By Dr. Jim Dahle, WCI Founder
I don't actually post about whole life insurance (WL) all that much, but the comments on WL posts number in the thousands and go on for years and years after the post is written. Most of the posts address whether or not you should buy a whole life policy (or its cousins, Universal Life and Variable Life). I generally recommend against them, and the insurance salesmen who love to post comments longer than the post itself not only recommend them, but feed their children and pay their mortgage from the commissions (50-110% of the first year's premium) on the sales. They're not happy when WCI readers actually have responses to the myths they're using to sell them. Today, however, I'm going to address a different question that I get in my email box far more often—how to cancel a whole life insurance policy.
Should I Keep or Cancel My Whole Life Policy?
Long-time readers will recall I was once the proud owner of a whole life insurance policy from Northwestern Mutual (NML). It was sold to me as a medical student by a very dear friend who happened to be interning with NML that summer. He subsequently went into another line of work. The policy was not only inappropriate for me, but it was just a terrible policy. What I really needed was a $1 Million, 30-year, level-term policy. What I got was a convertible $280,000 term policy whose rates would go up every 5 years until long after I would be financially independent coupled with a $20,000 whole life policy.
This tiny whole life policy was something like $21 a month. The annual policy fee was relatively huge compared to the premiums, not to mention the premiums were being paid on a monthly basis (even a poor medical student could have come up with $240 all at once if he had known it would improve returns). The policy had a terrible return. After 7 years, I cashed it in for something like $1,100. I had paid in something like $21 * 12 * 7 = $1,764. That's a loss of 38%, or something like -12% per year. It didn't quite track the minimum guaranteed returns in the original illustration, but my returns were pretty darn close to the minimum and a long way away from the projected illustration. The in-force illustration I obtained (just for fun) prior to surrendering it indicated I was still many years away from breaking even.
For a few hundred dollars of ill-gotten profit, NML is partially responsible (along with a mortgage lender, a realtor, and a mutual fund salesman) for unleashing The White Coat Investor on the world. I wonder how much they would love to pay now to get me to take down the whole life posts on this blog given that over 12 million people have visited the site in its first decade and some of the most popular posts are about whole life insurance.
The question we will be addressing today, however, is not whether you should buy a policy. It is what you should do with the one you already have. There are a number of points to consider.
Do You Want or Need a Permanent Life Insurance Policy?
Although 75% of those who purchase whole life policies eventually surrender them, there are a select few who want them and even a tiny percentage who actually need them. If you are one of these people, you should keep your policy.
Examples of people who need permanent life insurance include:
- Someone who will never actually become financially independent (working until death) and will always have someone depending on their income financially
- Someone with an estate tax problem
- Someone with a liquidity problem
- Someone with some legitimate business issues that are best solved with these policies
Even if you don't need a policy, you might want one. Perhaps you can't stand the volatility of higher-returning investments like stocks or real estate. Or perhaps the 3-4% returns you reasonably expect on the policy are adequate for your needs. Or perhaps you're into the whole Bank on Yourself/Infinite Banking thing. If any of this describes you, then you may want to keep your policy, assuming it is actually correctly designed to do what you want it to do. You might be able to improve it by paying annually, changing dividends to offset premiums instead of paid-up additions, or even by purchasing additional paid-up additions, but you probably shouldn't get rid of it.
Keep Your Whole Life Insurance Policy If You've Had It for a Long Time
Whole life has low returns when held for decades. It has terrible returns if only held for a few years. That means that, after a while, the returns GOING FORWARD may not actually be too bad. The terrible returns are heavily front-loaded, and generally follow the period for which commissions are paid to the salesman. If you're past those years, you probably want to keep the policy, even if you don't like it. I think 15-20 years is about the turning point, but one could argue this occurs by year 10, or even sooner. It varies by policy and how much you hate it.
Certainly, you can't argue it is a good idea to keep it just because you've had it for a year or two or five. If you don't want to pay the premiums anymore, then change dividends to offset premiums. If you just want to maximize the return, then purchase paid-up additions up to the modified endowment contract (MEC) limit and make sure you're paying annually. If you don't want to hire someone to evaluate the policy, this post may help you to evaluate your own whole life policy.
If You're Going to Cancel Whole Life Insurance, Do It Now
Whole life insurance works out best when you hold it until death. Once you have decided you are going to cancel a whole life insurance policy, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. You may want to wait until just before your next premium is due if it means the cash value will be a little higher, but you certainly don't want to pay more premiums on a policy you will drop at some point between now and your death.
Consider the Alternative
Remember that you cannot just consider the policy on its own merits. You also need to compare it to what you would do with the money if you were not using it for life insurance premiums. If you're going to be using the money to max out a 401(k), or even better, get a match in a 401(k), then it is a no-brainer to get rid of it. Likewise, if the alternative is something like maxing out an HSA or a personal or spousal Backdoor Roth IRA. If you, however, are comparing it to a taxable account, especially invested in low-risk assets, or to just spending the money, then it will compare a little more favorably. I often see agents selling whole life policies to doctors that still have 6-8% student loans. That's financial malpractice in my opinion. Heck, paying off your mortgage, even one with a relatively low-interest rate, may provide a better return than whole life, and it's guaranteed.
