I don't actually post about whole life insurance (WL) all that much, but the comments on WL posts number in the thousands and go on for years and years after the post is written. Most of the posts address whether or not you should buy a whole life policy (or its cousins, Universal Life and Variable Life). I generally recommend against them, and the insurance salesmen who love to post comments longer than the post itself not only recommend them, but feed their children and pay their mortgage from the commissions (50-110% of the first year's premium) on the sales. They're not happy when WCI readers actually have responses to the myths they're using to sell them. Today, however, I'm going to address a different question that I get in my email box far more often—how to cancel a whole life insurance policy.
Should I Keep or Cancel My Whole Life Policy?
Long-time readers will recall I was once the proud owner of a whole life insurance policy from Northwestern Mutual (NML). It was sold to me as a medical student by a very dear friend who happened to be interning with NML that summer. He subsequently went into another line of work. The policy was not only inappropriate for me, but it was just a terrible policy. What I really needed was a $1 Million, 30-year, level-term policy. What I got was a convertible $280,000 term policy whose rates would go up every 5 years until long after I would be financially independent coupled with a $20,000 whole life policy.
This tiny whole life policy was something like $21 a month. The annual policy fee was relatively huge compared to the premiums, not to mention the premiums were being paid on a monthly basis (even a poor medical student could have come up with $240 all at once if he had known it would improve returns). The policy had a terrible return. After 7 years, I cashed it in for something like $1,100. I had paid in something like $21 * 12 * 7 = $1,764. That's a loss of 38%, or something like -12% per year. It didn't quite track the minimum guaranteed returns in the original illustration, but my returns were pretty darn close to the minimum and a long way away from the projected illustration. The in-force illustration I obtained (just for fun) prior to surrendering it indicated I was still many years away from breaking even.
For a few hundred dollars of ill-gotten profit, NML is partially responsible (along with a mortgage lender, a realtor, and a mutual fund salesman) for unleashing The White Coat Investor on the world. I wonder how much they would love to pay now to get me to take down the whole life posts on this blog given that over 12 million people have visited the site in its first decade and some of the most popular posts are about whole life insurance.
The question we will be addressing today, however, is not whether you should buy a policy. It is what you should do with the one you already have. There are a number of points to consider.
Do You Want or Need a Permanent Life Insurance Policy?
Although 75% of those who purchase whole life policies eventually surrender them, there are a select few who want them and even a tiny percentage who actually need them. If you are one of these people, you should keep your policy.
Examples of people who need permanent life insurance include:
- Someone who will never actually become financially independent (working until death) and will always have someone depending on their income financially
- Someone with an estate tax problem
- Someone with a liquidity problem
- Someone with some legitimate business issues that are best solved with these policies
Even if you don't need a policy, you might want one. Perhaps you can't stand the volatility of higher-returning investments like stocks or real estate. Or perhaps the 3-4% returns you reasonably expect on the policy are adequate for your needs. Or perhaps you're into the whole Bank on Yourself/Infinite Banking thing. If any of this describes you, then you may want to keep your policy, assuming it is actually correctly designed to do what you want it to do. You might be able to improve it by paying annually, changing dividends to offset premiums instead of paid-up additions, or even by purchasing additional paid-up additions, but you probably shouldn't get rid of it.
Keep Your Whole Life Insurance Policy If You've Had It for a Long Time
Whole life has low returns when held for decades. It has terrible returns if only held for a few years. That means that, after a while, the returns GOING FORWARD may not actually be too bad. The terrible returns are heavily front-loaded, and generally follow the period for which commissions are paid to the salesman. If you're past those years, you probably want to keep the policy, even if you don't like it. I think 15-20 years is about the turning point, but one could argue this occurs by year 10, or even sooner. It varies by policy and how much you hate it.
Certainly, you can't argue it is a good idea to keep it just because you've had it for a year or two or five. If you don't want to pay the premiums anymore, then change dividends to offset premiums. If you just want to maximize the return, then purchase paid-up additions up to the modified endowment contract (MEC) limit and make sure you're paying annually. If you don't want to hire someone to evaluate the policy, this post may help you to evaluate your own whole life policy.
If You're Going to Cancel Whole Life Insurance, Do It Now
Whole life insurance works out best when you hold it until death. Once you have decided you are going to cancel a whole life insurance policy, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. You may want to wait until just before your next premium is due if it means the cash value will be a little higher, but you certainly don't want to pay more premiums on a policy you will drop at some point between now and your death.
Consider the Alternative
Remember that you cannot just consider the policy on its own merits. You also need to compare it to what you would do with the money if you were not using it for life insurance premiums. If you're going to be using the money to max out a 401(k), or even better, get a match in a 401(k), then it is a no-brainer to get rid of it. Likewise, if the alternative is something like maxing out an HSA or a personal or spousal Backdoor Roth IRA. If you, however, are comparing it to a taxable account, especially invested in low-risk assets, or to just spending the money, then it will compare a little more favorably. I often see agents selling whole life policies to doctors that still have 6-8% student loans. That's financial malpractice in my opinion. Heck, paying off your mortgage, even one with a relatively low-interest rate, may provide a better return than whole life, and it's guaranteed.
Get Term Life Insurance in Place First
Does your whole life policy belong in the trash? Probably.
It should go without saying that you should never cancel a permanent life insurance policy unless you already have sufficient term life insurance in place to meet your needs and wants. It usually only takes a couple of weeks to buy a term policy, but don't leave yourself exposed even for that long. Besides, you might be surprised by something found during underwriting.
