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Inappropriate Whole Life Policy of the Week

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  • childay
    replied
    Originally posted by The White Coat Investor View Post
    Latest edition, his, hers, and the kids'
    "A bit of a bummer" indeed

    Leave a comment:


  • The White Coat Investor
    replied
    Latest edition, his, hers, and the kids'


    My husband and I are both physicians in our early forties though I am no longer working to be home with the kiddos. He is a fellowship-trained orthopedic surgeon so has only been in the “real” workforce for about ten years. We’ve recently started listening to your podcast and understand what we suspected before, namely that we made a mistake buying whole life insurance for ourselves and our children. Not only that, but we have now “borrowed” from one of the policies. Each of our four children’s policies are currently worth $2200, but we’ve contributed around $5000 to each of these over the past several years. His is worth $150,000 but we’ve contributed close to $200,000. And mine was worth $90,000 but we borrowed this entire amount to add to a down payment last year. We’ve contributed around $120,000 to mine. So, do we just close mine and take the $30k loss and do the same for the kids’? Or pay mine back first and then convert it to something else? And what would you suggest for my husband’s? The total loss incurred by cashing out would be close to $100,000, and we just opened these over the past 3-6 years, so it’s a bit of a bummer...

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  • The White Coat Investor
    replied
    This week's edition:

    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 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!

    Leave a comment:


  • jfoxcpacfp
    replied
    [QUOTE=
    I think what annoys me the most about it is how I couldn’t just see how gimmicky the whole thing is from the get go. All these fancy crediting methods, cap rates, participation rates, surrender value, legalese, etc. I fancy myself a smart person. I have done more pure and applied math than almost any financial person besides an actuary, and the fact that I couldn’t wrap my head around it made me feel stressed and trapped.

    [/QUOTE]

    Almost sounds like some of the real estate investment products being peddled to physicians today.

    Leave a comment:


  • The White Coat Investor
    replied
    Via email:

    Dear White Coat Investor,



    I am a nonmedical young professional and I wanted to thank you for convincing me to drop my Indexed Universal Life policy. You have the most comprehensive database about one of the most complicated areas of personal finance out there.



    I recently graduated college and entered the working world. Overwhelmed by the onslaught of new information I had to try and understand to plan for retirement, I reached out to a friend who referred me to an advisor who works for an insurance company. I was provided with reading material that supported use of Traditional 401ks up to the standard deduction, then Roth accounts (I have the option of a Roth 401k contribution at my work), which I feel is appropriate as I am not a physician or a lawyer and will probably cap out in pay in the 100k to 150k pay range (in 2020 dollars). The 24% tax bracket is a pretty good deal for me right now as I have other exemptions, and this strategy allowed me to keep provisional income in retirement as low as possible to maximize my social security benefit.



    However, the strategy he recommended also included an Indexed Universal Life policy. The product sounded like a hammer for every nail:



    · Conservative, yet strong, cash value returns? Check.

    · Tax free death benefit with simpler rules than an inherited Roth IRA? Check.

    · Cash value that earns interest even when you take money out? Check.

    · Liquidity before 59.5 compared to a Roth IRA? Check.

    · Money for long term care without triggering Medicaid? Check.

    · Independent of employer 401k structure? Throw that in too.



    I thought I was so savvy. I signed up! After all, isn’t it good to “diversify” your retirement streams? I stumbled across this blog and just assumed mine wasn’t one of those “bad policies”.



    But as time wore on, and I had to part with hundreds of dollars a month - full 20% of my take home pay – I just kept finding better ways to do every single aspect:



    · Conservative, yet strong, cash value returns? Not NEARLY strong enough. A 10% return is 3x more than a 6% return for a 30 year time span.

    · Tax free death benefit with simpler rules than an inherited Roth IRA? There are simpler, better ways.

    · Cash value that earns interest even when you take money out? Doesn’t matter if returns suck.

    · Liquidity before 59.5 compared to a Roth IRA? Put 50k in a checking account and make 9% a year on the rest. That will cover everything but a house.

    · Money for long term care without triggering Medicaid? Better ways, including trusts.

    · Independent of employer 401k structure? Talk to your HR to add stuff or go somewhere else when the market turns around. Good companies have good 401k plans.



    I think what annoys me the most about it is how I couldn’t just see how gimmicky the whole thing is from the get go. All these fancy crediting methods, cap rates, participation rates, surrender value, legalese, etc. I fancy myself a smart person. I have done more pure and applied math than almost any financial person besides an actuary, and the fact that I couldn’t wrap my head around it made me feel stressed and trapped.