Get Term Life Insurance in Place First
It should go without saying that you should never cancel a permanent life insurance policy unless you already have sufficient term life insurance in place to meet your needs and wants. It usually only takes a couple of weeks to buy a term policy, but don't leave yourself exposed even for that long. Besides, you might be surprised by something found during underwriting.
Don't Worry About Tiny Policies
When you start talking about getting rid of a policy, the first thing to consider is any possible tax penalties or tax benefits of doing so. For a teeny, tiny policy like the one I had, that just doesn't matter much. My loss was only a few hundred dollars, and the tax benefit on that would be far outweighed by the hassle factor and the actual costs to claim that. If you have a tiny whole life policy, just cancel it.
You may have had one of these purchased for you by your parents, who dutifully paid a few bucks a month on it for two or three decades before presenting all $2,000 of cash value in it to you (and asking you to take over the payments). Be sure to thank them for their thoughtfulness, then cash it out and use the money to fund a Backdoor Roth IRA. You might not want to mention that you did that during Thanksgiving dinner, by the way.
Evaluate Your Options Carefully on a Large Policy
However, if you have paid tens of thousands of dollars in whole life premiums, you probably want to spend a little more time deciding what you wish to do with this policy. If your policy has a large gain, you've probably had it long enough that you should keep it. But if not, you can avoid taxation of that gain (typically taxed at your regular marginal tax rate) by exchanging it into a better cash value life insurance policy, a very low-cost variable annuity (VA), or even long-term care insurance.
The best of those options, in my view, used to be the VA, since buying another cash value life insurance policy most likely entails another fat commission, and most doctors reading this site ought to eventually be able to self-insure any long-term care needs. However, it is not so easy anymore to find a low-cost VA, so even that isn't a great option for a policy with a gain. Unfortunately, you can't even use losses from tax-loss harvesting to offset the gains since gains in a life insurance policy are not considered capital gains.
Preserving Your Loss
A much more likely scenario for someone who has only been paying premiums for a few years and now realizes they bought a “pig in a poke”, is that you are way underwater on your “investment” at this point. Perhaps you've been paying premiums of $20,000 per year for five years, and now have a cash value of $75,000. You could just surrender the policy, take your $75K to invest elsewhere, and consider the $25K a “stupid tax”. Or, you could have Uncle Sam share your pain a little bit.
Another Option If You Want to Get Rid of Your Whole Life Insurance
Yet another option is to just exchange that whole policy into a modified endowment contract. This can eliminate any need for you to make additional payments into the policy, a big reason why people want to dump their policies. Then you simply leave it alone until your death and have it be part of the inheritance you leave your heirs or your favorite charity. Note that if you go down this path, you can't use the cash value for a better use nor can you borrow against the policy later in life.
There are lots of options when you want to cancel your whole life insurance policy. Spend time evaluating them or you may make another mistake almost as big as the one that got you into this mess. But quit beating yourself up about your decision to buy it; many of us have done that.
What do you think? Have you had this dilemma? Did you cancel your whole life insurance policy or keep it? Comment below!
Hi There,
I have had a VUL with Transamerica for 9+ years. At the 10 year mark, I can cash out the full value. I am thinking about cashing out now and taking the hit for early surrender. My other option is keeping it, and just letting the cash value pay the premium for the next 10 months and surrendering after the 10 year mark. there isn’t much there…maybe 5 grand if I wait and 4 if I cash out now.
My question is- If I cash out now, or wait to cash out, will there still be a tax penalty? If I have to pay taxes either way, then I’ll just cash out now, but if I can avoid paying taxes on top of the early surrender fee, then I’d like to do that.
Thanks so much for your help!
The only taxes due are on any gains you may have. Do you have a gain? Quite possibly not after only ten years. The penalty would be a surrender penalty to the company. Since there isn’t much cash value there, there won’t be much penalty or taxes.
Thank you for the response. I am going to surrender now… Not sure about the gain. To be honest, even if there was a tax penalty, it wouldn’t be much on 4k. I’m willing to take the surrender penalty hit to get out of this and put the monthly payments toward retirement, which my employer is now matching up to 4% of my salary, so, it is a much better choice!!
Hello, I hope you can still help me out. My husband and I signed a whole life insurance policy with American income life through a close friend who talked us into nit and we have no idea what we were doing and just trying to help a friend make money. Anyway we husband signed up for WL at 30,000 face value and paying 114 monthly. It was opened 7/2013 and We have paid till date. When we called to get some info, we were told that our cash value is 600 if we canceled. We were nurses and have no idea why we did this. Please what is your opinion, I have read so much on this blog but the more I get confused. I did get one thing out of this that we don’t need it. Please help. Thanks
Nurses? Had it for < 4 years? I mean, you can get an in-force illustration if you want, but it sounds to me like your "friend" stole about $4000 from you. I'd just cancel it and walk away, but presuming you have a life insurance need, be sure to get your term life insurance in place first. The bad news is he probably thought he was doing you a favor.
