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!
I’m recently divorced at 52. My ex husband bought a million dollar whole life policy back in 1995. He has borrowed against it so now it’s only worth 500k if he dies. The cash value is $57000. I want to terminate the policy take the money and use it for paying off debt. I do not want to pay anymore high premiums I’m sure he has paid more premiums than 57k to not incur taxes. But am I crazy to cash out now?
I’m so mad at the greedy agent that sold us this scam, I want to sell out of Spite!
Make sure you don’t need the life insurance before canceling it. It’s also possible it’s not a terrible investment at this point given its been 22 years. But better than paying off high interest debt? Probably not.
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
Your blog has been very informative. I feel the same way as others and felt tied down to this whole life policy of mine. Have been paying for 2 yrs now and want to get out.
I have two 65 life policies with NWM for 2.1 Mil, their annual premium is 32439 and the net cash value so far is 33351, what’s the best way to get out?, should i do the VA exchange or accept losses and exit anyway. Thank you.
If you’re sure you want to get out (and this post may help you decide: https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/) then I’d do the VA exchange to get a $31K tax loss. I’m not sure why people keep asking this question in the comments section. Is there something in the post that isn’t clear about the various options to get out? Are you asking whether you should let the VA run until its value = basis vs try to take the tax loss this year? I don’t really have enough info about you to answer that. I guess I’d have to know how much of the loss you can actually take and you’d have to basically do your 2017 taxes to know that.
We bought a whole life policy from NML probably in about 1975. We bought it from a good “friend”. We told him our goal was to have $5000 in 5 years so we could buy a business. He told us that whole life was the best savings plan because we never had to pay it back since we would be borrowing our own money. We took out the $5000 loan and never paid it back. The loan with interest has now increased to $75000 and I HATE this policy. But when I have questioned NML about getting out of it they say they would have to report the full value of the loan as income to the IRS. We have NEVER received anything from NML except the $5000 in 1980. I don’t understand how they can count what they are saying we owe them as income to us. Can you explain this.
Hard to say much without looking at an in-force illustration, but it sounds like the cash value has all gone toward keeping the policy in force. What is the cash value and what is the current face value of the policy?
Hi there! I JUST recently purchased a whole life policy from a friend that works at Northwestern Mutual. I’m worried though that I made a mistake, but the whole reason it happened was because I am a recent undergraduate college graduate with no debt, loans, etc. and a decent salary- He’s now encouraged me not to cancel, so I keep having second thoughts. Is buying term the way to go for someone like me instead? It’ll look to be around $200 a month, but I’m nervous on what the fees will be to cancel.
If you just purchased it, it will probably be very close to a total loss. I’d probably still cancel. What is your need for a permanent death benefit?
Obviously you can’t get high quality advice about this policy from the guy who got paid to sell it to you. If he’s a friend, why don’t you ask him to pay you what he was paid in commission for selling it to you? Surely a friend wouldn’t object to that, right?
If you just bought it, get rid it. Consider the $200 (or perhaps $400 or $600 depending how long you’ve had it) a VERY small price to pay to learn that these are awful investments. Many people pay the premiums for a few years, and then learn that these are bad investments (thousands of dollars).
I wouldn’t even worry about any of the topics discussed in this blog post (ie, exchange to a variable annuity). Not worth your effort. Cancel the policy, cut your losses and be thankful you came across this blog now and now 3-4 years later.
Edits: “If you just bought it, get rid OF it.”
“Cancel the policy, cut your losses and be thankful you came across this blog now and NOT 3-4 years later.:
That’s right. The person who asked your same question last night was paying $150K a year in premiums and staring at a $350K loss.
There should be no fees to cancel. But you likely have no value built up, so you won’t get any money back when you cancel. Cancel it as soon as possible. In fact, do NOT make another payment.
If you need life insurance, term life insurance is the way to go. But you say they are you are a recent college graduate. Are you married? Have kids or other dependents? I am guessing that you do not, and thus have no need for life insurance at this stage in your life.
I really cannot type today.
Edits: “But you say THAT you are a recent college graduate.”
I purchased a whole life insurance 65 policy about a year ago ($200 a month) and am now realizing it was HUGE mistake!! I was really uneducated about investing money and the advisor told me this would be a great investment and good return on my money. I’m 23, not married, no kids, no property and don’t make that much money. I had no need for life insurance whatsoever (he told me the life insurance was an “added bonus” and it was an investment tool) Totally my mistake, but I trusted the advisor and thought I was making the right decision at the time.
Needless to say, I’m cancelling the policy ASAP. Definitely a learning lesson on my part….