Don't Worry About Tiny Policies
When you start talking about getting rid of a policy, the first thing to consider is any possible tax penalties or tax benefits of doing so. For a teeny, tiny policy like the one I had, that just doesn't matter much. My loss was only a few hundred dollars, and the tax benefit on that would be far outweighed by the hassle factor and the actual costs to claim that. If you have a tiny whole life policy, just cancel it.
You may have had one of these purchased for you by your parents, who dutifully paid a few bucks a month on it for two or three decades before presenting all $2,000 of cash value in it to you (and asking you to take over the payments). Be sure to thank them for their thoughtfulness, then cash it out and use the money to fund a Backdoor Roth IRA. You might not want to mention that you did that during Thanksgiving dinner, by the way.
Evaluate Your Options Carefully on a Large Policy
However, if you have paid tens of thousands of dollars in whole life premiums, you probably want to spend a little more time deciding what you wish to do with this policy. If your policy has a large gain, you've probably had it long enough that you should keep it. But if not, you can avoid taxation of that gain (typically taxed at your regular marginal tax rate) by exchanging it into a better cash value life insurance policy, a very low-cost variable annuity (VA), or even long-term care insurance.
The best of those options, in my view, used to be the VA, since buying another cash value life insurance policy most likely entails another fat commission, and most doctors reading this site ought to eventually be able to self-insure any long-term care needs. However, it is not so easy anymore to find a low-cost VA, so even that isn't a great option for a policy with a gain. Unfortunately, you can't even use losses from tax-loss harvesting to offset the gains since gains in a life insurance policy are not considered capital gains.
Preserving Your Loss
A much more likely scenario for someone who has only been paying premiums for a few years and now realizes they bought a “pig in a poke”, is that you are way underwater on your “investment” at this point. Perhaps you've been paying premiums of $20,000 per year for five years, and now have a cash value of $75,000. You could just surrender the policy, take your $75K to invest elsewhere, and consider the $25K a “stupid tax”. Or, you could have Uncle Sam share your pain a little bit.
Another Option If You Want to Get Rid of Your Whole Life Insurance
Yet another option is to just exchange that whole policy into a modified endowment contract. This can eliminate any need for you to make additional payments into the policy, a big reason why people want to dump their policies. Then you simply leave it alone until your death and have it be part of the inheritance you leave your heirs or your favorite charity. Note that if you go down this path, you can't use the cash value for a better use nor can you borrow against the policy later in life.
There are lots of options when you want to cancel your whole life insurance policy. Spend time evaluating them or you may make another mistake almost as big as the one that got you into this mess. But quit beating yourself up about your decision to buy it; many of us have done that.
What do you think? Have you had this dilemma? Did you cancel your whole life insurance policy or keep it? Comment below!
Hi WCI,
Thank you for all the insight. I have a WL policy w/ Mass Mutual I’ve been paying $630/month for about a 500k death benefit. My cash value is about $17k. The most recent dividend was about $880. I realize that I do not need the policy anymore as i do not have dependents and my folks are retired. So I’ve had the policy since 2012 and at that point my premium was $350/month. I bought additional about year and half ago after switching to Mass Mutual to bring it up to $630/month. (This was a BIG MISTAKE I feel)
My question is how do I determine my total basis as I originally had the policy with NWML and was convinced to switch over Mass Mutual via a 1035 exchange?
If i convert to a Vanguard VA, is there a way for me to know my basis somehow so I can keep track of when i can surrender the VA? Or is it better to just take the cash value and surrender the policy? Any hidden costs to just cancelling the policy?
With the cash, I would invest it in a Vanguard taxable account or a Vanguard VA as you mentioned.
Thanks,
Brian
Add up all the premiums paid. Voila. That’s your basis.
Would I bother with the VA? I probably wouldn’t for a loss less than $10K. No hidden costs, you just lose potential tax free growth back to basis.
Thx for the quick reply. I’ve paid total premiums of $36k and my cash value is $17k since 2011. So its a -50% loss straight up (not taking the opportunity cost into account)…Unbelievable. I made a stupid decision.
I do not have any outstanding loans on the policy or any debt. I’ve been paying my premiums on time so the policy in in full force.
Any idea on what the surrender fees? Or do I just surrender the policy and get a check for $17k and pay taxes on the gains?
Thanks!
Probably not additional fees. Yes, that may be worth the VA exchange thing for that big loss. Sorry to hear it.
WCI, thanks in advance for the fantastic website and for providing insight into a financial vehicle that I think is purposefully difficult to understand.
My wife and I currently hold two WL policies from NWM, bought primarily because I was convinced that once I maxed out my 401k, IRA and deferred comp plans (all achieved), these would represent a good additional avenue to “invest” on a tax-deferred basis. 5 years in, the policies are woefully underwater and I have the strong sentiment that these monthly premiums should be invested elsewhere–really anywhere else but here. I consider myself to be pretty financially savvy in all other aspects of my portfolio, but this was a definite miss on my part.
I am 43 years old, my wife 39. No children or dependents, none planned. All in good health with other term policies in place with NWM. Total outlay for both WL policies is about $1200/month.
Policy 1: (5 years in)
Cash Value: $21.8k
Cost Basis: $32.1k
Current potential loss of $$10.3k
Policy 2: (2 years in)
Cash Value: $8.1k
Cost Basis: $16.1k
Current potential loss of $8,017.
I have major problems with many aspects of these policies and am trying to figure out what the best path forward is. Reading above, it appears that I can no longer take the $18k loss against my taxes due to changes in the law, so this would be a significant hit to accept. Understood that I could move the cash value of both policies to a VA via a 1035 exchange, but it’s unclear to me if this is even worth doing at this point, as there is no profit that I am looking to avoid taxes on.
