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 owned (cuz I just surrender it) a whole life insurance for which I was paying $2K/month for the last 5 years that was sold to me when I started as an attending staff, and after surrender the cash value is a bit over $56K. This obviously is a huge loss. I just found this part of the blog about doing a 1035. Is it too late for me to try to do it? MassMutual just sent me the check for the cash value of the policy. I would very much appreciate any help.
I think you’re out of luck, but not 100% sure. I mean, you get 60 days with an IRA rollover and a 1031 exchange so I wouldn’t be surprised if you had a little time to do a 1035 rollover. Maybe worth calling the place you’d consider exchanging to, Vanguard I assume?
Will do that on Monday. Thanks for the help. And by the way, I want to thank you very much for putting this information out. I know that you hear this all the time, but as you say many times on your podcast, it is nice to hear a “thank you”. I already got couple of colleagues into finances, as well as nurses. I will keep you posted of what happens.
Like most people, I do like hearing thank you so thanks for that.
So the update is that the 1035 conversion can not be done AFTER the whole life policy has been surrender. And MassMutual will not reinstitute the policy even if I didn’t receive or cash the check after surrender, unless “mandated by law”. So bottom line I made two mistakes here, one: getting the policy in the first place; and two: getting out of it before planning what to do.
I think this will be a good point to highlight to other people in my position (which I assume are many), because after learning the bad deal of a whole life insurance, I rush too much to get rid of it, and that cost me $50K.
Looking at the bright side, that may tell me that I will not panic if we hit a bear market being new to investment (not to be confuse with not caring, cuz I definitely care about $50K).
On a different topic, please tell me if you have any suggestions for my situation:
– I’m 40 yo pulm/cc staff, my gross year income is 400K
– never invested before other than leave my 401a and 403b on default, which is currently the vanguard targeted 2040
– All my money is in the bank, total of $650K. I know I should invest, and I have been reading on how to do it and started with the WCI book
– I first have maximized my 401, 403 and HSA. My hospital allow me to have a 457, which I’m about to open and maximize
– Im renting a house (for 5 years) cuz I always being trying to move to a different job vs staying where I am (Iowa). I know that buying is better but everytime buying is an option then a possible job opportunity appears and the decision of buying is placed on hold
– I’m single. My girlfriend works as an NP and has $55K on student loans which she is paying (at 6.8%), which is planned to be paid according her schedule in 8 years
– I am thinking on dividing my current cash into: stocks 80%, bonds 15%, cash 5%. (Does the emergency found is included on the 5% cash? For me is $50K)
– the investments I’m thinking about will be obviously the vanguard index stocks and bonds
Should I be doing something else? Am I missing anything?
I’d do a Backdoor Roth IRA and start investing in taxable. Do you have a written investing plan? I’d get that first. If you can’t do one on your own, either hire an advisor or learn enough to do it on your own. My online course is designed to help you do that and is much cheaper than an advisor.
Sorry, forgot about the Roth IRA, done it already, and will be adding on it every year. I don’t trust investors anymore (for obvious reasons). I’m trying to build a plan on my own, I’m reading as much as I can do I can understand enough, but don’t want to feel that while learning I am losing even more time.
Is the option to 1035 exchange a whole life insurance policy into a VA and then surrender the VA and claim the difference between cash value and basis still available under the new tax laws? I have a whole life policy that I want to get rid of that has about 6800 cash value with a basis paid around 26,000.
No. But you could exchange it to the VA and then let the VA grow from $6800 to $26K and then surrender it tax-free.
Hi Everyone – I stumbled upon WCI the other night as I was digging for information as to what to do with our WLI policy. My husband and I both signed up for a $500K WLI 7 years ago. And, yes, we are now reckoning with our decision to use a WLI as an additional source of income after we retire. The policy was not purchased at a young age…we were 50 and 55 at the time. And, just to know, there is/will be no one who financially depends on us after we pass to the other side. After a couple meetings with our NML agent, we came to an agreement that includes a paid-up addition (40% of the payment we make). At the time, the bells and whistles centered around an illustration that indicated our premiums would be paid by the 20th year of the policy and an annual “income” would be available when we turn 75.
Sadly, the reality of our wants/needs did not resonate until recently…first, we plan to retire in 6 years (year 13 of the policy). Also, we now understand “projection” and what is/is not guaranteed…that payments may not end the 20th year and the amount calculated as an annual income is not guaranteed. And, of course, to state the obvious…we really have no need for this much insurance. Though we have not requested a recent illustration, I do have recent numbers. From our 2018 annual statement our total Cost Basis is $165,607 and total Cash Value is $139,235. We assume this reported Cash Value is what we will reclaim upon surrendering the WLI (plus/minus adjustments since January and minus, we assume, surrender fees). As for dropping the WLI…looking ahead to retirement in 6 years… we now realize the first 7 years of retirement will be our most active and promising for adventures. Having to pay premiums to complete the 20-year commitment would limit the plans we will make by reducing our retirement income.
From what we gather from the forum…our best bet is to surrender the WLI policy and reinvest through a 1035 exchange (we are considering Fidelity given my husband has a 401K with them). We understand the benefits of growing this investment back to Cost Basis (tax-free) …but, we are not so sure what to do next. While we do plan to dig deeper into the wisdom WCI has to offer, I am hoping to gain new knowledge from those on the forum. Is it a bad thing to retain the investment in a Fidelity Personal Retirement Annuity once the Cost Basis total is achieved?
Also, just to know, we do have plans for the money we would have paid in the 6 years following the surrender of the policy (while we remain employed). We have plans to use it as our emergency fund. With each year’s worth of unspent premiums (approx. $24K), we will invest in a 5-year CD. We would repeat this for 5 consecutive years and reinvest as each matured. This would give us access to $24K annually…along with a little bit of growth. Indeed, a very intentional low-risk investment.
