes you want REITs in your asset allocation. REITS are particularly tax inefficient for an asset class with such a high return. So a good choice for an account with some additional tax protection.
Like many people who have posted before me I am feeling the hefty cost of owning two modified premium whole life policies since 2008. A stay at home mother of three kids who are all in college presently, I contracted a 1 mil policy insuring my husband with premium output of 149k and the cash surrender value is 119k. The 500k policy on me has 78k put into and the cash surrender value is 57k. The agent put a rider on it whereby paid up additions go to the death benefit rather than reducing premiums. The premiums are due in a few weeks. I will not break even for another 8 years. I liked the idea of leaving assets to my kids and although 2 of them are in pa programs and will fare ok, the third has a learning disability and has not exhibited independent living skills yet, I also liked the idea of funds sitting quietly in insurance rather than glaring from asset statements in college financial aid offices but the liquid assets I had to support these insurance beasts were lost in a business venture. I have a variable annuity recently exchanged from a 7 year fixed annuity. I can access those funds in a half year, but they could only sustain these policies for 6 years leaving little for retirement. Would you recommend the exchange into a Vanguard VA and waiting til the gains equal the 50k I would forfeit to leave the policy? The new agent offered to reduce the 1 mil policy to 500k whereby I would pay the same premium I pay for the other 500 k policy and I would get a whopping 45k in cash which leaves 26k forfeited for the insurance company.
Classic example. Are you paying attention to this all you who think whole life is “the cat’s meow?” This is what I see over and over again. Someone sold a policy they don’t need and don’t want and still underwater after 8 years. $51K down the drain.
What is your plan for the disabled child? Better figure that out before deciding what to do about the insurance. If the plan is to live on the proceeds of these insurance policies, you may need to keep them or replace them. But otherwise, yea, I’d try to get out of these via a VA exchange.
That child is “functional” and could manage with sale of property assets upon our deaths. I can not get term because of a diagnosis…one reason I felt locked into the converted whole life policy. Given my premium is due 9/9 and there’s a 30 day grace period, do I have time to transfer this to an annuity? Did I understand you correctly when you stated to transfer to annuity before surrendering/terminating? I imagine it will take many many years to equal the value of the premiums I paid for both policies in the annuity which also has hefty built in fees. Are there any annuities you would recommend?
Are you sure you don’t need life insurance? If you do, then you had best keep this one. But if you don’t, then the VA is a good route to go. The usual recommendations are Vanguard or Jefferson National for their low fees.
Dr D,
Is there a good resource for those of us with children of special needs (I know that is a broad term)? But special needs trusts and when/how life insurance can be acceptable would be interesting read. I realize you have answered the whole life insurance issue for those of us who have dug into this blog. Thoughts?
MDS
This would be an invaluable resource to me for which the value of community would be immense especially trying to take care of a son who is on the spectrum with ASD.
I realize this is an old post, but I’m hoping the info makes it to Shoaib and Matthew.
Look into ABLE accounts. They’re tax-advantaged accounts available to individuals with childhood-onset disabilities. I don’t know much about them, other than their existence, so you’ll have to do some legwork on seeing if it benefits your family or not.
https://secure.ssa.gov/poms.nsf/lnx/0501130740
I have a post coming on ABLE accounts soon. Good recommendation.
I don’t know of a good resource, but a special needs trust is a great idea, whether funded with an insurance policy or other assets doesn’t matter so much. But just like with retirement, you need insurance until you have the assets.
Thank you so much for your insightful articles, I can’t tell you how helpful they are. It seems that my husband and I are in the same boat as so many other readers. I purchased my policy about 10 years ago before I was married, and then my husband purchased his about 7 years ago. Recently I’ve begun reading and reading and have found that we made some poor financial decisions in regards to life insurance, and we don’t know what to do. We are both teachers, with three small children (both mid-30’s). I have two policies – one universal life for $100,000 that costs $35/month and a 2nd whole life policy for $100,000 that costs $81/mo. I am looking at a 2015 statement and it says that my UL policy has a value of $1800 (slightly increased, I’m sure, since 2015) and my whole life policy had a value of $4400 at that time. My husband has one policy – a whole life policy for $200,000 that costs $162/month, and on that 2015 statement the value was listed at $8800. Listing those numbers, I’m embarrassed for so many reasons. We attempted to plan carefully, and we clearly didn’t. Secondly, I’m not sure how we never realized that, if one of us died, $200K is clearly not enough money to sustain our family if we were down one income on a teacher’s salary. I think we need to get rid of our policies, buy a ton of term, and direct the money into our IRA’s, but I don’t know. I don’t know what kind of penalties will occur and I don’t know how to find out. Thank you so much for any guidance you can offer.