I am taking up all of this with my NWM rep as well, but I have read that suspending the premiums is a possibility.
I’d be interested in hearing a clear take on what my options really are at this point, including staying in the game until the policies break even, which would be at least another 5-7 years.
Thank you in advance.
There’s nothing potential about those losses. They’re very real. You’re five years in with a loss of – 1/3. If it makes you feel any better, I had the same experience.
This post was written to answer your question. I wouldn’t bother talking to the agent. Why would you take advice from someone who already gave you bad advice?
Your option is surrender it and move on. Move it to a VA and wait for the VA to grow back to basis tax-free. Quit making payments and let the cash value of the policy buy the insurance (probably a bad idea). Or decrease the size of the policy in some way and then use the cash value to pay the premiums etc. But with only $18K in losses, I would probably just get term in place and surrender them and never talk to the agent again. Maybe I’d send him hate mail and tell him to quit hurting his clients.
Appreciate the honest feedback. Complication is that the agent is a 20+ year friend, so I’ve spent a lot of time trying to figure out how this “product” is actually viable outside of a tiny population of investors and why it was recommended, besides the obvious answer regarding commissions.
I am working with my CPA now to determine the viability of deducting the $18k from my taxes if the funds are moved to a VA and then the VA is closed, per discussions in countless previous posts. I know literally zero about VAs in general, so I’d have to learn more before deciding to keep money there for the long term.
I already have another $2M in term insurance with NWM, so no further action would be required there unless I was pulling all policies from them.
Appreciate your insights, thanks again.
If it makes you feel better, your friend probably thinks he did you a favor because that’s what his company taught him. It was a really good friend who sold me my NML whole life policy too.
You can no longer deduct the loss. Sorry. That option is now gone.
You should probably shop the term policy too. NML is rarely competitive there.
Interesting. I was aware that there were limitations in how the deduction could be taken, but the option is now completely off the table? Rough stuff. Do you have info regarding when IRS rules changed in that front, just for my file? My accountant can at least get a laugh out of my misery.
Sounds like the only thing to do now is to give it to a Vanguard VA and grow it back to basis, however long that might take. Or accept the terms of the WL and commit to the long term with the deal. Terrible.
Again, appreciate you taking the time.
Yes, discussed above and I believe the article was addended to reflect that fact.
Or just walk away as a third option. Seriously, that’s what I would do in this case. Lots of docs have made more expensive mistakes.
Ah, I see the article update now, thanks for that. One last thing—I am assuming that heavy surrender penalties would give you pause in taking action at this point? Seems like I would have to take a hard look at liquidation if the loss was approaching 50% or more based on these kind of fees. Although the only option at that point would be to do the math to figure out where the actual break even against those fees would happen.
Just speculation, don’t know yet if penalties would apply.
Thanks again.
I think the surrender penalties are baked in to the cash value already aren’t they? You sound like you’re leaning toward the classic behavioral mistake of trying to get back to even before selling even if it is a bad investment you don’t like. That’s all water under the bridge. Move forward based only on forward projections. If you’re happy with your expected return going forward, then keep it. If not, then surrender, lick your wounds, and move on.
Thanks again for the feedback and insights. No decisions made yet and understand your point about getting to even. Appreciate you taking the time.
Dear WCI,
Thank you for all of your informative posts. Unfortunately, I found your site more than a decade after my parents purchased a large whole-life insurance policy for me, and I’m not too excited about continuing the premium payments, but I understand than when you are this deep in the policy the decision to drop it can be complex. Can you recommend any trustworthy financial advisors who specialize in impartially analyzing these policies and who could help me reach a decision on what to do with the policy?
Thanks.
I only know one person who specializes in that–James Hunt. Evaluatelifeinsurance.org.
But most good financial advisors can help. https://www.whitecoatinvestor.com/financial-advisors/
You can take a stab at it yourself: https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
hi WCI, love love your website and bought your bought and read it in one long flight home. I went from finance ignorant (while holding a ph.d in economist) to finance savvy in the last two month and your website is the one that started it all! I feel like I owe you a huge thanks financially and mentally, and emotionally (see below).
Like many folks above, I bought a VUL from a “friend” (honestly, I’m erasing this person from my contact list) thinking that I got a sophisticated financial product. I don’t really need the insurance part (have it from my employer), but rather the investment part.
In two years, I put down 140k for a $2M insurance (since the friend says that 1M won’t give me enough cash portion for investment). now the surrender value is about 110k. after reading all, I’ve decided to transfer it into VA by 1035. Originally i thought about going with Vanguard (which I just opened an account and transferred half of my cash for index funds) Vanguard for the VA. But upon reading on their website, their annuity portion will be transferred and managed to Transamerica, the company that I have the VUL. So.. that was a big oh no, i have nightmare of this place.
so what other VA companies have low fee and good investment options?
thanks again for the great work!!!
You’re welcome.
You might consider Jefferson National. But there aren’t really any “low cost” VAs, just lower cost.
Thanks. According to their website they only charge 20 per month flat fee. That’s substantially lower than 0.25% of fidelity. Could this be true? I’m skeptical to anything too good to be true now.
My recollection is there is another fee, but I haven’t looked in a while. I think they at least used to be significantly more expensive than Vanguard, although still cheaper than most.
Ok will check
Just realised that I missed one factor into this, tax consideration. I’m non US, currently living abroad (aka non resident alien tax status). I’m not sure if I’ll be back in the next 5 years or not. What I know is as long as I am non resident alien, I don’t pay taxes on capital gains.