Congratulations! I know it feels bad to take a loss like this, and the approximately $2400 you’ve paid so far is a lot of money when you are 23 years old. But in the long run, this is a small cost to learn that these are bad investments. Many people never learn and keep paying for years. The fact that you are now wiser and have a lifetime of earnings ahead of you, will more than make up for the loss!
Yup. Cheap lesson. How much money are you going to walk away with? A few hundred bucks?
By the way, you’re hardly alone:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
Thanks! I am definitely going to do more research when investing in the future. I didn’t have many to consult with before being “suckered in.” Thankfully, I will know for next time.
I have reached out to the advisor and am nervous he will continue to try and sell me on the policy. Do you suggest stop paying all together? I have direct deposit set up right now.
Also, my current “Cash value” is at about $18.00…..totally sucks, but I’d rather get out now.
Thanks for the advice and the detailed article!
If you have no need for life insurance, and it certainly sounds like you don’t, then cancel immediately. Turn off direct deposit. Forget what the advisor tells you about the policy. Tell her/him you only want to take financial advice from someone who will act as a fiduciary (which is just a fancy word that says someone who will act/recommend financial decisions that are in your best interest). I guarantee you that s/he is not one.
At $18 cash value, don’t even bother with the complex recommendations in this blog (ie, exchange to a variable annuity). Just cash out now. Trust me, others paid a lot more to learn this lesson much later in life (e.g., my wife and me).
So after consulting with a tax professional; I’ve been told that of course things aren’t as simple as I presumed. I had assumed that the amount of premiums paid in total was equal to the basis of the policy. Unfortunately I was told that the irs only allows the amount of premiums AFTER administrative fees to be counted. So after subtracting nearly $12k in fees, I’m left with a basis that early equals the value. Yet another reason to avoid this type of investment
You might want to get a second opinion on that. I’ve never heard that before.
It depends on how those “administrative fees” are described and what they include.
For instance, for stocks any fees connected with the acquisition of shares is part of their cost basis, whereas maintenance fees of a broker account are not. Advisory fees also are not part of the cost basis.
For insurance products, premiums can’t be included. In a whole life insurance product part of the premium pays for the life insurance and can not be part of the cost basis.
I don’t think that’s correct. Please cite a source. Here’s mine:
The IRS recently issued guidance on these issues. In Revenue Ruling 2009-13, the IRS addressed the income tax consequences of both surrendering a policy back to the insurer and selling it to an investor group. Where the policy is surrendered to the insurer, any payment received that is in excess of the insured’s tax basis in the policy is treated as ordinary income. For these transactions, the insured’s tax basis is the full amount of the premiums he has paid on the policy up to the time of the surrender, reduced by any untaxed amounts that he had withdrawn from the policy.
I think what they’re arguing is that the amount of premium paid is not what I actually paid to NM. Meaning only a certain percentage of the amount I gave them actually goes to the premium (the basis). The rest went to administrative fees. That’s what I understand to be the argument.
Trying to play the Devil’s advocate here, but wouldn’t a WLI be a lessa bad, if not decent, investment factoring benefits on death ?
Of course, it would be for the heirs, not for the investor, but some people do plan to leave substantial assets to their next of kin.
Assuming one holds the WLI policy until death, the overall performance of the investment pales in comparison as if the policy holder just invested the premiums in low cost, diversified portfolio.
This is why you heard the expression, “Buy term, invest the difference” so often. If you need life insurance, just buy term life insurance. Much cheaper than than whole life insurance. The savings should then be invested. You’ll come out ahead.
And the above assumes you hold the WLI policy until death. Majority of policies bought are canceled before one’s death. Why? Because people realize they are terrible investments to begin with.
Remember you don’t get the cash value and the death benefit. It’s one or the other.
But yes, if you buy one at age 30 and hold it until you die at 85 and leave it to heirs, never borrowing against it to spend some cash value on yourself, the return on that investment will be something like 4-6% a year (probably 3% guaranteed). If you find that proposition attractive, WLI is for you! Just remember you don’t get that return in the first decade or two and you don’t get that return on just the cash value if you want to spend it yourself.
Still the Devil’s advocate talking:
But the amount paid by the WLI is guaranteed, differently from the return on any portfolio containing stocks, however diversified.
A fairer comparison would be vs. investing premiums in treasuries with a maturity date around the residual life expectancy.
I don’t have my wife’s data here, but tonight I’ll calculate the return rate.
Actually, if the holder dies soon he has hit the jackpot, so to speak. Little premium paid and life insurance amount transmitted to the heirs tax free (I believe).
Sure, but it would have been an even better jackpot if he’d bought term!