My girlfriend has had a whole life insurance with NM for the past 3 years. Annual premium is 10k and present cash value around 14k, for a loss of -16k.
Am I correct in estimating that cash value will catch up with premium paid in another 10 years, or so ?
If so, we are considering doing a 1035 exchange into a Vanguard VA and cashing it out immediately.
In such case, since she is well under age 59 1/2, would she be subject to federal and state penalities on early withdrawals ? I think not, being that part of the distribution non taxable.
The 16k loss would be reduced by 2% of AGI, about 3k in her case.
Just wanted to check in case I have some major misunderstanding.
TIA
Difficult to tell how long it will be before you can “catch up” or break even without getting what is known as an in force illustration, which you can get by calling NM and asking for one.
It is rare, but it sometimes worth keeping policies. While they are terrible investments (you’ve already lost $16K), it is going forward is what matters. However, it is often easiest financially and emotionally just to be done with it.
If you do cancel, you are correct that you want to do the exchange with a variable annuity. Once you do that, you can either cancel immediately and claim the loss (subject to the 2% floor), or you can keep the variable annuity until it grows back to your basis ($30K), and then cancel. Before the IRS updated the rules on how to claim a loss, it was best to immediately cancel and claim the loss. With the 2$ floor, it may be better to keep the variable annuity until it grows back your original basis ($30K) and then cancel.
There are/will be no taxes or early withdrawal penalties because there are no gains.
Difficult to tell how long it will be before you can “catch up” or break even without getting what is known as an in force illustration, which you can get by calling NM and asking for one.
It is rare, but it sometimes worth keeping policies. While they are terrible investments (you’ve already lost $16K), it is going forward is what matters. However, it is often easiest financially and emotionally just to be done with it.
If you do cancel, you are correct that you want to do the exchange with a variable annuity. Once you do that, you can either cancel immediately and claim the loss (subject to the 2% floor), or you can keep the variable annuity until it grows back to your basis ($30K), and then cancel. Before the IRS updated the rules on how to claim a loss, it was best to immediately cancel and claim the loss. With the 2$ floor, it may be better to keep the variable annuity until it grows back your original basis ($30K) and then cancel.
There are/will be no taxes or early withdrawal penalties because there are no gains.
I purchased a small $25,000 whole life ins policy in 2001 with a 10,000 child rider. My premiums are 31.05 a month but will be reduced shortly to 26.25 because my child rider is getting ready to come off. I have $4,596.45 in total cash value. I was thinking about canceling it and buying term ins but my dad thinks I should keep.it. What would you recommend?
I recommend you follow the steps in this post: https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
Interestingly, I sat down to do the 1035 with my Fidelity advisor. I told them my plan to transfer the cash surrender value into a variable annuity. I mentioned I would either let it grow back to basis and cash out or just take the loss above the 2% limit. THEY REFUSED TO DO IT. They said that they do not give tax advice, but because no basis could accurately be calculated they doubted the loss could be taken.
I mentioned that I had heard of others doing this and that I had read the irs.gov website. They would not allow me to open a variable annuity to 1035 the monies across. Did I do something wrong? Were they only there to collect the annuity fee?
What do you mean it can’t be calculated. The basis is the total of all the payments you made. Should be super easy to calculate.
Why in the world would someone not let you open a variable annuity and then 1035 the cash value of a whole life policy into it? At any rate, you don’t want to open one at Fidelity anyway. If it’s small, use the Vanguard one (low asset-based fees). If large, get a Jefferson National one (flat fees).
Their claim regarding basis was that you could not take the total of paid premiums as the basis. Fidelity argued that there was cost for the life insurance and overhead expenses that lower the basis. Thus, its not the total of all payments. Then my favorite was Fidelity rep argued that life insurance is never an investment only insurance. There we had some mutual ground.
Fidelity is what my employer uses for the 403b so thats why I had a conversation with them. My SEP IRA from side gig is at Vanguard so will try them next.
When it starts looking like I know more about something than the professional whose job it is to know more about it than me, I stop paying them.
https://www.califf.com/taxconsquenceslifeinsurance.html
The basis is the premiums paid.
Regardless, how could your advisor refuse to do a 1035 exchange ? That’s no doubt legal and what you write on your 1040 is your business, since “they do not give tax advice”.
I have been reading many of your posts regarding whole life insurance and wanted to see if you would be willing to weigh in on my specific situation.
I am 44 years old and have had a 1M whole life policy with NML since 2003, with an annual premium of $13,180. I am of the mindset to terminate the policy at this point and cash out the policy. I have paid 14 years of premiums thus far with a cost basis of approx. $184,000 and a cash value of approx. $200,000 (per the NML website). I have debated cancelling the policy many times in the past few years, but did not do because of the high costs in the first few years, etc. At this point, I feel like I should do so. I’m irritated with myself for ever buying the policy and regret the loss in return I have given up not having invested that money in the market over the past 14 years. However, I think it is still best to cut my losses at this point and at least invest the money in the market going forward.