What am I asking for? Well I know you all can’t give me marching orders…but, would like to know if we should refrain from doing anything as described above until we speak to an independent finance advisor. Or, to know if our plan is reasonable …one which we likely will still review with an independent finance advisor….but, for now, drop the WLI. Many thanks in advance!
Hmmm….7 years in still with a negative return. The WL salesmen strike again! Almost a 20% loss in the time that a simple index fund investment would have doubled. It pains me to read these stories over and over and over again.
Do you want an annuity? If so, then transfer the cash value into an annuity. Otherwise, the usual transfer to a cheap VA and then letting it grow back to basis before surrendering seems appropriate.
https://www.whitecoatinvestor.com/the-truth-about-buying-annuities-a-review/
Yep…indeed they did! Many thanks for quick reply. Step one 1035 exchange to VA followed by more reading and independent advice before surrendering. Thanks again!
I purchased a WL policy in ’02 from a friend……..seems to be the common thing. My wife was the beneficiary but we recently divorced and she agreed to not take any of it. I am now buried in debt due to the divorce and need any cash I can get my hands on. She actually paid the monthly premium for the 2 years we were separated so that was nice. I have no other person that I want to make a beneficiary. Cash it in?
If you need the cash and don’t have other sources AND you don’t need this life insurance, cashing it in seems like a no-brainer. However, without more details, it is hard to give any concrete suggestion.
Knowing more details would help me/others give suggestions. Such as the following:
– How much is your cash value is?
– What is your basis is?
– What interest rate(s) are you paying on your debt?
– Is there a debt payment now due that would cause a default (e.g., a mortgage)?
This is a 16 year old policy, so quite possible you are no longer in the hole (ie, your policy is worth more than the amount of money you paid into it over the years). Also, being a 16-year old policy, it may not be a terrible investment going forward.
Without knowing more, I’d likely tell you to cash it in, regardless. If you have high interest rate debt (e.g., credit cards at 9-30% interest) or might default (e.g., a mortgage), by all means, cash it in ASAP and use the money to pay down the debt. But if you know and are willing to share the above, others and I can give more informed suggestions.
Hmmm…no need for life insurance, need cash, and probably a lousy policy to start with if sold by a “friend,” I might dump even a 16 year old policy under those circumstances.
I’d at least calculate my return going forward before I did that though.
Earlier this year, I did a 1035 exchange of two NWM whole life policies into a Vanguard variable annuity (50% in total US stock market index fund and 50% in total international stock market index fund). My plan was to let it grow until the value equaled the basis and then cash out. Lately, I’ve been wondering if a better idea would be to cash out the VA and use the money to pay off student loans. The loans I’d be paying off range between 6.3% – 6.96%. Since these are guaranteed “returns,” this seems to make more sense, but I wanted to post here to see if I might be missing something. Is there any real advantage to keeping the VA? The only disadvantage I can think of to cashing out the VA to pay loans would be losing the ability to tax loss harvest for quite a few years. Any thoughts/suggestions would be appreciated.
Current VA value: $82,982
Cost Basis: $136,872
I’m assuming you cannot deduct student loan interest (ie, you make more than $165,000 if married or $80,000 if single).
You have almost $55K of tax free growth if you keep the VA vs. a guaranteed return ~6.5%. Without knowing your capital gains tax rate (see here: https://www.realized1031.com/capital-gains-tax-rate), hard to compare exact numbers.
Moreover, this is more about *your* risk tolerance. A guaranteed rate of return of 6+% is pretty good, but this is more a personal decision.
Let me do my best White Coat Investor impersonation – why not keep the VA and pay off the debt? Live like a resident (see here: https://www.whitecoatinvestor.com/what-does-live-like-a-resident-really-mean/) 🙂
Not sure I could live like that now. I’d likely keep the variable annuities, and live *slightly* more lavishly and chip away at the student loans.
6-7%? I’d at least refinance, but yes, I’d probably cash it out and use them to pay off debt. I find 7% guaranteed to be a very attractive return.
You know you can’t tax loss harvest in a VA, right? So you’re not losing that. What you’re losing is $54K in tax-free gains. Maybe $10-20K worth of tax benefits when all is said and done.
Also, not sure why you chose such tax efficient funds to put in the VA. Usually that’s a place for things like REITs and TIPS.
Noraz123 and WCI,
Thank you both for your replies. I checked and the marginal tax rate on capital gains for Virginia is 30.75%. If I cashed out the VA, and give up $54k in tax-free growth (approx. $16,500), then $83k would be put toward loans at 6.5% interest rate. I figure that costs me about $5,400 per year in interest. Right now I’m paying my loans off as quickly as I’m able, and it would take me realistically about 1.2 years to pay off $83k (approx. $6,500 in interest). This would make keeping the VA *and* paying off the loans as quickly as possible seem like a better “investment.” Am I thinking about this correctly or am I missing some big factor here?
The reason I invested the money in stock index funds (50% US and 50% international) didn’t have to do with tax efficiency. Instead, I thought those would be my best bet at reaching the cost basis as quickly as possible, since I want to cash it out at that point and reinvest. I will have to read about REITs and TIPS…do you think that would be a better idea?
Thanks again!
Choose asset allocation first and then asset location. Hard to answer your asset location question in isolation without seeing your whole portfolio.
I don’t follow your reasoning about the different amounts of interest.
Good afternoon all! I wish i would have read all of these posts or done more research sooner. My situation is similar to many of those above, I am just looking for a short piece of advice. I am 16mths into a whole life policy paying just over $1,000 per month and cash value is at just under $4,000. My plan is to cancel this policy and put it in my spouses backdoor IRA (which i am about to fund anyway) or put it in a normal investment account. That sounds reasonable right?? Also, if i understood the info from the posts above, since I have paid roughly 16k into the policy and the value is just under 4k then there is no penalty to be paid when I take the sum, correct?? Thanks
Correct, there would be no penalty when you withdraw.