Same would be true if you bought term life insurance.
Also – you might have a better return with WLI vs. treasuries. But it’s not an apple-to-apple comparison. With treasuries, you have full liquidity with no penalty if you sell. Not so with WLI.
Well, selling treasuries on the secondary market one faces the interest rate penalty (or gain, but more likely to be a penalty these days).
However the DA is convinced. Now I have to convince the DA’s wife, but I wanted to make sure I wasn’t missing anything.
Thank you all.
If you understand how whole life works and find investing in it attractive, then feel free to buy as much as you like. I find it to be an unattractive investment. Here’s an excerpt from my myth’s series that explains why:
Myth # 5 Whole Life Is A Great Asset Class
There are lots of asset classes worth including in a diversified portfolio, but whole life isn’t one of them. Insurance salesmen generally resort to this argument once they’ve realized they can’t convince you that whole life is a great investment in and of itself. They say that if you mix it into a portfolio of stocks, bonds, and real estate that it will improve the overall portfolio. However, you can call anything you want an asset class. Horse manure can be an asset class, but that doesn’t mean you should invest in it. Think of it this way. If I told you I had an asset class with the following characteristics:
50% front load the first year
Surrender penalties that last for years
Requires ongoing contributions for decades
Difficult to rebalance with other asset classes
Backed by the guarantees of a single company (and whatever you can get from a state guaranty association)
Requires you to pay interest to get to your money
Guaranteed negative returns for the first decade
Low returns even if you hold it for decades
Must be held for life to provide even a low investment return
Excluded from the investment for poor health or dangerous hobbies
would you buy it? Of course not.
I like your blog and I even agree with you, but this last comment sounds excessively vituperative.
In deciding whether to add an asset to a portfolio only three characteristics count: expected return, volatility of returns (and higher momenta, or even the return distribution, for the more sophisticated), and correlation to other assets. All the rest is superfluous.
As such, if you want to show how bad of an investment vehicle WLI are, I suggest concentrating on the analysis of those three characteristics compared to other available vehicles.
If that’s all that matters to you with an asset class, then you should only pay attention to those aspects. I care about the other things too, whether they are superfluous or not. That’s why I surrendered my whole life policy with a cumulative return of -32% after 7 years and don’t plan to buy another one. But if you like yours, go ahead and keep it. If you like one you see, go ahead and buy it. You don’t need my permission. But if you want my opinion, I think it’s generally a terrible investment.
First, horse manure is being too kind. It at least has value as fertilizer.
Second, I’m not smart enough for this blog’s audience. I had to Google “vituperative.” 🙂 It means “bitter and abusive.” While I cannot speak for Dr. Dahle, “bitter” is exactly how I feel after my wife took a $35K loss on a universal life policy and “abusive” describes my general attitude towards her financial advisors and others that sell the policies. So, vituperative seems to be a pretty accurate description.
I agree 100% with your statement:
“In deciding whether to add an asset to a portfolio only three characteristics count: expected return, volatility of returns (and higher momenta, or even the return distribution, for the more sophisticated), and correlation to other assets.”
But I feel your point is a bit too academic. The expected return is negative for about first 10 years. Basic math tells me that any optimal portfolio has 0% in this asset class.
Not sure were you got the idea that I support WLI. Feel free to read and delete. Our bickering probably not interesting for other readers.
First time commenter! Came looking for some knowledge and have spent the last few days, several hours each day researching and reading through the comments section.
So where do I start…..I guess like many here I was naïve to investing and got linked up with a “financial advisor” for Guardian through a friend. Had several meetings with him before I pulled the trigger on anything. He “advised” me that I should diversify my money and open up a ROTH IRA and a Qualifying Whole Life Policy (Whole Life 99). I started the ROTH IRA before starting my WL because I wanted to do my own research into WL polices due to me being unfamiliar with them. I wish I would have found this blog before I pulled the trigger on the WL. The ROTH IRA he set me up with is doing well. I started off only putting $50 into it to start, just a 1 time payment. Then after a while I put $100/month and then raising it to $150 currently. Even with putting in such a small amount I do have gains but obviously they are not substantial. I will probably just max it out this upcoming year from here on out.
The question more or less comes with my Whole Life Policy. Attached to the whole life I have 2 riders. One being the “Paid Up Additions Rider” and the “Long Term Care Rider”. My Premium if about $2800/year, $240ish/month. I am in a “high risk” career so I took that into consideration when talking to my advisor about options.