I’m interested in hearing people’s thoughts on this. Thanks in advance.
My thoughts about it are in the post above. Not much more to add. Just realize that after 14 years most of the really bad returns are water under the bridge. Going forward they might be 5%-6%, which isn’t terrible. But if you’re going to look at it with regret every time you see it, and have a better use for your $200K and $13K more a year, then sure, cash it out and put it behind you.
Your average annualized rate of return for the past 14 years has been a rather lousy 1.1% (give or take).
But how much would your life insurance pay in the future ? You should ask them an in force illustration and only then decide. Stock market returns may not be a lot higher in the foreseeable future and they are certainly going to be more volatile.
I hope you find this comment and answer to our situation. We’ve had a whole life policy through Protective Life since 1992. I’ve been bugging my husband every once in a while about getting rid of it through the years, but he stubbornly held on to it – some things aren’t worth fighting about. Finally, after hearing Dan Ramsey slam them again, he read the policy and found that the rates have been going up and up. We have about $16,000 in value now. Our rate is $73 per month for $100,000 primary and $100,000 for covered rider (me). Is it worth it now to cash it out and go for term at our age? He’s 59, I’m 60 and both in excellent health. He doesn’t like them anymore, but thinks we should just drop me and pay the annual premium instead of just cashing out. What do you think?
Can’t say. Not enough info. As noted in the post, it’s key to look at an in-force illustration to figure out your likely future return on it and then decide if that return is acceptable to you.
Two things from this article apply to my universal life policy:
Keep It If You’ve Had It For a Long Time
and
Don’t Worry About Tiny Policies
It’s a tiny policy, $15K face value, that my parents have paid for 26 years (since I was 1) and handed over to me. It just crossed over to having a cash value greater than the basis as of the last dividend distribution date. The rate of return for those past 26 years comes out to .03%. That’s obviously pitiful, but it has a guaranteed rate of 5% and last year, the cash value grew by 3.6% (after subtracting premiums paid).
My plan was to hold onto it and fund it to the MEC limits, so I called an asked for an in-force illustration of the plan, as well as what the MEC limits are. What boggled my mind is that the lady said that they can’t provide an in-force illustration because they don’t offer that policy any more. What was even crazier is that she said that MEC limits don’t apply to this policy because it’s so old (that’s wrong on so many levels, because the policy was taken out in 1990, and MEC testing first applied to policies issued in 1988. And even if that wasn’t the case, a material change to the policy would still get rid of any grandfathering.
Any thoughts what I can do? I think it’s a decent plan to fund to the MEC limits, but the fact that I don’t know what they are bugs me. BTW, I already have my tax advantaged space (401k, Roth IRA, and HSA maxed out), as well as well as every 5%+ savings account that I’m aware of.
$15K? I’d get rid of it just to uncomplicate my financial life.
Thanks!
Thanks for the article. It looks like in comments you are willing to help guide on specific scenarios.
I am tired of paying the $760 monthly premiums and never really getting a good ROI. According to your article and other I have read, at the 10 yr mark the ROI will start getting better. This might be true, but most of my plans are 14, 15, 16 yrs old. Should I take the cash value and then invest into a taxable account?
Already have:
$400,000 in ROth/IRA/SEP/401K
$160,000 in cash at the bank, to invest somewhere?
$40,000 in taxable option trading
No debt except $140,000 in mortgage (10yrs left)
Goal to be financial independent in 5-7 yrs, just needing to get up to est $800,000.
I now know I will be canceling the kids whole life plans, but trying to determine do I keep the adult plans. If not I would take that $760/month and put into a taxable account for investing, or should I put the $760/month into some other kind of account.