You *could* put that $4k into a variable annuity and let it grow tax free until it hits ~$16K. If you don’t have the additional cash to fund both a backdoor Roth IRA and put $4k into a variable annuity, I’d do exactly as you are proposing. Namely, cancel the policy and fund the IRA.
However, if you do have ~$9500 to invest, (or $10,500 if over the age of 50), I’d do both. $4k to a variable annuity, $5500 (or $6500 if over 50) to the Roth IRA.
Hi,
It’s been very helpful reading these posts. Thank you for the information. I was sold a whole life policy exactly a year ago through guardian to be my “Roth” IRA bc I exceeded income limits. What I have learned over the last year is I have a life insurance policy with crappy returns unless I stick with it for 30 years. I have a guardian whole life 95 policy with a 1.3 million death benefit. My annual premiums is 18k (1550/month). I’m 34 and based on the illustration in 32 years when I’m 65, I’ll have a guaranteed cash value of 582k and death benefit is 1.3 million. I no longer really want to have this policy, and the cash value here at 1 year is about $700. After reading some of the comments here I’m looking for the simplest and easiest way out and the best option to take my $700 in cash value and make my 1st years 18k back. The one thing I have read on here that I’m very naïve on is the variable annuity option with Vanguard that I’ve seen people speak about. Can I simply do this with my $700 or are there minimum requirements to open this? Or are there other better options for me. I just want to walk from this thing. Thanks
What a scam. As you now know, a whole life policy is NOT a Roth IRA
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
and high income earners CAN fund a Roth IRA, they just have to do it indirectly.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
And the truth is that EVEN if you hold a policy for 30 years, the return really isn’t all that great. Perhaps acceptable for some people, but never great.
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
The point of the VA exchange thing, and I don’t think $700 is enough honestly, you’ll have to add some cash to get to the Vanguard minimum, is to allow you to have $17,300 in tax-free gains going forward. So that might save you up to 23.8%*$17,300 = $4117.40 in Federal taxes, at the cost of some higher expenses in the VA. If that’s worth it to you, then go for it. If you just want to be done, then just surrender it.
BTW- The minimum at Vanguard is $5K and the expense ratio is 0.54% vs 0.12% for admiral shares (used the REIT fund as an example, the others are similar.)
https://personal.vanguard.com/us/funds/fees?FundId=0147&FundIntExt=INT&investor_disable_redirect=true
Thanks for your response. However, as naive as I am on these things, where did the 17,300 number even come from? Prior to reading these comments, I have never even heard of a variable annuity or understand it. So if I have to put up another 4300 to get to the 5k vanguard minimum, how do I try to make back my 18k and then make back the additional money put in for the minimum? This stuff is a foreign language to me.
You said you paid $18,000 and have a cash value of $700. $18,000 – $700 = $17,300
Get out of the mindset of “making back your $17,300.” That money is gone. It’s “money under the bridge.” It’s “stupid tax.” Stop focusing on it and move forward from here. Like Gandalf says, All we have to decide is what to do with the time that is given us. The only reason to even think about the $17,300 is because if you do the VA exchange thing you can get a little tax benefit out of it.
So invest to reach your goals, not to get back your $17,300. If you want that, you’ll need to go threaten to kneecap the jerk who sold it to you. [Note to police: That is clearly sarcasm and if MDA1776 actually goes and does that it is not my fault.]
Thanks for explaining and I would prefer more than a kneecap to said advisor. I guess the reason I was focusing on getting the money back in a variable annuity was bc of some of the posts I read here where you can transfer your WLI to a variable annuity and let it grow tax free via a 1035 exchange. I thought then that it let that investment grow, grow back to my 18k basis and then cancel/surrender the variable annuity, owing $0 taxes. That’s where I was going. Is that all correct?
Yes, that’s how it works. But whether you invest your $700 in a VA or in a taxable account, it’s going to take a long time to grow back to $18K without any additions. The additional tax benefit of the VA will help a little, but not a ton. I mean, let’s say you put $5K into a VA (exchanged $700 and added $4300 of new money to meet the $5K minimum). You let it grow over the next 20 years or so to $22,300. You then surrender it and you walk away with $22,300 tax-free. If you put $5K into a taxable account, and it grows to $22,300 over a couple of decades, you’ll owe up to 23.8% taxes on $22,300-$5K= $17,300, or $4,117, leaving you with $18,183.
That’s the point of the VA exchange. You get to avoid some taxes 20 years from now.
First, I agree 100% with Dr. Dahle. You have $700 cash value. Just cancel the policy, and be *very* happy you caught on to how bad this investment was after only 1 year. Many of us suckers were out a few years of premiums before wising up. 🙂
Second, let me answer your question. You put in $18,000 in premiums into this policy. It is only worth $700 right now. So your loss is $18,000-$700 = $17,300. This is where that number came from.
The only thing you could do other than taking that $700 and calling it quits, is investing it in a variable annuity and letting it grow back to your original basis ($18000). It would take quite a while to do that, and it comes at the cost of higher fees.
Cancel the policy (assuming you either do not need life insurance or have term insurance in place), take your $700, and buy yourself something nice – like a Vanguard mutual fund.
Follow the advice of The White Coat Investor, and you will more than recoup your $17,300.
Congrats again on finding The White Coat Investor and catching on to the ills of WLI. Many people who buy don’t.