I’m not hearing a reason to own permanent life insurance for you. I agree you probably need more insurance, probably need term insurance. I would probably do what you are planning to do- get rid of this stuff and move on with life. But get an inforce illustration first so you know what is guaranteed and projected moving forward. Just for fun and for the edification of others, let’s calculate your return on this “investment” (ignoring the value of the insurance.)
$35 a month x 10 years. We’ll call it $420 a year. Now worth $1800. That’s a return of -21% a year. Clearly a lousy investment up until this point. But in reality, just an expensive way to buy insurance that you actually need. The whole life policy has a return of -20%. Try justifying those policies whole life fans!
So, we all learn the Kreb cycle. And the Urea cycle…what great times medical school was. However, when it comes to money many of us were never taught how to calculate the time value of money.
Its a way of deciding is it better to have X amount of dollars now versus Y dollars in Z years. That makes these decisions like do I keep paying into a whole life or convert to a VA clearer. You will need to do some projections and thus make assumptions, but it really can be done.
Decisions regarding time value of money can be done. Its just not what we were taught . Its not what most of us do. I would suggest we have 2 options: one learn to do it yourself, or make sure that you have a team of consultants like an accountant and a lawyer. We think nothing of calling up the peds cardiologist if we have a murmur thats confusing or troublesome in the ED or clinic. You cannot know everything in medicine -unless you’re a FP doctor (Those guys and gals are way underpaid!!)
Why don’t we have consultants to make sure that MD does not mean “money dumb?” I bet you can find resources on this website or your church or community if you look hard enough. If you paid $1500 a year to have an accountant and/or a lawyer review your contracts,taxes and investments, you might be able to steer clear of mistakes by understanding your options better. Plus, if its an investment expense it may be deductible on your taxes. See WCI article on Schedule A! One of my favorite books is the Millionaire Next Door. It advises using experts to do what you are not an expert in. A good read even if a little stale. Not everyone can be George RR Martin.
Good luck.
Similar dilemma here. Wife and I purchased $250K each WL about 6 years ago, and added another $150K each 3 years ago with a total of WL $400K and currently worth about $40K cash value. We just purchased Term for $1 mil each at $1300 a year, WL is running $11K a year. Since we have the coverage with the Term now at more than 2X our original WL, I am wanting to cash in our WL and invest that amount plus our monthly premiums that we would end up paying. We are early 30s, 2 kids, and $370K 401K balance, with maxing out each year. Wife makes 2X my salary but also has a life policy through work that is free at 1.5X salary. I feel that we are adequacy covered for insurance with term now, and yes I know that we paid in WL is $60K, I am going to just consider that $20K we would lose be considered “stupid tax” or the cost of that insurance. Am I thinking this out right…?
I would at least run the numbers on your expected return going forward before surrendering. I would also try to figure out a way to use that $20K loss against my taxes. But yea, lots of people just dump their policy. I did after 7 years.
Hi James,
You are an inspiration for us docs working hard and trying to be smart about money. Hope you can help me out with this dilemma. I have a whole life policy with Guardian with a death benefit of 1.2M. I have been paying a monthly premium of 1758.00 a month. I took a loan out of it and there is an outstanding loan of 19K. There is cash value of about 65K at this time. I took this policy out as a savings vehicle and was sold on the idea that I can take money out of it “tax free” and that It will grow more compared to just keeping the money in the bank. I’m planning on using some these funds as down payment to buy a bigger house in a couple of years now that I have two kids. I plan on decreasing the premium once we buy the new house in 2018. I don’t want to be paying so much in monthly premiums and would want to use those funds to pay the mortgage instead. Do you think this is a good savings vehicle for this endeavor? I try to max out my 401k every year at the same time. Do you think this is good planning?
Thank you!!
No, I don’t think whole life insurance is a good savings vehicle as discussed in numerous posts on this site. But whether or not you should use your policy that you’ve already bought for this is a totally different question.
Personally, I’d figure out if you want to keep the policy first, then decide how you wish to save up for your house rather than doing both at the same time.
Hello,
I signed up whole life policy . This policy is 500k . Every year payment is around $7000 for 15 year. This policy give 50% (250k) cash value at age 65. I have to wait like 33 years to get this cash value. Is it sound investment ? I am looking to invest money . Or term insurance is better ?
Any advice ??
Thanks
Not enough info. I don’t think you understand how your policy works, so I’d start with meeting with your agent again, getting an inforce illustration, and having him explain again how your policy works and what your guaranteed and projected internal rate of return on it will be.
As a general rule, term insurance is what I recommend for people who have someone else depending on their income and whole life insurance is a poor investment due to the low returns.
Thanks for info.
I have all detail. Its long to explain here. So I keep it simple. Investing 105k in premium for 15 years. No payments after that. cash value growing slowly .after another 18 year (at age 65)policy cash value is 250k (guaranteed). So 105k grows to 250k after 33 year if I need cash value at that time. Is it sound investment ??
Any other investment option with good interest rate ??