If that’s the case, the benefit from transferring the policy to a VA is not longer valid. Am I right?
If so, should I still do so and sacrifice some of returns compared to a taxable account as a insurance? In case I come back in the near future and will be subject to capital gain taxes?
From what I’ve read on the web, Fidelity’s product looks decent: https://www.fidelity.com/annuities/FPRA-variable-annuity/overview
0.25% annual fee for <$1M, 0.1% for $1M+
We are all a bit spoiled by the few basis point fees on modern passive funds, but that's honestly not that bad.
As a side note, I've wondered whether Fidelity's VA could make sense for regular investors in high-tax states due to the fully tax-deferred growth. A typical passive stock fund yielding 2% could lose 2% x 30% = 0.6% or more to taxes each year, compared to 0.1-0.25% fee. Yes, withdrawals are taxed as ordinary income, and there's no step-up in basis at death, but for those planning to spend the money in retirement, and retire in a low tax bracket, it could make sense. Maybe some asset protection benefits too. Worth running the numbers, at least.
I have no relationship with Fidelity (not even a customer).
I agree. Those don’t look too bad at all if those are the all in fees. They might even be cheaper than the Vanguard ones were. My recollection is they were about 0.6%.
If you run the numbers on that scenario, you will likely find that it starts working out in your favor to use an annuity after a few decades. It just takes a long time for the tax protected growth to overcome the additional costs and the difference between capital gains rates and ordinary income tax rates. If Congress eliminates capital gains taxes though, then it wouldn’t take very long at all!
If I recall, Vanguard was a 0.5%/year annual flat fee, plus you had to use their “investor class” (or whatever their lowest class of fund was) shares, which added another ~0.1%. I bet that’s there the 0.6% is coming from.
I assumed that Fidelity would let you use their Zero funds inside their VA, but exploring their website, it looks like that’s not the case. The lowest-fee funds you can use are their “VIP” funds (never heard of these before), which have some active options, and their passive funds have ERs in the 0.1-0.15% range. So you’re looking at 0.35-0.4% total for $1M. Not fantastic but not terrible. Could be a good place to hold bonds outside retirement accounts, especially if/when yields rise.
If my cost basis is 40k and my cash surrender value is 12k, how long do you estimate it would take for a variable annuity to gain back the loss?
I am not familiar with variable annuity, any advice on funds?
Well…if you invest it in all stocks and get a 7.2% return, your money will double every decade. So a little less than 20 years seems a reasonable guess.
Hi, I have a question not sure if you will know the answer but I thought I’ll ask anyway. I was a NM agent for over 6 months. 5 months ago I bought a policy for my husband. Over $16k per year. After I saw all the dark sides I couldn’t stay anymore at the company and didn’t want to work there. Neither we cannot afford to pay that policy anymore so we let it laps it. Now they want the commission I received for it back, even if I don’t work there anymore. Is this lawful? :/ thanks!
Hi Sasha.
Commissions would typically be paid out in a lump….annualized for the agent even if paying with monthly premiums.
Dropping the plan before the year is up would mean that commissions that were advanced to you have to get paid back. No clue how this would be handled but I suppose it can effect your ability to work at another insurance company. If you plan to not get appointed at other insurance companies I am not sure what can be done. No fun. Sorry you have to deal with that.
It is nothing that NML did wrong in this case. They advance paid the commissions. Premiums stop and commissions are not earned on that monthly basis so that is the basis to the issue.
Hope you can figure it out.
Happy holidays.
I’m interested to know what are the consequences to the agent who sold me the policy once I cancel it. I wish there is some monetary and reputation cost to him too.
Depends on how fast you dump it. He may lose some residual commissions. Plus he isn’t getting any referrals from you because he didn’t treat you well. But you’re right that it’s pretty darn hard to sue him or something since he operates under the suitability standard instead of the fiduciary standard and, in the view of the law, it’s your fault you bought something you didn’t understand or actually want once you did.
I just spoke to Vanguard (we have some accounts there) and the representative told me they just recently stopped selling annuities. Any other companies? We have paid $30,120.40 in premiums in a WLI policy and have a cash surrender value of $26,168.90. Our premium is due in 12 days and I’d like to get out of this before then.
That’s unfortunate. I’m not sure I’d bother for $4K anyway, I’d probably walk away from that loss. But you might take a look at Jefferson National.
So, if we terminate policy, we don’t have to do anything else? We won’t pay taxes or anything…? We just lose the $4K? At this point, I’m okay with that but just want to be sure there isn’t anything I’m missing.
Just make sure you have sufficient term life policy in lace before you surrender.
That’s correct, you’re just out the $4K. And yes, make sure the term policy is in place before surrendering.
what is a whole life legacy 20 pay policy?
20 pay means you only pay on it for 20 years. Kind of like 7 pay and 10 pay policies discussed here:
https://www.whitecoatinvestor.com/friday-qa-what-about-10-pay-whole-life-insurance/
Legacy is just marketing.
WCI- First of all Thank you for creating this forum and to people who have posted their stories. Extremely helpful. I am also a victim of this. In 2014 i was sold a Guardian Whole life policy as a medium to stack extra money and create wealth long term.
So far my for my policy No.1- started 2014
Cost basis 91K
Cash Surrender is 71K – Loan of 5K. So available cash is 64K if i surrender.