I initially had the policy for about $4800/year, 400ish/month. I opened the policy originally in late 2014 and then switched it to the lower premium less than a year later. Being new to my career field I was not making much money and while I could afford the higher premiums I did not feel comfortable paying that much for the forcible future. I was a single with no dependents at that time. We lowered the death benefit which brought the premiums down but also slowed down the increase in cash value, which I was fine with. Now in my career I am making more than double what I started off making so I have no issues paying the current $240/month premiums until either I break even or beyond to keep the cash value increasing. My situation now is I will be getting married early 2018 and we are looking at having kids soon after. I did get a current Inforce Illustration of where I am sitting now. I have about $10,000 paid into premiums and have about $2000 cash value. I did know going into the whole life that the cash value in the early years was going to accumulate a lot slower. He was straight up with me. He gave me a Inforce Illustration even before we put it into affect so I could see how things would change over time as far as Guaranteed and Non-Guaranteed Cash Value increases went. Even with the lack of return in the early years it seemed like a good investment-He did explain it is a long term investment hence the “whole life” name. I was fine with that because I wanted to use it as a retirement tool. At the time I did not know there were better options that would bring me higher returns.
Comparing the initial Inforce Illustration(2014) to my current one (2017) I am above where I should be as far as Net Cash Value under the non-guaranteed category. It states that I should be around $1,358 cash value but due to higher dividends being paid out I am right under $2,000. As I pen through the current Inforce Ill. I will break even at the 14 year mark (10 years from now). With the initial policy in 2014 I was due to break even at the 9 year mark. Obviously due to the policy change that changed. Under the guaranteed section I will break even at 27 year mark. That 27 year mark will put me right at my retirement time frame. That kind of upsets me due to the fact that it would be a terrible investment my entire life that I would have nothing to show for.
I met with my advisor this week and picked his brain a little after reading the blog the past few days. Talked about the surrender aspect of the policy and other options out there. He reminded me that it is a long term investment/insurance policy and the company has been on par with paying out the non-guaranteed amounts. It does show that he was right and they have been on par or have paid more than their projected dividends. He also stated there is no surrender fee/charge. I did call Guardian directly and they said the same thing. They will pay out the cash value to me if I decide to surrender it.
I guess I am looking for advice. I have no problem paying premiums as long as this thing even outs and puts me in gains side by the 14/15 year mark. I also have no problem keeping the policy until retirement or even after retirement. The thing that has me nervous is if the company is not doing well then they are not going to payout the non-guaranteed amounts/dividends. My advisor told me that he has never seen dividends not be paid out. That somewhat reassured me but figured I’d come here and see what you guys think. Obviously it’s not the best investment looking back but I am willing to stick it out if down the line it’s worth it.
I have read about you guys recommending doing the 1035 exchange into a Vanguard Variable Annuity. Is this something you would recommend for me. Take the $8000 loss at this point and movie it over to the VA. Would you recommend me keeping it in there and letting it build back up or pulling it out right away and claiming it as a loss on my taxes? Also my advisor said that with VA’s you usually have to be a certain age to open it depending on the company. Any truth to that? Also does Vanguard still offer the no fee set-up and surrender?
I apologize for the long comment. Once I got typing I just kept going. Thanks in advance for any advice and help. Feel free to ask anything if it will better help with you guys giving me advice.
Well, I wouldn’t have bought. If I owned it now, I would surrender it. However, if you would be happy breaking even by year 15, I don’t see why you should surrender it. It’ll probably break even by then won’t it? Will you be happy with that or not? I wouldn’t be, but that doesn’t mean you won’t be. You seem to have pretty low expectations for a retirement investment return though.
I’m glad he put you into a Roth IRA, but disappointed that you put even more into whole life and didn’t even put in enough into the Roth IRA to max it out. I mean, who in their right mind would think a whole life policy is BETTER than a Roth IRA? That’s just financial malpractice.
It’s beyond me why you’re taking advice from someone who has already given you what is clearly bad advice.
Get term insurance in place, cancel the policy, use the proceeds in a Roth IRA and find a real advisor, not an insurance agent masquerading as one.
Have you seen this thread?
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
Your case is today’s submission.
And as far as the VA, no, there’s no age requirement. Who is this guy? So frustrating to me to see an insurance agent who should know something about annuities not know basic rules.
I guess I’d probably bother with the rollover for an $8K loss and just let it grow back to your basis before surrendering.
Yea I figured I made a mistake. I’m definitely am not happy keeping it for 15 years but I also don’t want to be out the money. The thought of paying 240/month for another 11 years is frustrating. It’s not that I have low expectations but if the dividends paid out every year until I hit retirement I would have contributed $100,000 into with a Net Cash Value of $195,000. I do get a pension with the state when I retire so I figured it would just be a little extra on top of some other investments and the pension I will have. If all the dividend projections paid out it would break even year 15.