Thank you
No, it isn’t a “sound investment” in my view. You can calculate out the rate of return relatively easily, but you left out your current value, which requires me to speculate a bit. But I figure the internal rate of return for you over a period of 33 years will be about 3.3-3.4% per year, worse in the early years and better in the late years. If you think that is sound, then go ahead.
My preferred investments are things like stock and bonds index funds and real estate. I think it is very reasonable for you to expect annualized returns in the 6-9% range for a portfolio composed of a reasonable mix of those things over the long run, so I don’t find 3-4% very attractive.
This is wonderful. I do feel as if no one is giving us straight answers at Northwestern so thanks for this blog. Here is our situation: my husband has a paid up 150k policy which he has had over 30 years . He has a 42,000 loan on this at 6% interest. So right now his life insurance is worth $110k and his cash value is $47k.
If he pays back the loan and puts nothing in again for the rest of his life, according to NW’s analysis , his life insurance in 25 years (non guaranteed) cash value will be $192,000 , and his guaranteed w/o loan would be 140k. HIs life insurance will grow to about 200k (about equal to his cash value). He has another 100k in term from another company.
In general we have assets of about $1.5 million, which includes our home, and no debt. My husband and i have a 17 year age difference but he is in great health and has good genes. We have a college age daughter who wants to go to medical school, and we are covered with a well funded 529 to cover college. We do not want to put all our money in the stock market and see this as a way to keep money safe, even though my husband is underinsured. In addition we can’t figure out the yearly expenses of keeping a NW whole life policy since our agent said this was “hard to calculate”. What do you suggest?
I’m not sure you’re asking a straight question, so that may be why no one can give you a straight answer.
If your goal is to “not put all your money in the stock market” then putting some in a whole life policy will meet that goal for you. If you also want a solid long-term return, then not sure the whole life policy is what you really want if you were deciding to buy a policy today. But after 30 years, chances are good you should keep this one. Paying back the loan you took is also probably a good investment, but hard to know without seeing an in-force illustration.
Why is your husband uninsured? How much do you need if he dies? It sounds to me like you’ll have something like $1M-$1.25M. Is that enough for you? If not, he needs more insurance.
Thank you for a great post. Here is my situation :
Base Policy: $500,000 started on May 2010
Cash Value: $22,251.66
PUA: $862.15
Dividend Additions: $5,230.08
Since policy date, I have paid total of ~$37,680.00
No loan
My policy has a guaranteed policy value for cash surrender value and it stated:
The cash surrender value is the sum of:
– the cash value;
– any due and unpaid divident;
– the cash value of any dividend additions;
– the value of any dividends additions;
– the value of any dividends left at interest; and
– any unearned loan interest;
Minus:
– any outstanding loans and loan interest.
When I purchased this policy is also at the same time I got interesting into stock trading. I finally, after 7 years of learning and loosing, managed to gain an average ~20% annually with my roth and taxable account in the last 2 years. BTW, I wasn’t learning and loosing with my roth; it was with money that I can afford to loose.
Is it a no brainer to take a lost and get what I can from the cash value? I can make better money with it than wasting the monthly premium going into it.
So….six 1/2 years in you have a return of something like -14% a year. Great investment huh. Drives me bonkers to hear people defend selling people this stuff when your situation is so typical of what I see.
I agree you are likely to earn better returns in the market than you will see from your WLI policy. But as noted in the post, the first thing to consider is why you bought it in the first place. Did you buy it as an investment to try to get as high of a return as you can? Do you actually have a need or a desire for a permanent death benefit?
Bottom line I wouldn’t dump it unless you have decided it is no longer something you need or want. If you do decide to dump it, I’d probably go the VA route to preserve that $15K loss.
I forgot to mention i’m not a doctor and 33 years of age. Salary is just 94k a year with a mortgage & student loan, plus a baby is on the way.
A colleague was talking about her financial was taken care off in the golden age with retirements and life insurance. She introduced her adviser and he gave me the whole sales pitch. I was 26 and the whole thing sounded wonderful. So I bought into it and the premium is $471/month.
So it was not because of high return or need a perma death benefit when I get it. It was just an awesome sales pitch and I knew nothing about investing. I have 1mil term life as well – yup he sold me on that as well with the pitch of convert to whole. Actually he sold me whole life, term life with option to convert, and disability insurance. I was young….
I’m planning on dumping the WLI and keeping the term and disability. However, could you elaborate on the reason why you wouldn’t dump WLI? Or your recommendation changed after more info given in this reply?
thanks for quick reply.
You have a student loan and only make $94K? Yea, I’d dump this thing. Sorry it was such an expensive lesson. If you want to try to do something to get a tax loss, then do the VA exchange. Otherwise, get rid of it, take your cash value and pay off your student loans. And tell your colleague how your “investment” worked out.