Policy No.2 – started 2017
Cash basis 20K
Cash Surrender – 13.5K
My total Cash surrender will be (77.5K) from my Cash Basis (111K) which gets me to a net loss of ~33.5K. I have stopped the payment to prevent further loss. Its is better to take a hit now than to keep bleeding more. I am single and no dependents. Just a home mortgage
Now i can rollover with 1035 exchange to a point where i can bring my cash surrender to cash basis (approx 5-6 years) and remove tax free at break even point. I already have a VA created with Lincoln which guarantees me 5% annual Income benefit and if the market goes more than 5%, i’ll get the higher %. The cost is however 3% of the income, which was created by the same Advisor who suggested me Whole life insurance. (trying to suppress the anger ) Should i keep it there or rollover to another VA with a better option. Also, Vanguard is shut, so any ideas on low cost VA’s?
ON the Flipside, If i do not rollover with 1035 exchange, cash out and take the loss, and invest all in an Index fund, where an average RoR is 10-12%, would that be considered a better alternative? I will obviously have capital gains but will have total control over my money with not worrying about surrender charge and fees.
I am burned out with what options are the optimum. i would really appreciate your $0.02 on it
That’s not a VA, it’s some kind of index linked annuity product which probably sucks. Why in the world would you buy something else from the same guy who sold you such a crappy WL policy?
If you must buy yet another VA, you can look at Jefferson National. Or you can just take your money, whatever is left after paying this guys two commissions, and go. But stop talking to whoever you’ve been getting advice from and get some real advice from a real advisor like one of these guys:
https://www.whitecoatinvestor.com/financial-advisors/
Thanks. It is Lincoln LVIP Global Moderate Allocation Managed Risk fund. Can these VA’s be moved to another VA or ROTH IRAs ?
Yes, to another VA, but not a Roth IRA.
Looks like it actually is a VA, but with crazy high fees:
Annual Fund Operating Expenses(Expenses that you pay each year as a percentage of the value of your investment)StandardClassManagement Fee0.25%Distribution and/or Service (12b-1) feesNoneOther Expenses5.75%Acquired Fund Fees and Expenses (AFFE)0.08%Total Annual Fund Operating Expenses(including AFFE)16.08%Less Fee Waiver and Expense Reimbursement2(5.81%)Total Annual Fund Operating Expenses (After Fee Waiver/Expense Reimbursement)0.27%
https://hosted.rightprospectus.com/LFG/lvip/Fund.aspx?pid=32589&dt=SP&gid=1
Why not switch to this one?
https://hosted.rightprospectus.com/LFG/lvip/Fund.aspx?pid=28203&dt=SP&gid=1
Then you can keep the same VA but have a better investment. Then surrender the whole thing when it grows back to basis.
I don’t see the “guarantee” you’re talking about. I’m not sure you understand what you have bought.
I really appreciate your help on this. This is eye opening and you are helping alot of people from hardships. You are right. I didn’t really pay attention when the advisers made me sign as my work travels were insane. I should have done my due diligence but better late than never.
One last concern. I am already in LOSS by $33K. How does it make sense to rollover the cash surrender from WL to a VA as compared to investing that money separately in may be index funds etc. Wont the RoR With index funds be better as compared to VA? Also even though i am doing 1035 exchange, they will only transfer the cash surrender value to VA and there will be surrender charge and 10% penalty once i surrender ?
Please correct me if i am wrong.
Thanks again for your inputs
The only benefit of a rollover to a VA is to allow you to get tax-free growth back to basis.
Depends on the asset class as to whether you do better with not paying VA fees and paying a bit more in taxes. For tax inefficient asset classes, the VA can be better. But for a Total Stock Market fund? Probably not.
Yes, many annuities have surrender charges.
I wanted to thank Dr. Dahle and everyone else at the WCI forums for the excellent education I’m receiving. I’m in the same boat as many with a NWM 65 Life policy that I have had for 3 1/2 years (Sept 2016). It is a $500,000 policy, with a monthly payment of $992. I have paid $38,000 into it, and it has a cash value of $20,000. I want to dump it, but don’t know if I should just eat the losses and pay the “stupid tax”, or convert it into a variable annuity. I have my 401K and Roth IRA fully funded each year, and my student loans are slowly being paid at an extremely low interest rate. I’m leaning towards the annuity as I don’t have to use the money now, and am okay just letting it sit. What annuity should I use as Vanguard is not an option anymore? And once you pick one, do you just have the financial institution that you are getting the annuity from make the transfer from NWM?
Thanks for all your help
There’s no right answer to this question. I wish there were a formula to plug in. Basically, you get $18,000 in tax free growth. So that saves you perhaps $6000 in taxes. But you lose some of that in additional fees you pay in the VA compared to a taxable account if you’re investing in something really tax efficient. But if you’re investing in REITs or something less tax efficient, then perhaps you shouldn’t include that in your calculation. With Vanguard no longer offering VAs, the cost to get a VA is now significantly higher too.
At any rate, if the hassle of a VA isn’t worth up to $6K over two or three years to you, then just surrender it. If it is, then go get yourself a VA.
You might try Jefferson National. And yes, they should be able to help with the 1035 exchange.
Can anyone confirm if James Hunt of https://evaluatelifeinsurance.org/ is still offering this service…? I don’t really see any listed way on the website to contact or engage his services. Does anyone know of someone offering similar services to evaluate whole life policies?
Yes – I used his services to evaluate my options for getting rid of a whole life policy. He is very good
[email protected]
No, I don’t know anyone else. I think he’s still doing these evaluations.
Help with understanding in-force illustration.
My wife has been in this NWM whole life policy for 5 or 6 years. Annual payment is a little shy of 12k. Insurance is for 1 million.
