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Inappropriate Whole Life Policy of the Week

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  • rxor49
    replied
    The $300/mo are what they call a "premium" but really they are voluntary contributions. It could just as easily be or $50 or $100 and the policy will continue to pay for itself out of the cash value. The $300/mo has nothing to do with what the policy is actually costing us. If you look at the screenshot I attached, the actual costs are:

    $147.10 "insurance cost" for the entire year - this is what I'm referring to as artificially low
    $1956.50 "other charges" for the year - this is where the problem is, and it's not clear what all these fees are really paying for

    Which was actually $175.30 per month over this 12 month period. I am well aware that is still more than the equivalent amount of term life, but that's not what I'm comparing here. I'm comparing the cost of of the surrender charge of >10k versus the cost of keeping it for 5 years, after which point the surrender charge will no longer apply.

    Edit: Also, when I say I am considering keeping this plan around, I don't mean in lieu of term life.

    Leave a comment:


  • VagabondMD
    replied





    Stop the bleeding. 
    Click to expand…


    That needs to be emphasized in bold. I don’t understand why I would continue to pay $300/mo for the next 5 years.

    Get some term then cancel the policy. If I read your post correctly, you didn’t even buy the policy (your in-laws did). I suppose you could get them to continue to pay the $300/mo (I don’t think this is a great idea though).

    When I told my parents years ago that I wasn’t taking over the whole life insurance policy that their financial advisor had them setup for me when I was an infant, they kept the money  ???? Was this supposed to be a financial gift from your in-laws?
    Click to expand...


    Totally agree. It's the classic "throwing good money after bad".

    Leave a comment:


  • ITEngineer
    replied


    Stop the bleeding.
    Click to expand...


    That needs to be emphasized in bold. I don't understand why I would continue to pay $300/mo for the next 5 years.

    Get some term then cancel the policy. If I read your post correctly, you didn't even buy the policy (your in-laws did). I suppose you could get them to continue to pay the $300/mo (I don't think this is a great idea though).

    When I told my parents years ago that I wasn't taking over the whole life insurance policy that their financial advisor had them setup for me when I was an infant, they kept the money   Was this supposed to be a financial gift from your in-laws?

    Leave a comment:


  • Zaphod
    replied




    WCI’s podcast inspired me to share our policy. I think highly unlikely we will keep the policy until death, but certain details are holding me back from canceling right away. Feedback is welcome.

    This is an AXA 900k variable life policy sold to my in laws for my wife back in 2013.
    Initially funded with a lump sum, then my wife has been paying $300/month into it since.
    The value of the account is tied to various diversified stock index funds. You can see in the attachment that stocks did quite well over this 12 month period.

    Total premiums paid (basis?) = $37,836.17
    Policy account value = $38,756.48
    Cash surrender value = $28,625.21 (after surrender charge)

    PROS:
    If you look at what they call “Insurance Costs” we are only paying $147.10 yearly for the $900k insurance, which is very cheap. However, I suspect this number is low artificially, and the real costs of insurance are tied into the other (very high) charges.
    After the plan’s 10 year anniversary, supposedly the surrender charge will hit $0 and we can access the entire policy account value.
    Also after the 10 year anniversary, the interest for loans against the policy decreases from 3% to 2%.

    CONS:
    As you can see, they skim 4% off the top every time money enters the account. Ouch.
    “Other Charges” are huge. You can see that they vary with the total account value, and roughly add up to 5% of account value per year.

    Assessment of options:
    1. Take the money out now. This would incur a >$10k surrender fee, and might have to do the switcheroo with a variable annuity to recoup losses.
    2. Take the money out in 2023 without surrender fee. This means 5 more years of charges (also around $10k), but has the benefit of 5 years of insurance coverage. If the value grows enough to keep up with the charges, maybe we can sell close to basis and not have to worry about losses. Regardless, I think we should stop paying into the plan and let it support itself.
    3. Keep paying into the policy and use it for infinite banking? No matter how many times I hear about this, I can’t quite wrap my head around how it works. If we take a loan against the policy, is the 2% interest going back into our policy value?
    Click to expand...


    I dont get it, this is still really terrible. The math is simple. 5 more years of charges at 300 a month is 18K. Time value of money (opportunity cost) and avoiding the fees and bs is all very worth it. This policy has barely kept afloat at neutral and its been in force literally during the best stock years ever.

    As for the insurance part, the 900k is crap. I have 3M term on me laddered at 2/20, 1/30 and 1/10 for my wife and I think we pay less than 2k per year. Term is very inexpensive. Stop the bleeding. The insurance cost for the 900k is not artificially low, your fees are artificially high.