Overall Life Insurance
–Ann Pr $9200
–Mon Pr $760
–Cash Val $75,000
–Paid in $100,000
Breakdown
38 yr old male
–Dea Ben $569,058
–Ann Pr $5735
–Net cash Val $43,000
90 LIFE
–Bought Dec 2009
–Ann Pr $1865
–Mon Pr $155
–Paid in $13,990
–Ann Div $322
–Cash Val $7722
65 life
–Bought Apr 2003
–Ann Pr $1275
–Mon Pr $106
–Paid in $18,072
–Ann Div $388
–Cash Val $115,717
90 Life
–Bought June 2002
–Ann Pr $1037
–Mon Pr $86
–Paid in $15,566
–Ann Div $364
–Cash Val $14975
EOL
–Bought July 2001
–Ann Pr $451
–Mon Pr $37
–Paid in $7187
–Ann Div $155
–Cash Val $4709
Term 80
–Bought Dec 2009
–Ann Pr $510
–Mon Pr $42.50
–Paid in $3825
–Ann Div $0
–Cash Val $0
_______________________________________________
37 yr old female
–Dea Ben $638,240
–Ann Pr $3628
–Net cash Val $31,000
90 LIFE
–Bought Dec 2009
–Ann Pr $1685
–Mon Pr $140
–Paid in $12,637
–Ann Div $322
–Cash Val $7626
65 life
–Bought Apr 2003
–Ann Pr $545
–Mon Pr $45
–Paid in $7720
–Ann Div $300
–Cash Val $6151
90 Life
–Bought June 2002
–Ann Pr $850
–Mon Pr $70
–Paid in $12,750
–Ann Div $329
–Cash Val $11766
EOL
–Bought July 2001
–Ann Pr $396
–Mon Pr $33
–Paid in $6303
–Ann Div $155
–Cash Val $5582
Term 80
–Bought Dec 2009
–Ann Pr $150
–Mon Pr $12.50
–Paid in $1150
–Ann Div $0
–Cash Val $0
_______________________________
5 yr old male
–Dea Ben $27,024
–Ann Pr $271
–Net cash Val $276
90 LIFE
–Bought Dec 2013
–Ann Pr $231
–Mon Pr $20
–Paid in $808
–Ann Div $0
–Cash Val $270
________________________________
1 yr old male
–Dea Ben $25,000
–Ann Pr $219
–Net cash Val $32
90 LIFE
–Bought Oct 2016
–Ann Pr $220
–Mon Pr $18
–Paid in $146
–Ann Div $0
–Cash Val $27
Thanks in advance for taking the time to read and guide.
You provide lots of information, but not nearly enough to give good guidance.
I agree it is silly to buy policies on children, so those are pretty easy to cancel and walk away from licking your wounds.
At 14-16 years old, the best thing to do is get an in-force illustration and calculate your returns going forward, both guaranteed and projected. If those are acceptable to you, then keep them. If not, then get rid of them, making sure of course that any legitimate insurance needs are covered by term life. 5-10 year term policies are very cheap for healthy people in their 30s. Might want to reshop some of that term too. NML term isn’t exactly competitively priced.
I agree you need to invest most of that $160K that’s sitting in the bank. That’s called a “taxable account.” Once you’ve maxed out all accounts available to you including Roth IRAs (through the backdoor if necessary) and HSAs, then what is left gets invested in taxable. I’d also be very careful trading options. Chances are the people you are betting against are a lot better at this negative sum game than you are.
I’d be very frustrated if I owned your policies. Despite owning some of them for a long time, you’re still underwater on all of them. That tells me they were designed primarily to maximize the agent’s commission. Although I think you may have a typo on the 38 year old male’s 65 Life policy. Otherwise that was one heck of an investment. Hard to say for sure without knowing everything else about your financial life and looking at the illustrations, but I suspect I’d surrender all of the policies you’ve listed once I had adequate term life in place. Your “advisor” has not been doing you a real service.
That said, your “number” is only $800K and you’re already more than 3/4 of the way there. I bet it doesn’t even take you five years to reach your goal.
Thank you for the article! I’m curious to get your input on my situation.
Both my wife and I are 1 year in to our whole life policies – each are $500k policies. Our premiums are $5500 each, with a $3500 rider. Our 2nd year’s premium is due this month. We make about $250k per year combined, but we have NOT taken advantage of my 457b or a 529 for our 2 kids.
I’m thinking of biting the bullet, and taking the $11k loss – I’m guessing you’d probably agree.
Looking at the VA option – if the remaining $7000 gets transferred to a VA, then cancelled, then applied to taxes – am I correct in estimating that this would save me about $2000? ($250000 x .02 = $5000 $11000 – $5000 = $6000 $6000 x .333 = $2000). If so, I’d need to continue paying monthly premiums to allow time to set up the VA, so I’d like pay another $1000-$1500, so I’m thinking it may not be worth the trouble…
Thanks so much!
So your premiums total $18K? That’s amazingly exactly the same as a 457B contribution, except one of them gives you $8K off your taxes and is likely to give you positive returns in the first decade.
Sorry to hear of your misfortune, but yea, if it were me I’d walk on this one.
If you go through the VA, then the easiest thing to do is leave it there until it grows to equal the basis, then surrender it. If you want to try to claim it against taxes right away, you can do that too. As far as how big your deduction will be, it goes on Schedule A and is subject to the 2% of income floor. So the tax year you do this, you want as many other deductions subject to that 2% floor as you can find- investing fees, unreimbursed employee expenses, tax prep fees etc. And since it is on Schedule A, it isn’t entirely deductible to you (since you’re exchanging your itemized deductions for the standard deduction) and Pease limitations may apply as well.
I bet if you called up Vanguard or Jefferson National, you could set up a VA very quickly without another payment, but if you did have to make another payment, make it a monthly one instead of an annual one. Personally, I’d move the $7K into a Vanguard REIT Index VA and leave it there for 10-15 years, cashing it out when it is equal to $18K. Two Vanguard VAs I guess in this case. But if you don’t want it reminding you of your mistake, just cash it all out and walk away, knowing you paid $11K for a financial education. The education will be worth far more than that in the long run.
And I’m reading above that the minimum for a Vanguard VA is $5k, so it looks like I would have to invest another $3k (adding $1500 to the $3500, for both policies) – does that make sense?