Summary of IFI says:
2019 Payment: $11,437
2020 Cash value increase: $10,382 (non-guaranteed).
Assuming the 2020 value increase turns out to be correct, wouldn’t she being effectively paying a 1 million life insurance a little more than $1,000 ?
At this point, isn’t that competitive with a term life insurance ? I mean, probably about double at her age, but it would not have a fixed term. I call it a wash.
Looking at the year-by-year table, 2020 guaranteed value increase is $9,000, which would double the cost of this insurance, making it definitely less appealing.
Not sure what the guaranteed vs. non-guaranteed amounts depend on.
Anyway, is the above point of view flawed ? We are evaluating whether cashing in or continue the policy. Present cash value is a little more than 40k, which is not a life-changer for us.
Thanks for any help and advice
No. She’s paying a $1M life insurance policy with $1,000 + the earnings on the current cash value. But if you understand what you bought and you like it, then keep it.
I don’t think you understand what you bought though based on your comment. A guaranteed value increase is a cash value increase, not a cost of insurance.
Yes, your point of view is flawed.
Do you want/need a life long life insurance policy? If not, do you have a better use for $12K/year?
I mean, she can probably get a 20-year term life insurance for ~$600/yr.
With the WLI she pays $11,400/yr. but its redemption value increases $10,300.
I get your point that also return on present cash value should be factored in. However market returns are likely to be muted (to use a euphemism) going forward.
Of course, one could say pay $600 for the term insurance and invest the other $10,800.
But, the WLI has the following advantages:
– does not automatically expire after 20 years.
– after another 7 years the guaranteed cash value will increase more than the annual cost
– already 2 years from now the projected, not guaranteed, cash value would increase more than the annual cost.
– insurance payout increases year over year.
What I’m trying to check is if at this point we are already at a stage when it is more advantageous to hold the WLI, rather than cashing out. I’m fully aware that in order to get to this point she paid a lot in the previous years. However those payments are already done; there is no way back.
You sound like you’re trying to talk yourself into keeping it without actually running the numbers. Why don’t you run the numbers, decide if that return is good enough for you, and then make a decision.
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
I was in the same boat with years and numbers as same as you. after running the numbers, it makes sense to cash out and take a loss now instead of bleeding for another 4-5 years. The money which you will cash out can be invested somewhere for much better returns for 4-5 years
I haven’t heard the numbers that matter yet. i.e. What is your return going forward for the next 10, 20, 30 years on the guaranteed and projected scales? Those are the numbers you need to make a decision and compare to your alternative uses of money.
That’s not an easy number to calculate.
Conceptually:
– take todays cash value: $42,382
– add yearly contribution: +$11,437 = $53,819
Compare to next year
– Guaranteed cash value: $51,847
– Plus chance of death times insurance amount of $1,100,666 x 0.11% = $1,211
Total: $53,058
So it looks like she loses $761 plus return on capital ($422 on 1-year treasury, after taxes).
This number is a little deceiving for the following reasons:
a) We could use projected cash value, which is $1,610 higher. What are the chances of actually achieving that return ? Not easy to answer.
b) I have compared to safe return from 1-year treasury, but we could invest capital in the stock market. Expected return would be higher than 1.30%, but at this point we would be comparing guaranteed dollars vs. volatile returns. I could have used a 2.1% Ally CD, but the difference is small potatoes (less than $200).
c) We are neglecting the fact that by staying in the insurance we get the option to carry it many years in the future, when chance of death will be very elevated and that part of return will dominate anything else. For instance, the odds of dying within the year for an 88yo woman are 10%, which would mean an expected return from insurance value of $110,000 for the year. Unfortunately my wife is 37, not 88, but it is bad accounting to ignore accruing insurance value.
Anyway, lengthy reply to show you that, while I have little doubts that she made a bad choice 6 years ago, after an “entrance fee” of $65k has already been paid and is not coming back (or, more accurately, only $42k would be coming back), I believe we are already at a stage were it is not a foregone conclusion whether to stay or cash out. This, even more so in the present environment of likely muted market returns for an extended period.
Yet, I could have made some mistake in reasoning, or in calculations, so please correct me if I’m wrong. There is nothing I would like more than having a well definite answer.
I’d go ten years out, 20 years out, and 30 years out. Look at the guaranteed number. Look at the projected number. Do a RATE calculation on all six and decide if that’s good enough for you. If you value the insurance too, use a term quote from term4sale for that time period and add that in too.
I agree the decision to keep is different from the decision to buy.
Well, 10 years out I have the following estimates:
– Using guaranteed cash value: -0.5% average annual return rate
– Using guaranteed cash value and value of life insurance calculated as premium x chance of cashing: +1.4%
– Using projected cash value and value of insurance: +4.4%
I disagree that the value of a perpetual life insurance is equal to the value (actually, cost) of a term insurance over the same time period.
A perpetual life insurance will be cashed in at some point, so it is equivalent to a zero coupon the maturity of which we only know in statistical terms.
In fact. the formula I used in the above calculations understates the value of the insurance, but is still a decent starting point for an estimate.
Are the above returns competitive, or not ?
Of course, -0.5% is not.
1.4% guaranteed and after-tax over 10 years is not too shabby: 10 year T-note closed at 1.33% taxable today.
4.4% after-tax I’d take it in a hurry.
I’m still uncertain on what is behind reaching the projected value, or not.
The illustration only says “reflect current (2020 scale) claim, expense and investment experience and are not estimates or guarantees of future results”
and mentions a “8% loan provision” separately.
Of course, if that means it simply reflects the last few year returns on bonds, we can forget about continuing with the same kind of returns.
Can you shed some light on this ?