    Leave a comment:


  • rxor49
    replied
    WCI's podcast inspired me to share our policy. I think highly unlikely we will keep the policy until death, but certain details are holding me back from canceling right away. Feedback is welcome.

    This is an AXA 900k variable life policy sold to my in laws for my wife back in 2013.
    Initially funded with a lump sum, then my wife has been paying $300/month into it since.
    The value of the account is tied to various diversified stock index funds. You can see in the attachment that stocks did quite well over this 12 month period.

    Total premiums paid (basis?) = $37,836.17
    Policy account value = $38,756.48
    Cash surrender value = $28,625.21 (after surrender charge)

    PROS:
    If you look at what they call "Insurance Costs" we are only paying $147.10 yearly for the $900k insurance, which is very cheap. However, I suspect this number is low artificially, and the real costs of insurance are tied into the other (very high) charges.
    After the plan's 10 year anniversary, supposedly the surrender charge will hit $0 and we can access the entire policy account value.
    Also after the 10 year anniversary, the interest for loans against the policy decreases from 3% to 2%.

    CONS:
    As you can see, they skim 4% off the top every time money enters the account. Ouch.
    "Other Charges" are huge. You can see that they vary with the total account value, and roughly add up to 5% of account value per year.

    Assessment of options:
    1. Take the money out now. This would incur a >$10k surrender fee, and might have to do the switcheroo with a variable annuity to recoup losses.
    2. Take the money out in 2023 without surrender fee. This means 5 more years of charges (also around $10k), but has the benefit of 5 years of insurance coverage. If the value grows enough to keep up with the charges, maybe we can sell close to basis and not have to worry about losses. Regardless, I think we should stop paying into the plan and let it support itself.
    3. Keep paying into the policy and use it for infinite banking? No matter how many times I hear about this, I can't quite wrap my head around how it works. If we take a loan against the policy, is the 2% interest going back into our policy value?

    Leave a comment:


  • The White Coat Investor
    replied
    This week's version. Guess what? It's Northwestern again. Almost a 100% loss.
    As it seems with everyone else who has posted, my husband and I were suckered into purchasing term 80 policies and a 325k whole-life policy EACH by a NWM agent.
    Good news. It’s been exactly one year only.
    Bad news, we’ve still dumped over $7000 into the whole life policies alone and now have cash values together totaling a whopping $173.

    Leave a comment:


  • AR
    replied


    Oh, I meet a few people who are happy with their policy. The following is generally true for them:

    # 1 They understood how whole life works when they bought it. (not the case for most in this thread)

    # 2 They structured the policy to minimize the insurance costs and especially the commissions. (not the case for most in this thread)

    # 3 They highly value something that whole life can do (usually even more than the return)- borrow against it to invest in real estate without needing to involve a bank or hard money lender, asset protection, “banking on yourself”, the lifelong death benefit etc. (not the case for most in this thread)



    # 4 They’re in a strong financial position, high incomes, low expenses, no huge debts, rarely student loans at all, maxing out retirement accounts etc. (not the case for most in this thread)
    Click to expand...


    I think that there is an important distinction to be made between people who are happy and people who should be happy.  I've met a couple of people who are happy with their policy, but they really shouldn't be.

    They're blissfully ignorant and have deluded themselves into think they made a good choice.  They have absolutely no idea about the tremendous opportunity cost associated with permanent insurance products.  The people I'm thinking of have policies that probably better than most of the monstrosities in this thread, but they would have been way better off (with respect to their own stated goals) if they just invested and bought term.  But to face that reality would be quite painful, so they remain in denial.

     

     

    Leave a comment:


  • The White Coat Investor
    replied




    Hey, WCI, at this point I think it would be more newsworthy if you came up with an “appropriate whole life policy.” I’m guessing it would be less frequent than weekly.
    Click to expand...


    Oh, I meet a few people who are happy with their policy. The following is generally true for them:

    # 1 They understood how whole life works when they bought it. (not the case for most in this thread)

    # 2 They structured the policy to minimize the insurance costs and especially the commissions. (not the case for most in this thread)

    # 3 They highly value something that whole life can do (usually even more than the return)- borrow against it to invest in real estate without needing to involve a bank or hard money lender, asset protection, "banking on yourself", the lifelong death benefit etc. (not the case for most in this thread)

    # 4 They're in a strong financial position, high incomes, low expenses, no huge debts, rarely student loans at all, maxing out retirement accounts etc. (not the case for most in this thread)

    Leave a comment:


  • Bmac
    replied
    Hey, WCI, at this point I think it would be more newsworthy if you came up with an "appropriate whole life policy." I'm guessing it would be less frequent than weekly.