Thank you both very much for taking the time to explain this to me. If I did put the 5K into a VA and then let it grow for 20 years to the 22,300 that you stated above, i can simply surrender my 22,300 without penalty fees, or even a dime of taxes on any of the growth etc? I understand that it’s a tax deferred account. So when or under what circumstances do penalties and taxes ever happen? Never? I wouldn’t be 59.5 years of age if that matters. I was reading up on VA and the surrender penalties/taxes explanations are not clear to a naive finance guy like me. Just curious but I at least have the knowledge now to move forward and I thank you for that.
I’ll leave this to Dr. Dahle to explain, as to be honest, I am not sure. That is my understanding based on how he explains it above.
Here’s what I know for sure – If you were able to put the $700 into a variable annuity (and only the $700), you could let it grow back to $18,000, and not owe any taxes. Not sure what happens tax wise if you put $4300 of new money in it and then let it grow.
But with just $700 of cash value, I’d skip the variable annuity. I realize it is different for each person, but it would not be worth it to me. Especially once you do cash in the variable annuity, you’ll need to figure out how to report it on your taxes.
The penalty fees depend on the VA, but there are no surrender fees on the Vanguard VAs. But yes, tax-free. If it grows to more than 22,300, you would pay tax on the gains at the higher ordinary income tax rates (not the lower long term capital gains rates.) And prior to age 59 1/2, you would have to pay a 10% penalty on any gains withdrawn.
Wow. I thought I was alone in my regret of buying whole life insurance. I feel so embarrassed that I took terrible advice from a life insurance agent (I was only 20 yo). Thank you so much for posting this and for all the people replying who make me feel like I’m not alone. I bought whole life insurance 10 years ago. The face amount is 400k. I’ve put in 13k, and surrender value is 9k (4k loss). After reading your blog I’m pretty sure I want to surrender it. Currently, I have no kids, no property, and more than $250k in student loans from med school. My question in this: should I surrender my policy and use that $9k towards my loans OR should I do the VA exchange OR put it towards a Vanguard mutual fund? Or a combination of loans and fund? I’m so afraid I’m gonna make more financial mistakes. THANK YOU FOR WHAT YOU DO!
Adding your story to the long, long list:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
And if you’re 10 years out and still owe $250K in student loans and presumably aren’t going for PSLF, I’d put it there. You should also consider refinancing them:
https://www.whitecoatinvestor.com/student-loan-refinancing/
And you need a good plan to get rid of them. That likely involves cutting your spending dramatically and sending the difference to the lender each month.
I don’t think I’d bother with the VA exchange for a $4K loss. It’s not going to save you much in taxes.
Thanks for the quick response!! That is a list I wish I wasn’t a part of. I am planning PSLF for my public direct loans but I have $42k in private loans that I’ve refinanced and need to pay off ASAP (and am hoping to take my $9k from my break-up with WLI and put it towards the private loans).
You’re 10 years out already. How many more payments do you need for PSLF?
I agree that you need to get those privates out of your life ASAP.
Hello, can’t believe I just heard about this site just now. Must’ve been living under a rock as all my fellow docs at work subscribe.
Super simple but “face-palm” question that I keep perseverating over…
Bought a $300K whole life from NWM four years ago. Have put in $18K ($300/mo) and forgot about it. Just looked at it for the first time in four years (I know, I know). Cash value is $12K so I’m $6K under.
What do I do? Eat the $6K as a life lesson? No student loans so I just want to stop flushing money down the proverbial toilet.
Just bought the WCI book too so looking forward to paying attention as I should have been years ago!
Thanks for any and all advice…much appreciated.
Two things you can do.
Simplest – cancel the policy, take the $12K, and celebrate the fact that (1) you now know about WCI and are enlightened (2) you are only $6k down and didn’t suckered into a bigger policy, additional policies, or paid into it longer, etc.
More complicated, but will save you $1K or so in taxes over the coming years. Move the policy to a variable annuity (Vanguard is a great choice), and let that $12K grow back to $18K. Then cancel, and you will owe no taxes.
Depending on your comfort level, I’d recommend the VA. Not just because of the few dollars saved, but it is good as your are getting started to learn how all these investments work.
Congrats on finding WCI. Another great resource is Bogleheads.org, a wiki and message forum where Dr. Dahle is a frequent contributor. I found these two sites when I was trying to understand and then unwind my wife’s WLI policies. WCI.com and Bogleheads.org are priceless. Follow their collective advice, and you’ll more than recoup your $6K loss in no time.
Couldn’t have said it better.
Noraz123,
Appreciate the advice and recs!!
I’ll reiterate that I wish I had seen this before “investing” in a WLI and thank you for your help. I was advised by a long time friend that this was the way to go and did not think he would advise me wrong, but I have felt uneasy about it for 2 years. Initially I was going to wait for it to break even, but I am 3 years in and at a 21k loss. The current Net cash surrender value is $2,000, from what I have read I should I do a VA and try and let it grow back the 21k over time. I’m single, without kids but plan on starting a family in the next 3-5 years. I have 45k left on my student loan at 2.6% over the next 7 years and a home mortgage of 490k at 4.3%. I will add that I am not a doctor but a PA, so my income is not as nice :). Before I cancel, I want to make sure the VA was the best choice. Also if I understand correctly, vanguard requires 5k minimum so I would have to contribute 3k up front which I can do if that is advised or should I just cut my loss?
OK. I have a Northwestern Mutual Whole Life Paid-up at 65 insurance policy. Premiums are 500/month. This is year 14. Cash value is currently 91206.62. Premium tax basis is 84,000. Loan rate 8%.
Seems like a long term loser. How to transfer out and not pay taxes (if possible)? I’m not sure what the surrender fee is (if any), but can I avoid that? I’m glad I didn’t lose money (at least I don’t think I did), but it seems like it could do more work elsewhere.