Believe me, at this point I am done with him and going to deal directly with Guardian to hopefully ditch this policy. I was pretty positive that there was no age restriction with the annuity from research but I wanted to see what his response was. The meeting I had with him the other day was more of a informational meeting for me to see what he would say about surrendering it. I went under the guise of just looking for “knowledge”(in reality it was lack of knowledge on his end) in regards to surrendering it but was dead set on surrendering it.
I have not seen that thread but I am definitely going to read it later.
So if you were me, what would your next step be? 1035 exchange into a Vanguard VA? Then let it build up to my loss? If so how does the process work with transferring it over. I apologize for my lack of knowledge with this. Do I set up the Vanguard VA and then do the exchange 1035 form and then surrender my WL? Or do I surrender the WL then open up Vanguard VA then do the 1035? I guess if you can just give the down and dirty, quick process I would be very grateful.
My next premium payment is 12/15, so I’d like to avoid paying if I can.
Okay. Sounds like breaking even in 15 years isn’t something you’re happy with. So now your only question is how to get rid of it.
You’re falling for a common behavior finance fallacy. You’re not treating your past premiums as water under the bridge. There’s nothing you can do about your $8K loss. It’s already gone. Staying in the policy doesn’t bring it back. The only thing you need to look at to decide whether to keep it or not is your return going forward because that’s the only thing you can do anything about. So if the return going forward is fine with you, then keep it. If it isn’t, then get rid of it. If using an $8K loss is worthwhile to you, then do the exchange. If not, then just surrender, get your cash, and walk away. Be sure you have adequate term coverage in place first obviously.
I think the best move if you do the exchange is probably to just wait until it grows to basis and then surrender, so you’ll be stuck with the VA and its slightly higher expenses for a few years. If you do the exchange, you don’t surrender the policy. You exchange it.
Call Vanguard and they can walk you through it. Seriously. This isn’t that hard. They’ll send you a form, you’ll sign it, and send it back.
Makes sense. Thanks a lot for the guidance. If I exchanged it to a Variable Annuity and cashed it out immediately, according to previous posts I can then claim the the 8k loss on my taxes correct? The minimum for VA is $5,000 from what some people previously stated. So essentially I would take my $2000 (WL cash value) + $3000 (personal money) and put it into the VA. Then immediately pull it all out (surrender the VA) and claim the 8k loss on my taxes. As far as that goes do you think that’s a better option than moving it over to VA and just sitting on it? Is it more of a hassle than it’s worth? If it is a good option and worth it how exactly does that benefit me financially by claiming the loss on my taxes?
This has been discussed in an addendum to the post as well as numerous comments on the post. The bottom line is you may not get much of a deduction for it if you cash out immediately, but I don’t know your tax situation.
As far as whether it’s worth the hassle or not, only you can decide. Certainly lots of people walk away from $8K losses with these all the time without feeling like they’ve got to figure out a way to get Uncle Sam to share the pain.
Ok. Gonna spend the next day or two deciding what to do. Thanks again for the help.
I posted a comment earlier in the year about a horrible NWM UL policy with term 80 that my wife and I were recommended by the NWM “financial adviser” that we held on for 7 years with a near $50k loss on the policies. We did 1035 conversions to Vanguard that we have since cashed out and used the money to pay off my med school debt, funded back door Roth IRAs and have enjoyed truer financial serenity since getting rid of the policies. We replaced them with high quality term policies and our finances are better and more simpler. I hope everyone reading here realizes that your “financial adviser” form NWM is just a salesperson out to fleece you. We made our realization almost a year to the day and hope that everyone with a whole life type policy reviews their annual statement and begins their next step to true financial freedom! Let everyone have a heathy and happy new year! Thank you so much for helping me see the light at the end of the dark insurance tunnel!!
I wish your story were uncommon.
I bought three term life policies. Now I just want to cry… I have one for my 10 year old son. We have paid about $7000 (for 7 years), my husband about $16000, and 3 year old son about $2000. If I pay surrender charges, my husband only gets $5000 and not sure what else I would get. We are able to keep paying the premium, but my husband said it is really bad idea to continue. It does not look so good to cancel either. You are right, I got myself into this mess.
You sure it’s a term life policy? It’s tough to buy those on a 3 year old.
Get real term life insurance in place on anyone whose income you’re dependent on, then cancel the other policies, take what you can get for them, and move on. Many here have made the same mistake.
You’ve spent $25K, and who knows how much you’ll get back. Perhaps $10K if you are lucky. I know this won’t make you feel any better, but this is actually a small price for learning. Going forward, what you can learn from this website (and I’d recommend reading Bogleheads.org as another great web resource) will more than pay for that $25K over the course of your lifetime.