You probably do need term life insurance, but there’s a decent chance you need a different policy than the one you have. Probably ought to make sure you have enough of that in place before surrendering either. More info here on how to buy it:
https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
WHOLE LIFE INSURANCE AGENTS: Give yourself a pat on the back. Your industry just cost this fellow $15K + probably another $15K in opportunity cost. Selling whole life insurance to someone with a student loan ought to be a prosecutable as malpractice.
What a shame. Damn life insurance agents that sell whole life to anyone they can find. It’s awful. Sorry you had to go through this.
We only sell term and you can apply online. Check out or site. All carriers like term4sale with some added goodies. Plus you talk to us instead of it being pushed to some random agent (that’s what term4sale does).
https://www.insuringincome.com/instant-life-insurance-quotes/
We don’t sell whole life. In full disclosure we wrote one whole life policy in 2012. Since then all term all the time (plus DI)
Thanks, your site confirmed my doubts on the benefit of whole life in the recent months.
Thank you Whitecoatinvestor for this blog. I found it very helpful and am in the midst of a 1035 exchange. I have a concerning story about the conversation I had with NWM during this process.
After I reached out to the main NWM office here b/c the guy that sold me the policy is no longer with the company, they paired me up with a local adviser to meet with to go over my options before cancelling. I took the meeting with hopes we could restructure to a sooner break even or something along those lines… there were several options he went over.. none of which were any better – in fact they stretched out the break even date. We ended up in a debate about the virtues / cons of having a whole life policy in the first place. He touted several reasons i’ve heard before but the scariest and most concerning one he hung his hat on was “the access to capital in a down market so you can take advantage and invest in stocks when they are down”… I asked for clarification on this.. He stated that a good tool to use with the whole life policy is the “line of credit”. He was recommending borrowing money against the policy to invest in the stock market!!! The interest rate to borrow against the policy is 8%!!! I was almost speechless. When I called him out on it he said that we must just have a different philosophy on how these policies benefit the consumer.
Has anyone else had this pitched to them?
We are in a military town. His office is very close to the Army Post. I hate to think that there are no doubt many young military families taking advice from this guy.
I’m not surprised. I find NML’s sales training and general philosophy to be appalling, especially for a mutual company.
Appalling would be an understatement. Problem with the agency systems is that they target “career changers”. Someone has taught middle school math for 22 years and they want a change.
Come on into our “financial planning” office. Looks fancy and seems legit. The training starts with a Whole Life centered focus without ever declaring this.
You can help someone with a Roth, term life, solid DI, reviewed auto and home and saved them money, helped with 401(k), etc….but if no Whole Life sold then the question that the Sales Managers ask is “How come you didn’t do FULL financial planning?” FULL financial planning = “Why didn’t you sell them Whole Life?”
A situation where all you do is sell Whole Life and you don’t do any DI, you don’t help with the 401(k) etc is seen as “better” (you would get an ‘at a boy) than the first scenario. Gross is the word.
These offices can have solid work that is done by the advisors but the problem is that the training biases the process.
I was introduced to life insurance many years ago by my brother who got an internship with Northwestern Mutual while he was in college. He was asked to put together a list of family and friends who may be interested in purchasing insurance. I was getting ready to apply to medical school at the time and I got a call from an NML agent. I was sold a $175,000 “Term 80” policy and a $25,000 “65-Life” permanent policy. The permanent policy is a “cash value” policy that I was told is basically a safe way to invest and a way to accumulate savings and offset funeral costs. I have been paying roughly $31/month for 7.5 years, for a total cash basis of $2,801. Dividends have increased the policy benefit to $26,036. My current cash value is $1,526. I am currently in the 2nd year of an orthopedic surgery residency and have significant (nearly $400k) federal student loans at roughly 7% interest from a combination of undergrad, grad school, and medical school. I have decided that this policy is not appropriate for me and I have decided to cash it out and cancel it. I will put the $31 premium towards a 25 year term policy (as I expect to be financially comfortable by then) to increase my term coverage. I have not yet decided if it is worth the trouble of opening a variable annuity with Vanguard to attempt to recoup the cost basis or use the loss as a tax deduction. Thanks to your site I at least know this is an option! My next project is purchasing disability insurance….
I wouldn’t bother but you can be consoled that The White Coat Investor made the exact same mistake. Seriously. I could have written that. Except my policies were $280K and $20K.
I literally spoke with someone yesterday that had a similar story.
They brainwash these kids fresh out of college. It’s awful. Drink the Kool-Aid.
Sorry to hear it every time. Good job figuring it out and thankfully it wasn’t worse.
Request DI quotes here:
https://www.insuringincome.com/request-quote-disability-insurance/
I too am a fool who purchased a NWM CompLife plan with a Term 80 policy about 7 years ago. We initially purchased the policies when we had one child and wanted more term, but ended up with a $2 mill Term80 and $1.6 million CompLife for me and a $600k Term80 and $800K CompLife for my stay at home wife. We had premiums of nearly $3k/ month and as we had two more kids, the cost was too high and dropped the premiums too $2k/month for both of us. While were we figuring out our financial plan, we kept telling our NWM agent that my medical school loans were paramount.