How to transfer out? I mean, that’s what this whole post is about, right? But not pay taxes? No way to do that. You’re going to owe taxes on $7K. If you don’t want to pay taxes at all (for some strange reason), you’ll have to either keep it or exchange it to something else like a variable annuity. Personally, I’d calculate the expected return going forward, and if that wasn’t acceptable to me, put term insurance in place, surrender the policy, pay the taxes on the $7K, and reinvest the cash value elsewhere.
Update:
Past 15 years there’s no surrender fee. Do I stay in for a year to avoid the fee?
8% loan rate, 7.45% gets credited back to cash value (what?). Net cost of loan = 0.55%???
That’s the loan rate: you can take a loan on you annuity. It will cost you an 8% interest, but 7.45% goes back into your annuity balance. NWM only takes 0.55% for kindly agreeing to let you borrow your own money.
The real issue is how much your annuity will yield going forward. Since you have already been invested for 14 years it is not a foregone conclusion that you might not be better off continuing. You need an in-force illustration and to make the appropriate consideration about the guaranteed return they offer going forward and what you can get elsewhere, and with what kind of risk.
Exactly. Do you have an in-force illustration in hand?
First of all, thank you for this life saving post! Also feels terrible to have committed to such gross mistakes.
Me and Wife have two WLIs purchased in 2010. Each policy is 1M Death Benefit. We both pay approximately 10.5K premium per year.
I reviewed in-force illustration for both. At this point, considering surrender cash value of 72K each, I am -20K under and wife is -23K in the policy. We are in early 40s so 20 Yr term is probably sufficient but it costs about 2K per year for term. I am thinking of surrendering by taking this as “stupid tax” and go into VA from Vanguard. Do you have a guidance typically how long would it take for us to take tax write off and dissolve VA?
I guess with capital loss write off cap of 3K per year, we are looking at 7-8 years to recover. Am I right?
Well, you’ve got $72K and $90K basis. At 8%, $72K grows to $90K in 3 years. You can’t write off the capital losses for this. You basically get $43K in gains that you don’t have to pay taxes on. So, at 23.8%, that’s $10,234 in capital gains taxes you would save by doing the VA thing. Obviously you’ll pay some VA expenses, but that’ll be pretty minimal, maybe $1500 or so over 3 years.
Hope that helps you decide.
First, congrats on finding this excellent resource in the White Coat Investor. This post also greatly helped me in understanding how bad permanent insurance policies are. So don’t think about how it is to have bought these policies, rather think about about how great it is that you know better and are more empowered!
Moreover, if it was a financial advisor that sold you these policies, I’ve move to get rid of him/her just as much as I would move towards getting rid of these policies.
Next question you should ask if is if you need any insurance. Buying term is a good thing if you do, but don’t buy term just because you are getting rid of whole life. Buy term insurance if you need insurance. Do you have kids? If not, do you or your spouse need the insurance from the other’s untimely passing?
Next, there is no tax write-off in this situation. There is no $3,000/year that you can deduct from your income or offset any capital gains. Unfortunately a loss on WLI is not like a stock you sell for a loss. Different beasts, and IRS has different tax laws.
You are correct that you can move your current cash value to a variable annuity via a 1035 exchange, and Vanguard is an excellent choice. Instead of claiming any tax loss, what you can do is move your $72K into a variable annuity, and let it grow back to $92K. At that point, you cancel the variable annuity, and you will owe no taxes on the $20K gain on the variable annuity. You would do the same for your wife, but in her case, but in her case, you can let the variable annuity grow back to $95K.
Recap: Unfortunately, there is no loss to claim. Rather, you can get future tax free growth ($20K for you and $23K for your wife).
Thank you NORAZ123,
Yes we have two young dependent children who are in school. Hence considering term insurance. I mistook that upon exchanging to VA, I would be able to claim a loss on the basis. But I understand now that I can hopefully grow the losses back to basis in 3-4 years and cash out.
Thank you WCI, it helps certainly. I mistook that upon exchanging to VA, I would be able to claim a loss on the basis. But I understand now that I can hopefully grow the losses back to basis in 3-4 years and cash out.
I’m so glad I found these pages. I got totally screwed by a ‘friend’ of the family who took my trust when I was 18 and dumped it into an ameriprise VUL and a Riversource Variable Annuity. I’m 32 now and trying to both get away from these horrible investments and free up cash for a downpayment on a house.
The VUL is a 1,000,000 death benefit with $66,000 in premiums paid, total value of the policy at 93K. The Riversource VA is valued at around $150,000 with $75,000 in purchase payments to date and a 145,000 death benefit. If I understand your posts correctly, my best bet to get out of this without being totally destroyed by taxes is to cash out the VUL up to the $66,000 basis cost, which should be tax free. I could then do a 1035 exchange to a Vanguard low-cost VA with the remaining ~30k profit of the VUL?
I’ve got two primary questions:
1. If I cash out the cost-basis of the VUL and then roll-over the rest to the vanguard VA, will I be subject to an early-surrender taxation of 10%? I read that some annuities (like ROTH IRA) are charged a 10% early cash in fee if you are younger than 59, but I don’t know if this applies to VULs.
2. Similar, can I cash out the cost basis (~$75,000) of the Riversource VA , or will this be subject to any major fees or taxes?
As an addendum, I don’t know if I totally understand the advice about what to do once the gain from these instruments is translated into the Vanguard VA. At that point do I simply continue investing in them benefiting from the lower cost load, or is the idea to hold them until they appreciate to the value of the policy and then cash them out in their entirety tax free?
Thank you!
Only if you actually want a VA, since there’s no loss here.