Also, I am pretty sure that you do not have term life insurance. Term life insurance is like car insurance. You pay to protect against something bad happening. There is no investment account or cash value. If you no longer need insurance (e.g., you sell your car), you just cancel.
Whole life and universal life are a combination of insurance and an investment. When you cancel, you may have some cash value in your investment part, and if you do, you get that back, less any fees and surrender charges. The fact that you have a cash value means you have some form of permanent life insurance.
Here’s what you should do:
1.) Decide whether to keep the policies. Whole life/universal life are terrible investments. But they are really terrible when you first buy them. They get less terrible the longer you hold them.
However, your policies’ cash values are small in the gran scheme of things. I would just cancel the policies (if you need life insurance, make sure you have term life insurance in place before canceling these policies).
2. One way to take the sting out of this is exchange your policies into a variable annuity. I highly recommend a no fee, low cost provider like Vanguard. Let’s say you get $10K back from a policy. Due to complex tax laws, if you invest that money (technically “exchange it”) into a variable annuity, you can let it grow to $25K. At that point you can cancel the annuity and you would owe nothing in taxes. This would save you about $5-8K over the long run. Not great, but better than nothing.
See the above comments for more information.
Again, sorry for your loss. Don’t feel too bad about it. It happens to many of us. If Dr. Dahle hadn’t bought (err, should I say, was sold) permanent life insurance years ago, he might not have been motivated the start this website to educate the rest of us. Follow the recommendations on this site, and you’ll be more than make up this loss!
Thank you for your response and suggestion. I’m dragging to tell my husband about these choices. You are right, we have whole life from MetLife (I think their company name has changed). If I take the money and transfer to variable annuity, what would be a typical return? When I spoke to the representative from MetLife, she said we can keep contributing to my husband’s whole life policy for twenty years total (~$5300 per year), he would be able to get $150k if we contribute for 15 year total, we can get back on investment without paying surrender charge.
The return of a VA depends primarily on the investment you choose inside it and how it does, but secondarily on the fees. So it’s important to buy an investment you’d buy anyway and keep fees as low as possible.
Thank you very much!
I am 25 years old, and no need for my whole life policy. I have put roughly $9000 in a whole life policy after contributing for 4 years, and the total cash value is only $7000 due to all the fees. The surrender value is $14,000, so it appears I would get nothing if I were to stop contributing and walk away.
Should I walk away, or keep it since I’ve already spent a large amount on it? Would I get any tax benefits if I were to walk away from it?
I’m not sure you understand the illustration. It would be unusual to make payments for 4 years and have NO cash value with a whole life. You probably get to walk away with $7K. The only way to get a tax benefit from this loss is to exchange it to a variable annuity and then you get some growth in that annuity tax free (until it equals $9000).
Well, unfortunately the surrender charge is $14,000. I called the insurance company, and was told that accumulated value ($7000) – surrender charge ($14,000) is not a positive number, and therefor I would not be getting anything back
If your surrender charge is $14K, and your current cash value is $7K, it seems the evaluation of this policy is easy. Cancel it. You don’t get any cash back, so no tax benefit.
I know it is painful to hear, but cancel it, and move on. Don’t focus on the $14K you lost, but rather the money you are saving by nipping this in the bud. Cancel it (if you need life insurance, make sure you have term life insurance in place).
You are only 25. If you follow the advice on this website, you will more than than make that $14K back in a few years!
Thanks so much for the work you do. I am a PGY3 new to the site. Recently finished White Coat Investor book and The Millionaire Next Door book. Will plan to read Bogleheads Guide to Investing next.
I definitely thought I was being a smart cookie when I met with a financial adviser in my PGY1 year to handle the “money stuff”. Started putting $200 per month in Roth IRA (good!) but my NWM adviser (no credentials on website when I checked yesterday) also talked to me about term life insurance (I think good; $33 per month with 800K+ total death benefit) and “65 life” policy that although I don’t speak insurance I think this is the whole life insurance I need to steer clear of. I’ve been putting $200 per month on his recommendation (total death benefit 178K) into that for 19 months now. I think I am early enough that it makes sense to get out now, plus I can just put the money into my Roth IRA as I should have been.
My question is about firing a financial adviser. I’d imagine I would communicate with him about wanting to cash out the whole life insurance policy. I dont really feel like dealing with him long term after discovering all this. I feel the term life insurance is fine to keep but would I need to do anything to take control of Roth IRA from him? Despite my reading to become self sufficient, I may still consider meeting with a more credentialed adviser about getting organized initially.