Thanks again for all of your help!
Yes, that’s probably right. Unfortunate. There’s no great option here. Walking away the loss isn’t taxable. Sticking with it probably doesn’t make sense. You’ve got to add more to do the VA exchange (and then pay a higher ER for a decade) etc. Just makes you want to punch the agent in the nose, doesn’t it? I mean, what kind of a jerk sells a WL policy to someone who isn’t even maxing out his retirement accounts? He’s either ignorant or conniving, and neither is good.
For the VA exchange on 2 separate/identical policies, do you think the 2% salary floor applies to each policy independently, or combined, on taxes when married filing jointly. That is, do you think I could combine our losses from each VA together ($5500+$5500=$11000) and claim an $11000 loss, which would be subject to the 2% income rule? Or would each $5500 loss be subjected to the 2% rule separately (which would result in less tax refund on the loss)?
It’s not 2% of salary. It’s 2% of AGI (line 38 on the 1040.) If you’re filing Married Filing Jointly, that’s combined.
Hi. You are doing a great service over here!
I was hoping if you can give me your recommendation on my situation.
I am 1 year in to my WL policy which is $1.75 million between me and my wife.
Premium paid till date: $23,800
Cash value: $3666
How do you think I can get out of this with minimal loss?
The reason I want out is because of the rigidity and the fact that I would actually lose money if I get out sooner than decades as far as I understand correctly. I would rather invest in real estate or my practice.
The post above was written to answer your question. I’m not sure what else I can add. You’ve lost $20K. If you continue to contribute, you will continue to lose money, at least for a few years. You can share your loss with Uncle Sam by doing the transfer to a VA thing.
If you’re only a year into it and you realize it is a mistake for you, then it’s time to get out. All that’s left to decide is whether to deal with the hassle of the VA transfer. In your case, it probably is.
All of this is new and alot of info for me. Im 30 and about to finish PA school. not quite in the doc range but still with the same issues. As of right now i signed up with a 65life with 100k cash value for $129 and a term 80 900k death ben policy for $35 with NWM.both are monthly premiums of course. im single and have no dependants.im only a few months with the policy, 4 months in and wondering if I should cancel these policies and just invest in something else. I havent really suffered much loss but would it be worth keeping one or the other? I do have my 403b, roth and traditional iras in places as well. cash value only $7.87 =)
Classic NML. 65 Life and Term 80 for everyone. For someone with no dependents too. What a jerk of an agent. Yea, I’d cancel and walk away. At least you’re getting out only losing a few hundred bucks. When you do need a policy, buy a term one, but probably not a NML term policy as they’re rarely priced competitively.
Trying to bail out my sister. Has a NWM Adjustable CompLife policy from 2011. 330k death benefit. To date, has a cash value around $6,700 and a cost basis of $10,500. Annual premium is about $1,800.
I’m trying to help her understand this, but I’m struggling as well. Not sure what ‘Adjustable CompLife’ is, but probably some proprietary mumbo jumbo.
The fine print though mentions “total death benefit includes $70k WL, plus adjustable term protection of $210,500 term and $19,500 paid up life additions.” Below the ‘premiums paid’ part, it also shows that part of the premium is for each of those ( the WL component and the adjustable term protection). So maybe it’s not a traditional bad WL policy?
Regardless, is it worth it here for her to cut her losses and cash out? Love your site and all your comments on BH.
Pretty typical case. I see this every week or two.
As noted in the post, you’ve got to start at the beginning when you’re trying to decide what to do with it. Does she have some need for a permanent life insurance policy? I mean, it clearly isn’t a good investment- her cumulative return after 6 years is something like -30%+. She won’t break even for another 6 years or more. But maybe there is some reason she bought it besides an investment. I kind of doubt it though. It was probably just sold to her so the agent could make a commission. So if that’s the case, yea, I’d buy any necessary term coverage, take my $6,700, and lick my wounds chalking up the other $3,800 to “stupid tax.” That probably wouldn’t be worth it to me to try to claim that tax loss, but if it is to her, she can do a VA exchange.
Appreciate your response! With 2 kids she needs LI, but not WL. I’ll recommend she get a term policy, then cancel. Tough pill to swallow now, but better now than in 10 years… Keep up the great work!!!!
Dear WCI,
I’m a dermatology resident who started an Adjustable CompLife Insurance plan with NWM just before starting residency. My premium is $18,300 per year, and insurance started at 2 million. I am now 2.75 years into the policy, have paid $50,000 in premiums, and my cash surrender value is $23,900, which is even lower than “guaranteed” cash surrender value (which should have been $24,400). If I pay one more quarterly payment, I will have paid $54,900, and the cash value jumps up to $37,000, which is a little better (a loss of $18K vs $25K)
Unfortunately, I read your book when it was too late for me, but then I justified keeping this whole life policy based on the “projected” cash surrender value. After 2.75 years, I’ve noticed my plan isn’t even keeping up with the “guaranteed” cash surrender value, so now there is no way in hell I can justify keeping this policy. It would take me 22 years just to break even! And that’s IF my plan keeps up with the “guaranteed” column, and so far, it has not.