To be fair, you’ve done okay in both of these. 4.72% per year in the VUL for the first 15 years is really good, much higher than you would have had in a whole life policy over that period. That was obviously buoyed by the bull market the last 10 years. The VA actually did a little better at 9.72%. Now I don’t know anything else about these particular vehicles, but you really can’t complain too loudly about your performance.
So your choices are to walk away and pay taxes on $102K in gains at your ordinary income tax rate, exchange them both into a low cost VA and leave them there, or to leave them where they’re at. The pro of # 1 is you’re out and don’t keep kicking yourself for this decision every time you look at it. The con is the tax bill. The pro of # 2 is you probably get lower expenses and better investments, likely improving performance going forward from what it would otherwise be, although you lose the death benefit. The con is that you’ve still got a VA to deal with in your portfolio for the rest of your life. The pro of # 3 is you don’t have to do anything but keep making payments. The con, you may be in a lousy VUL and VA and every year you’re going to think about doing something with it revisiting this decision over and over again.
You’re proposing a combination, doing a partial surrender of the VUL and moving the rest to a VA. I think that’s also a nice option if you don’t want # 1 or # 3. You can’t do that with the VA unfortunately. That one is first in first out. So either cash it out or transfer it all to a lower cost VA.
I’m a third-year medical student, single, no dependents. My veteran parents purchased a Navy Mutual Flagship Whole Life Insurance policy for me 2.5 years ago. Because I am their dependent, they’re currently paying for the policy, about $2.5k/year with a dividend option to “Purchase Paid-Up Additions” and an included “Chronic Illness Option.” Death benefit is $500k and scheduled paid up date will be in 2036. Per the “guaranteed/non-guaranteed” tables, the cash value of the policy at the end of year 3 will be about $7.5k, and per my policy document, “the cash surrender value will never be less than the sum of premiums paid into the policy.” Since purchasing this policy, we haven’t taken out loans against it or actually done anything with it.
Several questions:
1. Does this mean that if I dump this policy, I walk away with a net return of 0%? Or am I miscalculating?
2. Should I convince my parents to get rid of this policy? My guess is that the answer is “yes,” but I’m having trouble understanding the contents of my policy and what makes it bad to have. I’ve read your article on evaluating your WL policy but the calculations seem different when I plug in my own numbers.
3. Does getting rid of this policy now mean that the cash surrender value we get back is taxed as my income or my parents’ income?
1. Possibly. Double check the policy to see if there are surrender charges within a certain number of years after opening the policy. You can also call the company and ask the current cash value to confirm.
2. Yes. If they want to you have insurance, maybe purchase a level term policy and let them pay those premiums which will be more like $300 instead of $2500 for the same amount of insurance.
3. You may owe tax on any paid up additions (dividends credited to the policy). The premiums you pay form the basis of the policy and you will not owe taxes on that portion of a surrender. (Note: the company may reduce the basis slightly due to the cost of actually insuring you during this time. So if your premium was $100, the cost to insure may have been $5, so your reduced basis may be $95, depending on the company.
That’s an interesting policy that guarantees no loss. I wonder what you had to give up to get that.
Why was the policy bought?
My parents bought the policy thinking that it would pay a death benefit to me upon my father’s death, though now that I actually read through and understand the policy better, I’m the “Insured” person and my father is the “Owner,” so in fact the benefit would pay upon MY death. I’m not even out of medical school nor do I have any dependents, so this policy seems unnecessary.
Doesn’t look like there are surrender charges, but I’ll look into confirming the current cash value. The policy document states that the cash surrender value will be the greater of (1) current cash value or (2) cumulative base premiums paid + cumulative PUAR premiums paid – cumulative dividends – cumulative withdrawals, and again, will never be less than the sum of premiums paid into the policy.
Yes, since it isn’t doing what you thought you bought it for, it seems reasonable to dump it. It’s nice that you can get your money back. Usually you’d be down 25-40% at this point.
Dear Confused MS3, I am a veteran and have insurance with NMAA. Since you are not the owner of the policy, you are not currently able to make decisions about the policy. If/when your parents transfer ownership of the policy to you, the cash value may be taxable. While you are a medical student or resident, your income taxes on such a transfer would be nil or negligible.
If you do become the owner, then the choice becomes yours. At that time, my advice is to look carefully before you decide to “dump” the policy. Premiums paid in are preserved. When it is paid off in 2036, you will have at least $500K of paid-up insurance for life.
One additional advantage of this particular policy is the “Chronic Illness Option” that you mentioned.
Chronic Illness Option: If the insured is age 60 or older and develops a need for assistance with two or more activities of daily living or cognitive impairment, the plan’s death benefit can be paid out over 48 or 60 months. This can help offset costs associated with a chronic illness, including long-term care.
Your policy should also have the Terminal Illness Option: If the insured is diagnosed with a terminal illness resulting in a remaining life expectancy of 24 months or less, a one-time lump-sum payment of up to 100% of the benefit can be paid.
Thus, the policy could also help you while you are alive, as well as provide a Death Benefit for your heirs.
As you have noted in trying to compare this policy to other Whole Life policies, it is different. In my opinion, it is a different creature entirely and is vastly superior to policies sold by mutual insurance companies.
If you dump this policy, you cannot buy another from NMAA in the future, unless you enter the military.
What do you do for a living Donna?
I am a physiatrist (Physical Medicine and Rehabilitation), now retired for 6 years!
Thank you! That last comment almost sounded like it was written by an insurance agent!
Nope! Definitely NOT an insurance agent. I just have dealt with Navy Mutual Aid Association since 1978, when I was in Flight Surgery school with the Navy. Access to membership is limited to active duty military (and veterans in some states).
Navy Mutual Aid Association is very different from the mutual insurance companies that you see selling policies to young doctors. Similarly, NMAA policies are very different from those that you usually deal with.