Shoot, if you’re happy with 4% you should put all your money into whole life insurance. You’ll probably get that over 50 years.
I’d expect your experience to be somewhere between the guaranteed scale and the projected scale if I were you. But if you’re happy with the guaranteed scale, go for it. I wouldn’t be. If I’m going to tie my money up for 5 or 6 decades, I want a whole lot more than 4% from it.
My wife has a whole life policy through Guardian which she has only been paying in to for ~17 months. Unfortunately the total premiums paid so far are $10k and the cash value is roughly $2k, so looking at an $8k loss. My plan is to surrender the policy and then invest the money in a tax advantaged retirement account (we do not currently max out all of our tax advantaged options). I feel this would be better than trying to do the 1035 exchange in to a VA at this point since the main benefit of the VA is the tax free growth back to basis. She also has student loans remaining, so we could throw the $2k at those. Any thoughts on this? Investing the cash value into a tax advantaged retirement account looks especially good right now as the market is “on sale” and we are young (28 & 30 y/o).
This website has been a huge help as I’ve learned about the vastly better uses for our money than this whole life policy. You can add to your records another account of a doc being sold a whole life policy while still carrying significant student loan debt. Thankfully we will have this corrected soon!
Uhhh…..that sucks. Practically malpractice to sell someone with student loans whole life insurance in my opinion.
If I do a 1035 exchange of my WLI policy to a variable annuity, do I need to continue to pay them premiums? Are their policies where I can simply change over to their VA, invest and let it grow back to basis without premiums?
My friend recommended this site after I told him my wife and I both have whole life policies with Northwestern Mutual. They call them “20 PAY Life”. We have had them for 6 years. We have some cash value build up in both policies. After reading some articles on this site I see what a nightmare they are and want to get out ASAP. We both pay an annual premium that is due in a couple weeks. I would like to dump these and use the cash value to fund 2 backdoors Roth’s and/or an individual 401k through my LLC for tax year 2019 if possible. Does anyone have recommendations on how I should start this process and what steps I should take? If you need further details please let me know.
Thanks, Brian
If you are already decided that you are going to dump them, you’re probably pretty close to even so no point in messing around with a 1035 exchange to a VA. Just get term insurance in place, call up Northwestern, surrender the policies, and have them send you any cash value you have as a check. Easy peasy.
If you’re not yet decided, run the numbers and make a decision.
Thank you for the replies. I am not close to even. When I said I wanted to dump them I just assumed it was a good move even though I am going to lose a good amount that I have paid in premiums. I should have included more specific details on my situation…so here they are.
I have a “20 PAY Life” policy with Northwestern Mutual. The death benefit is 250K. It started in 2014 and I have and annulaized premium of $6,423.36 and a current cash value of $26,381.15.
I have read on your site about moving to a Vanguard VA. Would it make sense to do that or transfer to a 1035?
I also have 2M in term like with them at $1,548.24 a year premium.
6 years into it and still quite underwater. Unfortunate.
Vanguard no longer offers a VA unfortunately, and the next best alternatives are significantly more expensive. But you only have a $10K loss or so, perhaps not worth trying to preserve. Since you have term in place, why not just surrender the policy, get the cash value, and invest it as per your written financial plan?
I would like to second the advice from WCI. If you need life insurance, be sure to have term life insurance firmly in place prior to canceling your 20-pay policies.
I wonder if COVID-19 will have any impact of approval of new life insurance coverage?
I wouldn’t think so, but who knows?
Thanks for this site doc. I purchased NWM WL in 2009 (at age 42), total death benefit $520k, annual premium $9900. Paid $109k into the policy so far, total accumulated value $124k, taxable income if surrendered $15k. Term insurance in place (since 2009). The premium is now burdensome due to life changes (long expensive divorce in-progress, credit card maxed out) thus 401k no longer maxed, have never done a backdoor Roth, etc. I’d like to surrender/cash out the policy to pay off above debts and invest the rest. This seems to make sense after reading your books and blogs. Given the above, is there any reason to NOT cash out the policy as above? Appreciate your time and expertise, thanks again.
I’d still run the numbers, but I bet you still surrender even after 11 years given the life changes.
Much appreciated and thank you again. Will surrender the policy. Although it’s the right thing to do it is not an easy decision, and the underlying ‘psychology’ that makes it difficult to walk away when there is time and money invested is an interesting one.
I have had a WL policy for 4 years and I am paying $1000/mo w/ net surrender value of $16,500. Per my insurance agent it will take 4 more years and 48k more to break even and walk away. From my understanding your advice would be to do a 1035 conversion to VA. I am 30 years old and was reading about 10% penalties if you withdraw before age 59 1/2. What are your thoughts on WL to VA at my age? Would another option be to lower my premium and ride it out a few more years to break even quicker than a VA would break even? I do realize staying in the WL does not allow me to make use/invest the premiums elsewhere during this time 🙁
Thank you for all your advice!
There’s only a penalty on gains. Until you get back to what you paid in whole life premiums, there are no gains to pay a penalty or taxes on.
You really want to put $48K more into this thing? What would happen if you took that $48K plus your $16,500 and let it ride for another 4 years? If you think you can beat the guaranteed scale on your WL policy, then surrender it and invest the money. If not, then keep it.
