by Guest » Mon Oct 05, 2009 09:20 pm
I know this is not a new subject here, but I really haven't seen anything specific enough to my situation to help. I'm 50 and my dad took out a whole life policy on me about 25+ years ago. The policy has paid for itself for a long time. The cash value is about $30,000 at this point and it supposedly pays around 8%. My mother is listed as the owner, but she would give the policy cash to me or share or whatever. That's not really a concern. A couple of years ago I was unemployed and needed some cash, so she took out about a $5000 loan. What I'm seeing now is that on the anniversary of that loan this year I had to pay roughly $750 in interest after all was said and done. I'm trying to figure out if it makes any sense at all to either pay back the loan or continue to pay yearly interest (and for how long). I realize that a whole life policy shouldn't be used as an investment, but I already have it, so it's not a question of getting a new policy. What I have told my mother is that the policy won't do anyone any good unless it's cashed out at some point, because I don't really need life insurance. I have no dependants I have to be insured for. Sure, it would be wonderful for my mother to have an extra $100,000 if I died, but like I told her, we just have to assume that I will outlive her (and I realize that may not happen). For all practical purposes, it would need to be cashed out at some point to do me or her any good. I know that when she has mentioned it to the insurance agent, who has been a family friend for many years, he tells her that nothing these days pays out 8%, blah, blah, blah. I know that he wouldn't flat out lie to her, but I also know that it's in his best interest to keep the policy in effect. When I look at the sheet of projected cash values (that was printed 25-ish years ago) of the policy, it looks enticing, but somehow I just don't think it makes sense to keep the policy forever. Also, I can get $100,000 of life insurance through my job for very little money. Can anyone clarify this for me? I really need a good reason to either pay back the $5000 or to continue to pay the interest (apparently also 8%) yearly. Sorry this was so long. Thanks bunches in advance.
Posted: Wed Oct 07, 2009 01:59 am Post Subject:
Talk to the agent. He knows the ins and outs of the particular product. At this point, he doesn't really have any stake in the policy being kept or dropped.
Posted: Wed Oct 07, 2009 09:32 am Post Subject:
You may cash it out at any point of time. You may ask your agent about the benefit of paying back the loan. But, I don't see any reason why you should continue paying this yearly interest.
Posted: Thu Oct 29, 2009 05:21 pm Post Subject:
Thanks for the opinions. I haven't replied until now because I thought maybe someone who had dealt with a similar situation might come along. I didn't realize the agent no longer had a stake in the policy, though.
Posted: Wed Nov 04, 2009 04:26 am Post Subject:
Ok, first let's fully understand the mechanics of whole life insurance. It is a return of premium product meaning the premiums you pay you can have back at a guranteed interest rate plus a dividend if it's a participating policy.
This means you do not need to die, or cash the policy in to take advantage of it's ability to accumulate value.
You can access cash values in two ways, either a direct withdrawal, or a policy loan. A wise approach involves both. Withdrawing money to your basis--because life insurance has a first in first out (fifo) tax treatment meaning you can access every dollar you put in first and it is accordingly not taxable--and then taking policy loans--drawn against remaining cash value that if accessed otherwise would be a taxable distribution.
When taking a loan against the policy you are the lender and the borrower. You can choose to let the loan remain outstanding or repay the money...to yourself, INCLUDING the interest. This means the interest that you are currently paying is going back into the cash value of the policy, if you repay the loan that too will go back into the cash value and be credited just like the interest you are currently paying back into the policy and the cash that currently sits there.
On a whole life policy the only payment you can make that is an expense for which you will receive no cash is a rider, e.g. waiver or premium, increase option, yearly renewable term insurance, etc.
So you have a $30,000 position that receives a favorable interest rate that will rise if interest rates rise--the cash component of a whole life policy sits in the insurance company's general account, which is 90+ percent bonds (viz. interest sensitive investments). If you needed another 5000 dollar loan you could go to the bank and then make interest payments to them, or lend yourself the money and make interest payments to your self.
I would strongly caution you against dropping this policy. Your agent may or may not still have a financial interest in its remaining in force--it really depends on the company--but based on the size of the policy it's not a huge financial interest; I would tell you he's simply guiding you in the right direction. However, if you came to me with this question I'd be less interested with the rate of return than I would be with the shear flexibility this policy provides you. Maybe you can get better than 8% maybe you can't I've never found a crystal ball that gave me an answer. Here's what I do know. No financial product has as high a risk adjusted rate of return as participating whole life insurance, and no other financial product offers anywhere near the number of guarantees.
I'd be happy to entertain any follow up questions or points of clarification.
Posted: Wed Nov 04, 2009 04:27 am Post Subject:
post deleted by moderator as duplicate post
Posted: Fri Nov 06, 2009 07:42 am Post Subject:
I very much appreciate your well thought out response, anonymous34, even though some of it goes right over my head. You seem to know what you're talking about and seem to see at least some merit in this type of policy. I guess my main confusion at this point is just what does a person with no dependents do with a policy like this in the long term. Does he or she hang onto it until retirement? Until Social Security goes broke? Until his 75th birthday? Understand what I mean? I will be rereading your post, by the way. :)
Posted: Sat Nov 07, 2009 03:55 am Post Subject:
I'm anonymous 34, decided to register.
In terms of how long to hold on to it...
There shouldn't be a reason you couldn't hold on to it forever.
With regards to asset accumulation you are working on that every time more money is credite to the policy AND every time you pay a premium--you are adding more money to the policy when you do that.
Once you've reached retirement you can set up systematic withdrawals and pull out a set amount each year to supplement income, or you could use it as a source of money for things like vacations, major purchases, emergencies, etc.
At this point the policy should be self sustaining meaning the increase in cash plus dividends paid every year will take care of the premium required. It's also possible you could reduce pay up the policy, which require no additional premiums--this is dependent on the company some will allow you to do this whenever, some require a decision be made at policy issue and then there is no way to change or stop it.
I know it's hard to conceptualize, but the policy you have can pay for itself AND provide you with extra cash or an income stream. This is why I'd say there's no need to ever actually "cash" it in.
It seems like a very counterintuitive claim. Insurance that not only can self fund itself, but also provide you with money, because--after all--insurance is supposed to be an expense. However, I think you are quickly learning that not all of it is.
Ultimately it will always depend on your unique situation and goals.
If just one thing can be learned from all this, the greatest take away in my opinion is that whole life insurance can be an asset class all on it's own. A wealth accumulation tool that has many great features not found in their entirety with any other asset. You may come to realy thank your father's decision to begin this policy all those years ago.
Usually I find the regrets most people have once they've discovered who this sort of thing really works is that they didn't undertsand this sooner, and that they didn't have more cash in it.
Keep this in mind...
You know what happened to the cash positions on all the whole life policies in the U.S. when the stock market went through its painful correction over this past year? They increased by at least their guaranteed rate and most if not all also received a dividend making the increase even better, assets that go up in a down market.
Posted: Mon Nov 09, 2009 03:33 am Post Subject:
Thanks, BNTRS. It's starting to make a bit more sense now. You sound like you know what you're talking about and I'm assuming that you do. I may just plan on paying the interest again this year and talking to the agent just to make sure he knows where I'm coming from. I guess I just always assumed that the agent would never tell anyone to cancel a policy no matter what. I appreciate the time you put into your answer. I'll still need to reread it before it sinks in, though.
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