I really wish that you would do some research into this, perhaps for a blog? You might find that there are, actually, significant benefits to NMAA policies for the military members who could actually get NMAA insurance.
I’m not seeing a big difference worth promoting NMAA for. What big differences are you seeing?
Well, one that you mentioned, above–“It’s nice that you can get your money back. Usually you’d be down 25-40% at this point.” As we assess the Pro’s and Con’s of the NMAA policy, one major Con found in typical Whole Life policies is absent. You, yourself said, “That’s an interesting policy that guarantees no loss.”
I’d say, right off the top, the lack of a huge loss early in the policy life is a huge difference.
In addition, there are significant “Pro’s” that I see.
1. Coverage even for death due to war or aviation is significant.
2. Terminal Illness and Chronic Illness options make this type of policy useful–even while the insured is still alive.
A side-by-side comparison using equal coverage for a certain age/gender and equal payment schedules between NMAA and NML (maybe Mass Mutual) could prove interesting.
What is the premium for each company? Is NMAA less expensive?
What is the guaranteed cash value over time?
What are the exclusions, if any?
What are the options included at no cost for Chronic/Terminal Illness?
I think that’s a function of you buying a MEC, not you buying a MEC from NMAA. I guess I’d have to look at MECs from other companies to compare apples to oranges, but that policy of yours also guarantees NO return until year 4. So that’s where the commission comes from- the earnings on the money for four years.
1. If you’re a pilot or military member that probably matters, but not so much everyone else.
2. Lots of policies have those provisions. I don’t think they’re worth much personally. It isn’t much different from borrowing against the cash value. It’s not like there is something extra there. You’re just getting death benefit a little early. Once more, they cannot sell it based on what it actually is, so they try to sell it as something else.
I wouldn’t be surprised AT ALL if it compared well against NML, but that’s like comparing a mutual fund up against a 5.75% load, 2% ER actively managed fund.
I can’t answer your other premiums. I’m not an insurance agent either. If you want to talk to an insurance agent, get those numbers, and submit a guest post, I suspect we would run it. But what is happening here is we’re comparing two crappy things. Just because one is a little less crappy doesn’t make it good.
So, if I were to compare a NMAA $500K policy for a 25 y.o. male with same value mutual fund whole life, what other company/companies do you think would be worthwhile?
FYI, the normal people who would buy NMAA would be active duty military, younger, and NOT MEC. They would likely be paying over a period of time which would not trigger MEC.
Why would a 25 year old buy a whole life policy? A 25 year old is what…..an MS2? Selling them a whole life policy is basically malpractice.
And a 25 year active duty military person buying a whole life policy? Also not particularly wise.
Again, comparing one bad product to one slightly better but still bad product is not something I spend a lot of time doing. But sure, you can get two policies drawn up for you by an agent and compare them and maybe show the NMAA one is a little better. I’ll watch for it as a guest post.
I’ve read extensively on the comments. I am trying to figure out if the $135,000 out of my whole life would be better invested in a taxable account vs moving to a VA and then cashing out later. I will take a $15,000 loss and I wonder if I would make more back in a taxable account vs trying to grow it back and take a $0 loss.
For the next $15K in gains, the VA. After that, probably the taxable.
So, like so many who have posted here we are looking to get out of a Whole Life Insurance policy. Right now (about 5 yrs in) we have paid in about 62,500 and have a cash value of about 39,000. We are debating doing the variable annuity thing described to grow back the lost money tax free vs taking the check and paying off some other loans and free up monthly cash to fund a spousal IRA.
My real question is this . . . . to do the variable annuity option, does it have to be all or nothing in order to reap the benefits of growing it back to the cash basis tax free? AKA: would there be any way to put say half into a variable annuity and take half to pay some other things off?
Any advice?
I suspect you can. Why not call up the Vanguard folks and ask? But if you only put $19,500 of your cash value in, your basis will only be $31,250.
I started listening to your podcasts last month. I’m an orthopaedic surgeon and my wife is family medicine. 6 months ago our 10yr term life insurance was converted to a $1 million Mass Mutual Legacy 20 Whole Life Insurance plan with a monthly premium of $1,467.69, so we’ve paid $8,806.14 so far. Cash value is 1,048.02
After I heard your podcast I asked our financial advisor about this product and he said that he whole heartedly agrees that most whole life is crap, but that the legacy 20 is better in that you only pay in for 20 years and then the rest of your life the investment grows. At the time this satisfied me, but I wanted to check with you all first.
My wife and I are both 1.5 years into practice so our medschool debt is not paid off (6.8% rate) nor is our mortgage (4.4%).
Is the Legacy 20 plan better that what then 8 pages of comments has described or should I just try to cancel it?
So….you think it’s pretty good so far to have paid $9K and have $1K left. Really?
I’m sorry you have mistaken a commissioned salesman for a financial advisor. If you stop paying now, you will have only lost $8K. Personally, I think it’s the equivalent of financial malpractice to sell someone with 6.8% student loans a whole life policy. Make sure you get a new term policy from an ethical insurance agent before dumping this one.
Will do. I was trying to hold out hope that maybe the Legacy 20 was more magical than the longer term plans, but I won’t delude myself anymore
If I were going to say one payment plan were better than others, I’d say a 7 pay or 10 pay would be better than a 20 pay. I guess 20 is better than 50.
Sorry. You’re not the first and you won’t be the last. You’re in very good company.
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
Hi,
I have 3 whole life policies from NWM in names of my children ( minor) which are only 2 years old. I exchanged my policy in to vanguard annuity. What’s the best way to get rid of these besides cashing them out? I will really appreciate your help.
2 year old kid policies? There can’t be much cash value or basis there. Why not just walk away?
I referenced the IRS website you cited –it seems the deduction for a loss has been suspended as of 2018. Thought I’d pass it along in case you were going to update this article
“Losses.