During the ensuing 7 years, saving for college (3 kids, 8, 6, and 3) and paying down a healthy med school loan became tight. About a month ago I received the annual policy statement and saw the large difference between my cost basis and cash value; between our two policies were are down $48K…. hence we immediately realized that these policies had to go. he also put us in loaded mutual funds shortly thereafter bc we said we had some extra cash (boy do i feel stupid…) instead of paying down my loan.
We are currently in underwriting for 20 year level term policies with USAA and hope this will be done soon and will transfer the policies ASAP. A few questions, with a 1035 conversion to a VA. How soon can i harvest the tax loss? I can’t stand paying for my med school loan with a 53k balance and will pay it off and we need the cash value to do a needed addition to our older home. I keep reading about the controversy where to take the tax loss on front page of 1040 or subject to 2% and AMT. How does the two step transaction come into play and will it affect my taxes? One last thing, the “agent/bandit” was a CFP at the time of our interaction (isn’t that a fiduciary and could there be recourse with FINRA?) Thanks for everyone’s ear and I feel embarrassed about my major blunders.
Damn it. I hate to hear these stories. They are everywhere unfortunately.
You should be aware of your rights as a consumer.
A consumer can look up their “financial planner” here:
https://brokercheck.finra.org/
Type in their name in the left column. Find out how long this person has been in the business. Did they start in the life insurance sales job (I mean financial planning) directly after college?
Do they have “disclosures”? This would include customer complaints and what the customer was seeking and what was awarded.
You might ask “How did this complaint start? I believe that I am owed something as recourse.”
If you think that there was something that was misleading or you think it is worth having the regulatory body that oversees all of us financial people do a review, then you should know that this is your right as a consumer.
If somebody wanted to initiate a complaint, here is the link:
http://www.finra.org/investors/file-complaint
I get so mad when I hear these stories for obvious reasons. It destroys the trust that people have in insurance agents. I never say that I am a financial planner because that is not what I do. I, and many others, are paid a commission when you purchase an insurance product. Calling it Financial Planning simply is a way to “market” the entire process as being some high level “I can save you” calling. A good insurance agent will show you all option in the market and won’t put you through the “dog and pony show” that it sounds like you were dragged through.
3k per month going into Whole Life and other permanent products with student loans at 7%!! Noooo! That is awful. So sorry that this happened to you.
The most important thing you can do is to number 1) make sure your rights were not violated. If they were you should know that FINRA exists to protect YOU.
In regard to the loaded mutual funds: If you look up your rep and you see that they have a Series 6 and Series 63 license then you will know why. Series 6 allows someone to solicit and get paid for the sale of mutual funds (not ETFs or individual securities, and not “fee-based” asset management fees – reality is that it is just another way to say commission).
Series 63 is a state law exam. Very short and easy to pass. Series 63 allows reps to sell mutual funds and also, variable annuities (could be wrong on that one – we don’t sell VAs and don’t do any investments anymore).
Look up your rep. People would be shocked to see the complaints that some reps have with penalties of 40k, 50k, and up in damages that had to be paid.
Do you think that they would lose their job or license? You would hope so – but nope. Just as long as they can keep bringing in the whole life sales (and variable annuities, etc) the sales managers let it happen.
It is a damn shame.
Also, with premiums of $3k per month let’s just say that the commission from those was MASSIVE. I cannot tell you exactly what the amount is because we are not supposed to say (ridiculous isn’t it?) but lets just say that it is maybe 100x greater than what the person would have been paid if they had the ability to put you in a managed investment account, charging 1%.
Feel free to call me if you have questions about any of this stuff. Email me first at [email protected] and we can go from there. Gross, gross, gross.
Let’s extend a huge thank you to Dr. Dahle for having the vision to create this blog that has helped so many to get some transparency. I bet he is a pretty good Emergency Medicine doc too. Ha.
One way that this blog can help consumers out there is to make sure people know where to go to file a complaint when a financial person does what they believe is inappropriate. Leave it to the arbitrators at FINRA to sort it all out. Maybe you just made a mistake purchasing what you did? Maybe it was “malpractice”. All it takes is presenting the fact patterns to a 3rd party – just think of Grand Rounds or any case study that you have seen or will see.
Thanks Joe, that’s exactly how i feel. I checked his name on the FINRA site and saw no disciplinary actions, but he disclosed owning a boat, a luxury vacation property (zillow values 1.3-2 mill) and a consulting business. A google search of his hometown showed that he recently purchased a multi-million dollar luxury home. All adds insult to injury. I hope that any prospective buyer of life insurance, especial whole life types, realizes that they are just subsidizing the lifestyle of the the agent at some possible financial peril of their own. The minimal search just corroborated my thoughts about this guy – takes advantage of people while a fiduciary. I need to secure my new policy, figure out the 1035 and then proceed with the FINRA complaint.