    Here I am, thousands of dollars later, with nothing to show for it but a lapsed policy. Call it a lesson learned. Part of my contempt is for the IRS. If the tax code wasn’t perforated with loopholes to every single rule, there would never be a market for any of this garbage. Same goes for Medicaid/care. But we all have to live within the rules.



    People need heuristics in life. There will always be too many variables to ever plan for what is to come. This is why, when you need financial advice, you absolutely cannot risk ulterior motives or lack of holistic expertise. You need a pro who has met with people from all walks of life over the course of many years, who can help you prepare for things you can’t yet foresee.



    Moral of the story: Almost no one benefits from these policies. You can be a upper/middle income earner, get your full social security, retire tax free and worry free and you simply do not need one of these contraptions to make that dream a reality.

    Leave a comment:


  • artemis
    replied
    The more things change....

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  • The White Coat Investor
    replied
    This week's winner (loser?):

    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

    Leave a comment:


  • The White Coat Investor
    replied
    Today's edition with the usual player demonstrates a bit issue with a permanent policy--life changes.

    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.

    Leave a comment:


  • The White Coat Investor
    replied
    New one:

    Last fall, I was approached by an old friend of mine, an associate with Northwestern Mutual, to purchase disability insurance. I'm currently 30 years old and was actually already thinking of following through on this, so I could capture the anticipated low premiums (I'm in great health and fortunate not to take any medications). I was told of a new law being passed on 1/1/20 which could affect my premiums, so I bit hook, line, and sinker and purchased DI and Term policies. When I had my semi-annual meeting with my financial adviser, I was then accurately informed of the "MOOD" definition NWM provides as well as the overall high cost for term that I was paying. (She even cited the WCI blog posts for further understanding of this!) I felt pretty dumb for not consulting my CFA first but also feel fortunate to have caught this early, and to have been reinforced by your blogs and podcasts. And that I was lucky in that I at least have term policy, despite its cost, given the current risks we all face at this present time regarding Covid.

    The reason I write this is to highlight my overall experience. I was approached as a close friend, and pitched that I needed someone to help me continue along my current trajectory but that unexpected things happen and should be planned for. When bringing up the definition of "MOOD" to my adviser, he tried to sell me on how the "MOOD" definition was still better than "true own occ."

    Lastly, when doing more digging I realized he had connected with many of my former med school colleagues through LinkedIn. I felt cheated, like I was dealing with a used care salesman. Throughout each call he would always ask for names of my colleagues so that he could also help them. I always refrained as I feel like I am in no position to provide personal guidance in this realm. Overall, the experience was a total sales job.

    I'm currently in the process of transitioning to other policies performed through an independent broker with advise from my CFA. Also for your readers, I should be paying roughly 50% less per month for stronger policies (let that sink in a bit) vs. NWM.

    Leave a comment:


  • The White Coat Investor
    replied
    A comment today on the blog:

    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!

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post


    That's only one of the benefits. The other is the ability to grow back to basis tax-free in the VA before surrendering.
    That's the only one I was talking about. Besides, most investors don't want to stick with their mistakes that long.

    Leave a comment:


  • The White Coat Investor
    replied
    Originally posted by jfoxcpacfp View Post

    Yes, they are still allowed but TCJA took away the tax benefits of the 1035 exchange (CL deduction).

    That's only one of the benefits. The other is the ability to grow back to basis tax-free in the VA before surrendering.

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post

    What do you mean? 1035 exchanges aren't allowed any more? How did I miss that? Or are you just pointing out that a VA can't be surrendered for a taxable loss?
    Yes, they are still allowed but TCJA took away the tax benefits of the 1035 exchange (CL deduction).

    Leave a comment:


  • The White Coat Investor
    replied
    Originally posted by jfoxcpacfp View Post

    This is pretty pathetic. Every day I have initial consults scheduled, at least 1 person (on average) has one of these, almost exclusively NWM. It boggles my mind. Did you point out that a 1035 exchange is no longer a tax benefit under TCJA 2017?
    What do you mean? 1035 exchanges aren't allowed any more? How did I miss that? Or are you just pointing out that a VA can't be surrendered for a taxable loss?

    Leave a comment:


  • jfoxcpacfp
    replied
    Originally posted by The White Coat Investor View Post
    Yet another. You can't make this stuff up.
    This is pretty pathetic. Every day I have initial consults scheduled, at least 1 person (on average) has one of these, almost exclusively NWM. It boggles my mind. Did you point out that a 1035 exchange is no longer a tax benefit under TCJA 2017?

    Leave a comment:

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