    Leave a comment:


  • The White Coat Investor
    replied
    Here's one posted on the Bogleheads forum:
    In the course of righting the life insurance ship, I've reviewed the whole life policies that were purchased for me years ago by my parents. I'm now covered by adequate level term life coverage into my 50's, with conversion options available at that time if I need.

    In reviewing my two whole life policies, I expected them to be bad and to have no second thoughts about canceling them. I've asked for in force illustrations but surprisingly they seem to have trouble getting that together. At this point, I'm trying to understand just how these numbers shake out:

    Policy #1: $10k whole life paid up at 100, annual premium 89.60
    34 years of premium paid in ($3046.40), cash value =$1,866.60

    Policy #2: $25k whole life paid up at 100, annual premium 279.75
    10 years of premium paid in ($2797.50), cash value =$1215.80

    I've been reading a lot about this topic, and I see the examples that others list with their own policies. Somehow, my policy #1 after 34 years seems to be the worst performing whole life policy I can find anywhere. Policy #2 seems like it's (barely) a better performer. I know the prevailing wisdom around here, but does anyone have an idea of how the numbers can be THIS bad?

    Leave a comment:


  • treesrock
    replied




    Today’s edition. Northwestern Mutual. Why does it always seem to be Northwestern Mutual?






    Your website and blog is very helpful! My wife and I have just realized we have made the same mistakes as many others that have found your site. Our situation is a little bit unique in the fact that our NW Mutual agent left the company and started his own business. We had invested probably close to 100K over 7 years and only have a cash value of around 70K. He said we could move this over to Mass Mutal and get better dividends and a lower borrowing rate. After realizing he is just filling his wallets again with our money, we want out! We took our NW mutual accounts paid up at his advice and started funding a new mass mutual policy. Luckily, we had only put about 7 months worth of premiums at this point (about 15K), the cash value is basically nothing. From reading your site, we think doing a 1035 exchange on the NW mutual money and getting a variable annuity and letting it grow up to our basis and then cash it out. For the mass mutual account- I am not sure what to do with this? Should we continue to fund it for a while and then do the same thing? Is there a way we can carry over the loss on this for tax purposes? Could we do a 1035 exchange with both and have a bigger loss?

    Click to expand...


    At my large academic institution, NWM has infiltrated like the plague.  They are somehow given access to graduating residents, so much so that some departments allow them to give presentations to the group as a whole.  Since I've started here I've literally had 5-6 different NWM advisers contact me after being given my name/contact by my colleagues to set up an interview.  I politely decline each time but its insane how entrenched they have gotten here.

    Leave a comment:


  • SerrateAndDominate
    replied
    We had some NWM agents aggressively trying to recruit my classmates as we were graduating medical school.  At the time, I knew there were a lot of things I didn't know about finances, but everything they were selling seemed like a bad idea.  Luckily, I was busy towards the end and never sat down with them again.  The only reason I met with them was because one "advisor" was my neighbor, which I didn't find out until a tree from my backyard fell on her place.

     

    The second pitch I got was from an "advisor" who I knew from college.  I told him that I wanted to get disability insurance because they had a reasonable rate.  He sets me up with disability but then gives me information on a variable life policy.  Again, I was in the mindset of trying to move and didn't want to make a huge commitment about something I didn't read about, but when his pitch was "Allen Iverson had one of these policies so he would be set for life," that's when I knew it was garbage.

    Leave a comment:


  • The White Coat Investor
    replied
    Somehow I feel better knowing people other than doctors get suckered into these suckers too:

    First off, thanks for writing about whole life policies. I'm not a
    doctor but as a first year investment banking analyst, I was sold a
    whole life policy because I didn't know any better. The policy is for
    a $225k death benefit. I started paying in October 2010.

    My monthly payment is $166.63 plus a $30 rider that I didn't realize
    was the cost of an ALIR and NOT part of my monthly payments. My
    dividends have also been going towards buying additional paid up
    insurance. So overall I've paid $14,996.70 in monthly premium payments
    and $2,700 for that useless rider for a total of $17,696.70.

    I'm now 30 and the cash value is $11,836 and I'm trying to figure out
    what to do with this at this point.

    Leave a comment:


  • VagabondMD
    replied








    Why does it always seem to be Northwestern Mutual? 
    Click to expand…


    Haven’t you seen their commercials?  Apparently their financial planning involves building a pool

    https://www.youtube.com/watch?v=JDE-fju7i9Q

     
    Click to expand…


    I bet the guy in the commercial that could afford the pool is a NML agent and not a client.
    Click to expand...


    Where are the customers’ yachts?

    http://awealthofcommonsense.com/2015/02/10-great-lines-customers-yachts/

    Leave a comment:


  • The White Coat Investor
    replied
    Pretty fantastic marketing department eh?

    Leave a comment:

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