I very much appreciate any thought you all have.
You can probably get a better deal on the term than NML so shop that too. But yes, you learned your lesson early and for very little money so that’s great. It took me years longer than you.
You don’t even haver to ever talk to this guy again if you don’t want to. You can just call NML and cash out and move on.
https://www.whitecoatinvestor.com/how-to-fire-your-financial-advisor/
And you just do a Roth IRA transfer to Vanguard. No big deal. Just fill out a form and wait a couple of weeks.
The addendum to the post mentions that you can deduct VA losses using the 2% miscellaneous expenses on Schedule A. With the new tax law, that deduction no longer exists. Is this work-around dead (at least for getting a loss)?
If one 1035s to a VA, can you access that at any time penalty free once the cash value equals your cost basis? At that point you essentially break even?
Yes, it pretty much is. Best option now is go the VA, let it grow back to basis, then surrender the VA.
Your website and blog is very helpful! My wife and I have just realized we have made the same mistakes as many others that have found your site. Our situation is a little bit unique in the fact that our NW Mutual agent left the company and started his own business. We had invested probably close to 100K over 7 years and only have a cash value of around 70K. He said we could move this over to Mass Mutal and get better dividends and a lower borrowing rate. After realizing he is just filling his wallets again with our money, we want out! We took our NW mutual accounts paid up at his advice and started funding a new mass mutual policy. Luckily, we had only put about 7 months worth of premiums at this point (about 15K), the cash value is basically nothing. From reading your site, we think doing a 1035 exchange on the NW mutual money and getting a variable annuity and letting it grow up to our basis and then cash it out. For the mass mutual account- I am not sure what to do with this? Should we continue to fund it for a while and then do the same thing? Is there a way we can carry over the loss on this for tax purposes? Could we do a 1035 exchange with both and have a bigger loss?
You need at least $1 in cash value to do the exchange, and even with that, you’ll have to add some money to it to get the minimum amount for a VA.
Exactly what the White Coat Investor said. First, get rid of this financial advisor. Second, cancel the Mass Mutual policy immediately. Don’t spend any good money after the bad. Cut your losses ASAP.
Third, if you are counting on this policy for life insurance as well (you are probably not), then make sure you have enough term life insurance in place before doing any exchange.
Next, move the 70K from NWM to a variable annuity via a 1035 exchange. Get a no-free, low cost one. I would recommend Vanguard, although there are other vendors that are good as well.
If you use Vanguard, then will send you the paperwork that you need. You’ll need to choose an underlying investment for your variable annuity. One of the best choices from Vanguard is their Total Stock Market Fund variable annuity – https://personal.vanguard.com/us/funds/fees?FundId=0604&FundIntExt=INT&investor_disable_redirect=true, but they have a handful to choose from:
https://personal.vanguard.com/us/funds/annuities/variable
Congrats on getting educated. I know it doesn’t take the pain out of the loss, but many people lose even more. Kudos to the White Coat Investor for educating the masses.
Thanks Noraz,
Any help through this process will be appreciated. Can I contact you somehow for the paperwork?
Dave – gladly help out. A few thoughts – one, to not have my personal email address listed on the open internet, you can send me messages through the website Bogleheads.org. I have the same username there (noraz123). Dr. Dahle (ie, the white coast investor) is a frequent contributor to that website as well.
Bogleheads is a great financial help forum, very much aligned with the White Coat Investor. Moreover, in addition to messaging me, you could also post your question to the Bogleheads forum. There are plenty people even more knowledgeable and helpful that I, that can assist.
Last – @WhiteCoatInvestor – I have a thought for another blog article. A visual walk-through of how to cancel a policy and convert to a (Vanguard) variable annuity. While it wouldn’t cover anything than what is already in this article, it could be an article that could drive traffic. I am thinking something along the lines of this https://thefinancebuff.com/how-to-backdoor-roth-hr-block-software.html
Sure, but it’s tough to get screenshots without revealing account numbers. I guess you could black them out. Plus I have to find someone who is actually opening a VA to take them.
I have copies of my wife’s forms for both 1.) creating the variable annuity at Vanguard via 1035 exchange from Northwest Mutual and 2.) canceling the variable annuity at Vanguard requesting payout.
I was thinking of taking some screenshots for Dave, with blacking out the names, account numbers, and cash values. Gladly share out if you’d use it. I can’t speak for others, but when I was trying to learn how to cancel my wife’s VUL, I was completely clueless. Even after reading this blog article and more on Bogleheads, it was still a bit of process. I would have benefitted from walkthrough for sure.