Wow wow wow. We are of course living in the Age of Transparency now. A quick google search yielded some powerful and intriguing information.
The data gets out and we see things more clearly than ever. Sorry to hear that this had to happen to you. Terrible.
My Great Uncle Al…..well let’s just say nobody would have pulled that crap on him. Awful. How these people sleep at night – I have no clue.
Let me know if you need any help. Take care.
Sorry for the few typos and grammar issues. I hope you get the point. I wanted to stop what I was doing to respond.
For transparency purposes, here is my brokercheck summary:
https://brokercheck.finra.org/individual/summary/5205120
Retired from the game…no more investments for this guy. Only term life and disability, and then web development projects that we have elsewhere.
It is now a requirement of FINRA that any registered representative of FINRA has to put a link to Brokercheck.org on the bottom of their approved website. The requirement should force reps to put the direct link to their profile instead of just the homepage. Thing is that if there are multiple people with that name and you don’t know their registered address it can be tough to find the profile. There could be disclosures with complaints there and you might just miss them.
Look up your FINRA rep. Ask them about their profile. They should be happy to share and provide more information.
https://brokercheck.finra.org/
WANT A GOOD SCARE AND LAUGH AT THE SAME TIME???? CHECK THIS OUT (SCARY):
https://brokercheck.finra.org/individual/summary/316687
I will give you a clue: He is famous – not for good reasons.
Thanks for all the useful info! I’m also trying to figure out whether to take a loss or exchange to 1035.
Policy #1, cash value of 13907.61, cost basis 9036, so taxable gain on 4871.61
Policy #2 cash value of 12346.47, cost basis 17685, no gains so no taxes due (loss of 5338.53 if cash out)
What would WCI do??
# 1. You have a gain. There’s no loss to take. Are you sure you want to dump the policy? It might be worth keeping if you’ve had it long enough to have a 50% gain. Be sure to look at an inforce illustration.
# 2 Assuming it doesn’t make sense to keep the policy, I think I’d exchange to the Vanguard REIT VA, use it for part of my REIT allocation, and when the $12K grows to be $18K, cash it out for no tax cost. Shouldn’t take that long. 5 years maybe.
Thanks for the info and suggestions!
Policy #1 was a small policy started by my parents and then transferred over to me, I actually haven’t made any premium payments but the dividends (?) are taking care of it… i’m pretty sure that will eventually run out though… I asked for the inforce illustration but honestly wouldn’t even know what to look at to see if it’s worth to keep vs toss.
#2- great idea! I actually have half my roth IRA in REIT with fidelity (other half in small cap investment to round out my portfolio) But I looked at that the vanguard REIT VA and seems like a good return. Just need to make sure there are no surrender penalties when I cash out…
Thanks for the info and the suggestions!
Policy #1 is a small policy (100K) started by my parents and then transferred to me. I have never continued to pay the premiums and have just let the dividends (?) take care of it. So it should run out pretty soon right? I asked for an inforce illustration but don’t even know how to analyze it to see if its worth it to keep.
#2- great idea! the returns on the Vanguard REIT VA look pretty good. I currently have half my roth with REIT and other half in small cap with fidelity. Just want to make sure that the VA does not have surrender fees when I cash out eventually…
Read the fine print for sure, but I’m pretty sure Vanguard’s VAs don’t. You can hire someone to analyze the policy if you’d like. It’ll run you about $100 though.
Before you get rid of the policies, validate that going forward that they are not a bad investment. As you can tell, they have probably been horrible investments to date. Get an in-force illustration and see what your returns would be going forward.
For policy #1, you are correct, there is no loss.
For policy #2, you have a loss of $5340. Please read the above comments re:how to claim the loss. It seems that the correct way to claim the loss is subject to a 2% floor of your income. For example, if your income is $200K/year, you can only claim the loss above and beyond $4K (2% x $200K). Which means you can only claim the loss of $1338.53 (= $5338.53-$4000). If your income is higher, your loss is even lower.
There are more aggressive ways to claim the entire loss, and there was a lot of debate of which was the correct way to claim the loss. Unfortunately, in 2014, IRS gave guidance in publication 575. See my comment (noraz123) above from June 24, 2015.
That’s a big publication. Can you direct me to the exact page with that guidance?
From Pub 575 (https://www.irs.gov/publications/p575/ar02.html):
“Losses.
You may be able to claim a loss on your return if you receive a lump-sum distribution that is less than the plan participant’s cost. You must receive the distribution entirely in cash or worthless securities. The amount you can claim is the difference between the participant’s cost and the amount of the cash distribution, if any.
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.”
Looks pretty definitive. I think I’d better add an update to the original post.
It’s sad to say, but I’m almost three years into funding my Northwestern Mutual Life Insurance (advisor is a life-long friend) and I’m taking a deeper look into whether the policy is a good fit for me or not.