Can anyone advise please, I think we are about to pay a lot of “stupid tax”
My father bought a Northwestern Mutual Policy in his name many years ago. I signed anything or agreed to take it over, but from what I understand, you do not need to, to be responsible for it. It seems that the policy has been loaning itself money to pay premiums for years. The most recent statement says that it has an Accumulated Value of $27,402, cost basis of $7,075 and a taxable gain if surrendered of $20,327. Although the tax gain is over $20k, the actual surrender value is $3k. Calling the company, they suggest paying $1200 per year forever, in order to gain a death benefit of $24k, which does not make sense at all to me. I realize that this has not been correctly handled by me, as it was never something I signed up for,or wanted, but can you advise a way to shut the door on this without receiving a tax bill on money I have never received?
Thanks
If you don’t own the policy, you don’t own the policy. But if your dad gave it to you, you just received a git of $27K and only owe taxes on $20K. Say “Thank you!” even if you turn around and surrender it.
However, that isn’t what you got. You got a “gift” of $3K that comes with a tax bill of something like $4K. Does your dad not like you?
I’d ask him to pony up the tax bill in excess of the value at a minimum if you have a good relationship with him. If you don’t, I’d refuse the gift.
Since Vanguard did away with their low cost variable annuity is Fidelity considered the best option for 1035 exchange?
I don’t know that there is nearly as good of an option out there now, but you might consider Jefferson National.
Jim, thank you for the quick response. Other than comparing fees, what else should I be looking for when researching the annuities? The purpose is to surrender a VUL into an annuity and I don’t want to end up with a worse product than the VUL itself.
With a variable annuity, you’re basically looking at fees and available investments. If one of those isn’t very good, I might skip this thing entirely and just surrender it and eat the loss. How big is your loss? Is it really worth the hassle?
I contributed $72,000 per year for 5 years ($360,000 total). Cash value is about $290,000. With $30,000 surrender fee. Ugghhh…
I’m sorry. Sounds large enough that I would probably deal with the hassle of a VA to get $70K in tax-free growth from it.
I am about 7 years in to my Index Universal Life policy and thankfully I didn’t contribute a whole lot to the policy until now. I would like to understand what my options are here.
Premiums Paid till date: $8400
Cash Value: $4600
Cash Surrender Value: $0
I was under the assumption I could take a loan on the cash value of the policy, but was told that is not possible due to the cash surrender value being $0. Is that correct?
Am I able to do the 1035 exchange into a VA with the Cash Value even though the Cash Surrender value is currently $0? Or is there any other option to get the cash value of $4600 from the policy? Or is my only option to lose all the premiums paid $8400 if I stop the policy now?
The other option I am considering is contributing until my Cash Surrender value is equal to the premiums paid into this policy, breaking even, minus the inflation loss. In this situation, I would not be taxed or penalized on the Cash Surrender value, would I?
Thankfully I have not contributed a whole lot of money to this policy, but I would like to maximize what I can here.
I don’t think a cash value of $4600 has any meaning if your cash surrender value is $0. Basically, you’ve paid $8400 and lost it all if you walk away right now. That’s an infinitely negative return on that “investment.”
Yes, you could do the exchange, but not sure I’d bother just for a loss of $8400.
Don’t fall for the sunk cost fallacy and remember that just because it is psychologically less painful to say you got your money back, it doesn’t mean you did the right thing.
I’m also happy you didn’t buy a very big policy. Lots of docs did and have the same return you have.
Hello! I’ve spent the last few hours reading through NWM Whole Life comments and needless to say, I regret my decision to purchase. After growing my annual compensation to the point where I could max out my 401K contribution, Back-Door Roth IRA contribution, and investing into the market with monthly savings after setting aside emergency funds, I sought professional advice on another way to “smartly” save for the future in a tax efficient way. Unfortunately, I didn’t trust my gut and purchased a NWM Whole Life policy under the guise of “contribute now, see the big benefits years later”. No kid plans or big purchases coming up – if I canceled the policy, I would push the current monthly payment into the market for future purchases.
Looking for your advice on whether to exit the policy & take my loss or invest into a Jefferson National VA through a 1035 exchange. And even if I should stay in the policy until I break even in 13 years (based on the Accumulated Value forecast – which in hindsight was a bad deal)
Details: Whole Life Plus 100 – started at age 32
Purchased = Late September 2019
Annual Premium = $20.7K
Net Accumulated Value = $3.7K
Last Annual Dividend = $0
Thank you in advance for your help, greatly appreciated!
No point in staying now if you don’t want to hold it for life.
If I were going to buy a whole life policy, it wouldn’t be that one.
$17K loss….could be worth the annuity hassle. Is it worth dealing with an annuity for 2 or 3 decades to save something like $4K in taxes? I would probably pass and just chalk that $17K loss up to, in the words of Dave Ramsey, “Stupid Tax.” Sorry, I paid my own years ago.
Hi – Thank you for the response. Hard pill to swallow but maybe the wake up call I needed to start taking more control of my finances versus relying on other “professionals”. If you were to be in a whole life policy, would you expect year 1 cash value to be above 50% of premium? And would it be fair to say you also recommend staying clear of advisors charging 1.3% of portfolio fees?
You can certainly buy policies that will be above 50% after 1 year.
No, I would not hire an advisor charging 1.3% when there are so many good ones charging less.
Help! I’ve been suckered into a WLI policy and I want out. I’ve also stupidly gotten my rollover IRA and Roth IRA in variable annuities. I want to get them both out of these terrible investments. Please someone advise how I can take back control of my money?!!
Start from your desired end and work backward. Are you planning on using an advisor? If so, take all this to the advisor and have them sort it out for you. That’s what you pay them for. No advisor? Then where are you going to custodian the money? Vanguard? Start there opening accounts. Whole life can just be surrendered and then the money reinvested. As far as the annuities, they could also be surrendered and reinvested inside the retirement accounts.