How would you like to submit a guest post on it?
Wow. I’d be honored. But as you can tell by my posts, I am not a great writer. How you like to edit/correct guest posts?
We do lots of that! I’d say half of our guest posts are pretty polished and the other half need significant editing. Here’s the guidelines:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
That will be awesome and very helpful. I can contribute anything else I can as I go through the process over the next few months.
Hi. Thank you for the valuable information.
I own a WL insurance and have been paying it for the last 2 yrs.
I pay $225 a mth and so far have paid $5500 into it. My cash value is at only $3200
I am really considering surrendering my account and was told since my cash value is less than the surrender amount I would lose all the money I have paid.
Should I just cancel it? Or take the loss and start investing my money to my employers 403b
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
Not sure. That sounds like a typical whole life policy. Was that not what you expected when you bought it? Why did you buy it?
But yes, if it were me I’d dump it and invest my $3200 in a better investment. But hard to say if that’s the right move for you or not. Read that link and hopefully it will help you decide if it is the right move for you or not. But if you’re paying whole life premiums and not even maxing out your 403(b), you’re almost surely making a mistake.
As it seems with everyone else who has posted, my husband and I were suckered into purchasing term 80 policies and a 325k whole-life policy EACH by a NWM agent.
Good news. It’s been exactly one year only.
Bad news, we’ve still dumped over $7000 into the whole life policies alone and now have cash values together totaling a whopping $173.
Reading about ways to preserve the loss that you’ve posted (thank you!), how do we calculate whether it is more cost effective to transfer it to a VA with Vanguard or just to take the loss on the taxes? Or is it even worth the time?
Thank you.
Not worth the time. Unfortunately the IRS has tightened up the rules, and you can no longer claim the loss anymore. If you only have <$200 in cash value, don't even bother with the variable annuity. Cut your losses asap. Sounds like you already have term life insurance in place, so as long as that's enough coverage, cancel these policies.
It hurts to lose the money, but the fact that you caught it within a year is great! You've saved a lot of money by not throwing good money after bad. Nicely done. I wish that my had been so lucky.
It’s not the size of the cash value that determines whether it’s worth the VA thing, it’s the size of the loss.
Of course, there’s a minimum purchase for a VA, so a low cash value does have that issue.
I do think that the size of the cash value relative to the basis matters, too.
Hypothetical (and a not likely, truly horrendous) scenario:
$100k basis
$3k cash value, which let’s say is just enough for a variable annuity
Are you going to buy a variable annuity with higher fees waiting for it to grow back to $100k?
What if it were a $50k basis? $25k basis? I’d probably just cut my losses here because the time needed for it grow back to the basis.
To get a $97K loss? (really $97K in free gains) You betcha. I sure would. I’d probably do it for $25K. But not $2K.
Not sure whether the basis of your annuity would be 3k, or 100k. I think it’s the latter and in such case you can still claim a partial loss later. You don’t have to wait for the annuity to grow back to 100k.
Also, what is this new IRS rule, mentioned 2 posts back, that bars one from taking the loss on a whole life insurance ?
You never could take one on whole life. The new rule is that you can’t really take it on an annuity, so you just have to let it grow back to basis then surrender it.
Therefore, from the point of view of the annuity, funding it with fresh money, or with money coming from a WLI is exactly the same ?
Then, why not simply cash out the WLI value ? What’s the advantage of the annuity ?
You get the gains up to the basis tax-free.
Hello, thanks for this blog post, was a great find when I was looking to resolve an issue with a policy, also with NWML. I have a policy that started 40 years ago and has 4,000 paid into it (basis). It grew to $60k over 40 years and is paid up but I have also taken $58k in loans and interest over the years. It is now going to lapse if nothing is done as the loan amount is 99% of the cash value and the annual dividends ($1100) are less than the annual interest ($2900). There is a few hundred dollars of cash value remaining in the policy for now until the next interest payment comes up. I called Northwest Mutual about doing a 1035 of the cash value into an annuity (and I would pay in whatever needed to get to the minimum required for annuity) and they told me that due to the loan on the policy, it would not be tax free since the IRS rules is that if there is a loan then you either need to transfer the loan in the 1035 or pay taxes on the lesser of the loan balance or gains in the policy. Both the loan balance and the gains are close to $60k. Do I have any other solution to avoid the lapse and the taxes on the gains other than paying into the policy to keep it alive? Is 1035 into annuity as outlined in this blog post really not an option due to the large loan on the policy? Thanks again! – Art
That’s a good question. I don’t know, but I suspect they’re right and you’ve either got to pay off the loan or pay some tax. Not quite the way it was sold to you, is it?