Currently, I have 2 Adjustable Complife policies. One I have been paying for 29 months ($8,814.55 in premiums, cash value of $6,386.67) and the other for 5 months ($454.10 in premiums and cash value of $1.52). I also have a Term 80 policy that I’ve been paying for 29 months ($216 annualized premium and a net death benefit of $438,953.00).
What exactly is going on with my policies? After following your writing from some time, I think I want out of my Adjustable Complife policies. What do you think? Should I dump more into my Term 80?
First, let me say, “Congratulations!” The fact that you have found site and are reading this article makes you much more informed than most cash value life insurance investors. I, too, came across this article/site having the same questions as you with my wife’s policies.
Next, you asked, “What do you think? Should I dump more into my Term 80?”
It may sound harsh, but I’d consider dumping your financial advisor, friend or not. These policies were not likely good for you, rather good for your advisor (there are big commissions on cash value life insurance policies).
To state the obvious, making the investments into these two “Adjustable Complife” policies were not good investments (investing $8814.55 and only getting back $6386.67 after 2.5 years sounds is a poor investment). However, just because it has been a poor investment to date, doesn’t mean it will be a bad investment going forward (although it likely will be).
The most important thing you need to ask is if you need life insurance in the first place. Are you married (and the the primary earner or have mortgage)? Have kids? If you do need life insurance, then the right approach is almost always term life insurance. The next question is how much coverage do you need? If you were to pass away today unexpectedly, how much would your spouse/family need? If you do cancel your Adjustable Complife policies, make sure you have the right amount of coverage of term insurance first. If you already have enough coverage with the term policy, then you most definitely don’t need the other policies from an insurance point of view.
Next, you need to figure out if these Adjustable Complife policies will be good investments going forward. The first step is to ask for an in-force illustration from Northwestern Mutual Life for each of these policies. Once you have that, then you need to determine what the return will be going forward for these policies. I found it much easier to hire someone to do this. If you read the above comments, there are a few people recommended on this site (one is James Hunt at evaluatelifeinsurance.org, and I can recommend him; it cost less than $100 for him to review my wife’s policies).
If it is determined that it is best to dump your policies, then you need to decide if it is worth it to you to get some tax savings from this. Looking at your numbers, it looks like your loss is only about $3K (you paid $8814+454 and you will get back $6386+1.52).
Probably just easy to cancel the policies and not worry about any variable annuities. Between when this article was written and now, the IRS has clarified how you can claim the loss. A rough estimate says that if your income is greater than 50x your loss, you won’t be able to claim any loss. So if you make $150K or more (and if you are married, this would be combined income), there is no loss you can claim.
I know this likely won’t make you feel better, but the good news is that you found this website/article when you have only put in about $9000. Moreover, your policies seem decent that you have some cash value. If it is any consolation, my wife was in the hole $30K between her premiums paid and cash value when we got married and I started reviewing our combined finances. This is how I found this website/article and James Hunt.
My wife not only dumped her cash value life insurance policy, we also dumped her financial advisor who sold her the policies. My belief is that you will likely do the same.
Last, I will leave the politics aside, but there is debate about the proposed “fiduciary rule” that is supposed to take affect in April that was implemented by the prior administration, and the current administration is looking to dismantle. While the rule is only for retirement accounts, if this rule were to be enforced for all accounts, it is likely your financial advisor would not have sold your these policies in the first place. Why? Because these policies are not in your best interest. They are great for the financial advisor because the of the huge commissions they make, and they are terrible for most investors because of the return (29 months and $8800 later, you get $6300).
Rules/regulations aside, if you need a financial advisor, make sure that they at a minimum are a fiduciary. Moreover, there are recommendations for good financial advisors on this site. And managing your own investments isn’t that hard either. Check out Bogleheads.org if that is something you want to consider. Else, check out the recommendations for financial advisors on this site.
Good luck!
Not sure I can add much to Noraz123’s comprehensive reply other than to endorse it. Be sure you have better term in place if you do decide to dump either your term or your whole life policy.
I’ve found NML term policies to be too expensive. I’ve found their permanent policies to be dramatically oversold to people who don’t need them nor want them once they understand how they work.
Just saw that you updated the original blog article with the updated IRS guidance on claiming the loss (ie, subject to 2% floor).
It would seem to me that there is still a good alternative for those who have significant loss in the cash value life insurance policies. That would be to transfer the cash value to a good variable annuity and let it grow to the original basis. You could then withdraw tax free. The tradeoff of course is that you’d pay a greater fee than if you invested in a taxable account. For example, a Vanguard Total Stock Market variable annuity costs 0.45% + $25/year vs. Total Stock Market Admiral costs 0.05%. But at least a way of making some lemonade out of the cash value life insurance lemons.