Would you recommend I take the $18,000 loss and make the 1035 switch over to a Vanguard Annuity? I was also wondering if its possible to cash out, take the money and put it in index funds myself, and then write off the $18,000 loss over several years? (Or is this not possible since what I purchased was technically insurance and not an investment?) I would highly appreciate any sort of response or advice! Thank you in advance.
$50K in 3 years to a resident. Then people wonder why I have a low opinion of NML.
Not sure what the point of a guarantee is if you don’t at least get that. Are you sure you’re reading the paperwork right?
But yea, if you want out, I’d do the VA exchange thing. You can’t write off a life insurance loss. That’s why you have to go to a VA first. The best thing to do at that point is let the VA grow tax-free until it gets back to the value of your basis, then cash it out and invest the proceeds in taxable.
Thanks for the fast reply! Yes, unfortunately, they fleeced me early and mightily, and let me know that I’d be way ahead of the game if I started so soon with such heavy contributions.
I’m definitely reading the paperwork correctly, and the value has always been just under the guaranteed column (by a few hundred dollars).
It’s going to be a hassle to cancel since they will do everything in their power to keep me, including forcing me to jump through hoops. But I’m confident I need to get out of this thing before I lose any more time.
Thank you for your guidance.
I’d love to see a copy of a policy underperforming the guaranteed column if you feel comfortable sharing. I would, of course, remove any identifying information before using it for anything.
I’d love to see a copy of a policy underperforming the guaranteed column if you feel comfortable sharing. I would, of course, remove any identifying information before using it for anything.
Absolutely. editor (at) whitecoatinvestor.com
Hello – thank you for your column and your work; I only wish I’d known about you when I was still in training and facing the same insurance pitches! I, too, fell prey to the “advantages of whole life” spiel when I was just looking to get some disability insurance. I ended up with disability along with both whole and term life insurance. I’ve been uncomfortable with the whole life for quite some time now, and am now thoroughly convinced to get rid of it. Basic info on the whole life: am just over 7 years in on a Guardian policy, annual premium $2244, death benefit $213k, current cash value roughly $10k. I know I want to surrender the policy, and will eat the loss as a “learning experience”. I do also have the term policy already in place (started at the same time), and will keep that for its term.
I’m still confused, however, about the 1035 exchange: how important/valuable is this, as opposed to just cashing it out and using it for other purposes (e.g., investing it on my own, or paying off school loans)? Is it worth the additional steps of setting this up? At this point, I’ll be taking a loss when I cash out, so there shouldn’t be any tax penalty.
Thank you for your help!
At least it’s a relatively small loss, what, something like $5K, no? Not sure I’d bother with the VA exchange thing for such a small loss, but you could if you want. I’d probably just surrender it and put that $10K toward your loans.
@maria – your question, “is it worth?” is somewhat subjective. Worst case you just cancel the policy and eat a ~$5K loss. Other options outlined below.
Read through the comments above which explain a lot of the nuance, once you have done a 1035 exchange to a variable annuity (I highly recommend using Vanguard, low fees, no commissions, no cancellation fees), you have two options:
1.) You can invest the surrender value (~$10K) in a vanguard fund within the variable annuity. You can then let it grow to back the amount you paid in premiums (~15,700K –> I am using $2244 x 7 to calculate that). At that point, you cancel the variable annuity. You will owe no tax as you technically had no gain. This is simplest and cleanest approach.
2a.) You can immediately cancel the annuity and claim a lost of $5K on your taxes. However, starting in 2014, the IRS clarified how you can claim this loss, you can only claim the amount above and beyond 2% of your income (AGI). If your income is $250K or more, you cannot claim any loss.
So, either eat the loss or invest in a variable annuity save yourself capital gains tax on about $5K. I am guessing 20% tax bracket and that it will be long term gains, so you save yourself about $1K in taxes.
Don’t lost sight of the most important thing – you are now educated! While this “investment” may have cost you, many people never get educated and lose much more. And those of us lucky enough to get educated, end up losing more than $5k (my wife/me included)!
Has anyone been charged a fee for policy surrender from NML before? If so, was it based on the length you held the policy? I’ve looked all over the NML website, and then the web, and can’t find any information on that.
Read your policy. The answer is in there. But the bottom line is get your in-force illustration and look at the surrender value- i.e. what you get when you walk away. Your cash value minus any fees.
The thing is, I have gone through my policy statements, and can’t find anything. I was wanting to ‘have my homework done’ before speaking to my agent. I have already decided to take my pain and cancel my policies. I am already aware of my basis vs cash values, and have decided to accept the debt I’ll incur.
You shouldn’t have debt even if you get less out of the policy than you put in.
Have you obtained an “in-force illustration?” If not, call up the insurance company or ask your agent for it. That’s step 1.