You may be able to claim a loss on your return if you receive a lump-sum distribution that is less than the plan participant’s cost. You must receive the distribution entirely in cash or worthless securities. The amount you can claim is the difference between the participant’s cost and the amount of the cash distribution, if any.
Generally, the loss is claimed as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Form 1040, Schedule A. However, for tax years after beginning December 31, 2017, and before January 1, 2026, these miscellaneous itemized deductions have been suspended. Therefore, a deduction for these losses is not allowed.”
I think it’s already been updated, hasn’t it?
I only see the update in the article from 1/31/17 saying there is a deduction for the loss. The IRS website now says you can no longer deduct the loss (deduction is suspended effective 12/31/17 through 12/31/26)
You’re right. Must have been a different post I updated with that info. Hard to keep 1500 pages of the internet up to date all at once.
I’m so upset with myself — for being late to the conversation on Adj Comp Life insurance. Context: in late 2014, my son, 22yo, passed away unexpectedly. Tragic beyond anyone’s imagination. I had a little insurance money and he had been asking me to consider buying insurance from his friend, who, at the time, worked at NW Mutual. About 5 months after my son’s death, I purchased a NW ACL policy. Premiums ~$12,000/year x 4 years paid to date =~$48,000 paid in. Current cash value, ~$32,000. My bad. I also bought a long term care policy for my husband and me (which I just discovered is a flat-rate benefit of $6,000 /month, so allegedly when we need it in our 80s, it’ll only really be worth ~$1,000/month?), and life insurance for my daughter and steps kids. I’m just getting out of a daze and fog since my son’s death.
Here’s where I’m at: today transferred my Roth held at NW Mutual (I’m so angry at being taken to the cleaners) and opened a Vanguard account, Roth IRA to start. Second, I’d like to put as much of ~$32,000 from the cash value of the ACL policy into the Roth if I can. Our adjustable household income is right on the edge (~$180k/year). Can I do that? Also, can I claim a loss on the NW Mutual ACL policy?
I’m just wanting some advice on moving forward. I’m 53 yo and plan to retire in about 13-14 years. My husband is a federal employee and has retirement accounts, too. In the meantime, I’m maxed out on my other IRAs.
I’m sorry to hear about your son. From my comment just prior to yours, you can no longer deduct the loss from your life insurance policy on your taxes. I’ll leave it to WCI to address the remainder of your questions. Best of luck
Thanks, David. Much appreciated.
You can’t roll a life insurance policy into a Roth IRA. IRA contributions are $6K/year ($7K/year if 50+). That’s it. Sounds like you can probably make direct Roth IRA contributions, but if you’re worried your income may go up a little, might want to do them through the Backdoor.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
No, you can’t claim a loss on life insurance. The closet you can get is to roll that cash value into a very low cost variable annuity like at Vanguard and let the $32K grow to $48K and then surrender the annuity. That $16K in gain won’t be taxed. Whether that’s worth the higher costs of the annuity and the hassle to save $16K*15% in taxes is up to you.
Thank you for this post!! I’m just learning to navigate my way through finances and it is a lifesaver. I am a fellow and have just purchased Term Life insurance and afterwards found out that my mother told me she started an insurance plan for me 7 years ago and has asked me to start making payments on it so I reviewed it. It turns out it is a Comp Life Whole life insurance with NWM for 280,000. I obviously don’t need both and after realizing the scam that whole life insurance is, will be getting rid of it. The plan summary so far is:
The Total Cash Value: $7,966.93
Cost Basis: $10,951.47
Taxable Gain if Surrendered: $0.00
(This is a NWM policy and this is on the plan: Life Insurance Annual Policy Statement
Cash Value distributed from the Policy or applied to repay a policy or premium loan is taxable to the extent it exceeds the Cost Basis)
So it seems that I am at a loss of $2985. I am just starting to get my finances in order. I have not yet deposited the most in tax deferred accounts, HSA, 401K, backdoor Roth so I am not sure what is the best move (but do have some savings to invest in those other accounts). I want to cancel this policy ASAP.
– Should I take the cash value (and not pay any taxes on it) and invest it in a 401K or other index fund with Vanguard? And if i do this, I would not be paying any taxes correct?
– or do a 1035 exchange and take the money out when my losses are 0.
Thanks for your help!!
Thank you to Dr. Dahle & the WCI staffs and community! Seriously, this WCI has got to be a REQUIRED course in year 2 of medschool and again throughout Residency.
I’m late to this 5 year party, but at least I made it. Coincidentally, I purchased 2, that’s right TWO, TransAmerica Index Universal Life(IUL) policies exactly 5 years ago this month: One for myself, another for my 4 yo daughter to w/d the cash to help pay for her college tuition
1) -Age at purchase 41 yo. Face Amt: $100,000. Premium Paid(Cost basis): $19,200. Cash Value: $17,327. Surrender Value: $14,836
2)-Age at purchase 4 yo. Face Amt: $500,000. Premium Paid(Cost basis): $24,278. Cash Value: $21,044. Surrender Value: $13,454
From these posts I’ve learned to cut my losses and pay the ‘stupid tax’, and do a 1035 exchange on these IUL policies. My question to all of you WCI is do you have any other advice on what’s the best approach to my situation? What is the best provider for low cost variable annuity? I was thinking of doing a 1035 exchange to a Vanguard VA, but Vanguard is ending its annuity offering to investors in a few months(end of 2019), and will completely transfer its client servicing and account administration to Transamerica by the end of 2020. Do you have any insights into how the fee structure will be affected with the transfer?
Thank you all
I wouldn’t expect fee structure to change if you buy the VA. If you want to keep it simple, you can just walk away and not try to get something for your $15K loss.