I agree that is a good option and often the best option, particularly if you have limited tax-advantaged space and desire to hold high expected return but tax-inefficient assets such as REITs. I’m pretty sure I wrote about it in the original post, no? Yes, here it is:
64 year old MD foolishly purchased NML $300,000 adjustable comp life at age 35.Death benefit now up to $525,947. I have been using dividends to at first pay premiums for about 8 years and now decrease my premium cost.Even using dividends to help with premium costs will need to pay $1269 out of pocket to cover total premium cost.In force illustration projects my annual out of pocket costs will increase annually as NML projecting dividends to decrease. The total cash value is $57,653 and my cost basis is $33,296. I no longer need the life insurance(children fully grown, no outstanding debts etc). My insurance agent tells me I could stop paying premiums altogether by having death benefit benefit reduced to about $110K range. I am just thinking of cashing in the policy but have read your comments that this may not be wise to do after owing policy for 30 years.Also I would have to pay taxes on my gain and still working and in high tax bracket(likely retiring next year however).Appreciate your thoughts.
This sounds like a universal life policy. Unlike a whole life policy, this one has an increasing cost of insurance as you get older. So that tends to eat up the cash value unless you feed the beast. Given that and the fact that you state you don’t need the insurance, I’d give serious consideration to cashing it out, paying taxes on the $24K in gains and moving on with life. But for that much money, I’d get an in-force illustration and pay someone $100 to analyze it and get their recommendation. Maybe wait until the year after you retire if you want so the tax bill is slightly lower.
Sadly, my husband and I are 2 years into our very large whole life policies with NWM Our premiums over the past two years combined are about $200,000! Does it make sense to cancel the policy now after paying such high premiums.
I bet your agent loves you.
Does it make sense to cancel the policies? Hard to say without knowing why you bought them. Why did you buy them?
But the fact that you’ve lost money in the past (and you have because that’s how these work) should not affect your decision moving forward.
We are two years our of residency and were fortunate to have no loans. We are a dual physician family. We maxed out back door roth and 401K. This was pitched as a good investment vehicle for retirement and we feel for it. =(
I don’t find whole life insurance attractive as a retirement investment vehicle. Do you? What return do you expect going forward on this? Do you like the idea of borrowing against your policy to provide “income” in retirement? What are the terms at which you will borrow to get your own money? These are the questions to ask yourself as you decide whether to keep it or dump it. But you’ve spent enough that it’s worth spending another $100 and having a pro evaluate the in-force illustration.
I don’t think you will need to look around on this site and read comments from everyone for long before you realize that the agent put you into something that not many others have done.
I was picturing you being in your late 50s. Kids grown. Maybe ortho surgeon making 1 million annual. Not the case is it?
Is that good? Bad? Can’t say.
Why not some solid 30 year term and other investments first? Real estate? Taxable investments? Etc?
Do you know the commission rate on the product that you were sold? I can’t say but that agent loves you. Not bought. Sold.
What’s the agent’s name?
Wow. That is all I can say. Whether you should keep it or not is not as simple as Yes/No of course. So much has to be taken into consideration.
One thing that always makes me scratch my head: OK, so these guys and gals LOVE whole life. They get you to put 200k into it. What I don’t understand is why they don’t then line up whole life quotes from all possible carriers. Why not work to find the absolute best efficiency?
We all know the answer to the question. They don’t seem to care about maximizing the deal for you. If not you then who is it for?
Some good inexpensive term life sure does work pretty well.
Your comment and whitecoatinvestor.com is that agent’s worst nightmare. Same goes for all of them. They are hoping that their clients live in a bubble and never ask what you asked:
“Does it make sense to cancel the policy NOW?”
I hope that the reasons that you have the policy are so easy to lay out and I hope that it makes sense for you to keep the policies. It is an expensive mistake if you get out now but it could be more expensive if you wait longer.
I agree with Jim’s logic: Just because someone lost money in a deal in the past should not shape the decision to keep it or get rid of it. If you are feeling like you should not have bought it then I can promise you that this feeling will not go away. It is a plan that you really need to keep for a long time.
I have had a VUL through Transamerica for 9+ years. If I wait until 10 years to surrender, I will get full cash value. I am thinking about surrendering now and taking the surrender value and running. My second option would be to stop paying in and using my cash value to pay my premiums for the next 10 months and then surrendering after the 10 year mark. I am wondering though, if I cash out now, do I have to pay taxes on the surrender value? If I wait until I can take the full cash value, will I have to pay taxes on that?
Just trying to weigh the pros and cons. I am willing to wait (but I will not pay in any longer either way) if it means that I won’t have to pay taxes on the full cash surrender value. If the only penalty for early surrender is the surrender fee (?) then I could care less about that. I just don’t want to pay taxes on top of the surrender fee if I can avoid it.
There isn’t much in there. I stand to walk away with maybe 5 grand if I wait. Otherwise, 4 grand.
Thanks for your help!