I spoke/wrote imprecisely. I mean, my cash values are slightly lower than my basis for each policy, so I’ll incur some loss on each one when I cash them out. I actually read down through all the above comments, and there is a wealth of knowledge up there! I know/read that you’ve been thanked about a thousand times, but here’s another heartfelt ‘thanks’!
If I understand correctly, the in-force illustration lays out the benefits of your policy, including the benefits to which a policyholder is entitled, the premiums required to maintain the benefit, the expenses related to policy issue and maintenance, and the benefit and premium periods. After reading my policies carefully, and then reading on your website, and then reflecting on the information, I can’t imagine a scenario where continuing paying those policies makes good sense for me. To say ‘I understand’ them implies more knowledge than I have so far, but I’m getting there. I am still paying down debt and would be able to finish off the rest of it with the cash value of my policies. I can then begin maxing out my 403b and 457b policies through my employer and actually begin to build some net worth. Sadly, I’ve been in practice 12 years already and am still in debt. But I still have modest hopes of financial independence. If I can cut loose these premium payments AND eliminate my debt, I think I’ll be making a major course correction.
The In Force Illustration not only tells you where you stand right now, but also tells you both guaranteed return going forward (you’ll likely have to calculate it yourself) and your projected return at the current scale.
I agree if you still owe on student loans and aren’t maxing out your retirement accounts that this almost surely doesn’t make sense for you to keep, much less buy in the first place.
Hi,
I have a Guardian “Life Paid up at 99” plan. I started in 9/2010. The monthly premium is $154. The current death benefit is $187,300 and cash value is $7,500. I’ve paid in about $13,200 at this point. I am very involved with real estate investing and see that providing for my retirement and leaving an inheritance. I am on the fence with what to do with this policy at this point, whether to cut my losses and take the cash value, or to keep it going as a decent investment (hopefully going forward) that I can take loans out against. Any insight would be greatly appreciated!
-John
I’m surprised when people post that question on this particular post, because normally when I see it, I post the URL of this post as I feel it answers that question pretty well. Help me with this because you’re like the 50th person to do it, so there’s obviously a problem with the post. What information is the post missing that it should contain to answer your question? Do you think linking more prominently to this post would help? https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/ Maybe I’ll do that.
Basically, ensure you don’t need the insurance or can easily replace it with term.
Get an in-force illustration.
Calculation your return going forward.
Is that an acceptable return for you going forward?
If so, keep it. If not, dump it.
After 7 years you are down >40%. In exchange you got premiums supporting a life insurance the value of which depends on your age and other personal factors, but it would be easy for you to estimate.
However, it is only possible to answer your question looking forward, i.e. based on an in force illustration. How much your policy is expected to yield ?
Hi-
Thank you for all your insightful posts and more importantly comments. I was hoping to maybe get some quick advice on my situation. After reading your posts, I am fairly committed to dumping my Universal Life policy. Here is my brief situation.
– 41 years old, single, no defendants, no children, no plans on having any (I know, why did you buy life insurance??)
– No plans to by term
– Year 3 of a 1 Million$ policy. Surrender value 41.5k , Total premium paid 56.6k. Not sure exactly what surrender fees I have in store for me yet. Net loss is around $15k currently
– I pay the AMT with an AGI in 2016 of around $470k.
– Premium is about $15.5k each year which is a perfect amount to divert to mega-back door roth instead.
– Live in a high tax state: California
My question is, how best to dump the policy. Reading above, the advice would be a low cost annuity. Do I
1) Cash out the annuity and harvest the tax loss? My assumption is though that given the 2% rule I would only get to take about half of my loss $15k – 2%*470k = 5.6k
2) Allow the annuity to accrue to the original basis. But is that a bad investment as well? Should I just take the loss and get the money into something higher performing?
Finally, I should add that I have the option through work to defer up to 100% of my salary in tax deferred, non-qualified deferred compensation. Not expecting to get into that, but suffice to say, I have many options on the table to use the money.
Thanks!!
Sorry, I think I screwed up my calculations. I’m assuming as an AMT payer, that my ability to harvest the loss is pretty much nil? Or substantially less than the 2% floor calculation.
I think you have pretty well thought this out. Can’t comment re:AMT as I am not familiar enough with it, but
Option #1 – Harvest the loss (Assuming you can)
You can claim 5,600 loss. Assuming 50% tax bracket, which is probably where you are at with your income and California, saves you about $$2800.
Option #2 – Transfer the policy to a variable annuity and let it grow back. This gives you $15K free of capital gains. If it weren’t capital gains free, you’d pay capital gains tax of about 31% (20% federal + ordinary income tax bracket in CA) = $4,650.
There are good investment options with Vanguard. They have no fees variable annuities – see here for choices: https://personal.vanguard.com/us/funds/annuities/variable
The fees are higher, though. About 0.45%.
I’m so frugal, I’d go the variable annuity route. But if I had your income, I might just take the loss.
If the AMT becomes an issue (and I’d have to research it a bit more) why not just stick it in the VA until value = basis, then cash out and move it to a taxable account?
Thanks for the comments and advice