Yet another whole life question

[shogun0660]

Yet another question on what to do with a full life insurance account.
For background,
I’m five years out of residency, maxing out a 403B, 457b, have a taxable investment account I contribute to montly, wife working and maxing out her 401k. We contribute to 529 plans for our kids each year.
I do have residual student loans, most in the 4% range, but about 35k sitting at 5.5%.
In terms of insurance we have a 10 year 1 million dollar term policy for me, a 20 year 500,000 dollar term policy for me, and a 20 year term 1 million dollar policy for her.
On top of that, we have a 1.5 million dollar whole life policy, to which I started contributing in 2012. (sold to me mainly as an investment tool since we had maxed out work accounts, and were using a taxable investment account as well). For last half 2012, all 2013, and part of 2014 I contributed monthly. For rest of 2014, all 2015 and 2016 I did not contribute due to changing jobs, moving, other expenses. I just started contributing again about 1k per month.
Looking at current values on the account, in total I have put in 42,000, and value now sits at 29,000. Surrender value is 7,000. Ouch.
Any advice on how to proceed?
1. Just cut my losses, and use that money on a monthly basis instead to pay down my 5.5% rate loans, and start an HSA too.
right now that’s how I’m leaning.
2. Stick it out, since I have 5 years into this thing and will take a considerable loss? Though it seems at this point I’m not even remotely close to breaking even on this account.
Any advice is appreciated!

thanks for any advice

[Craigy]

With every $1k you put in, how much does the surrender value go up?

Also what is the spread between "value" of $29k and "surrender value" of $7k?  Is there a large surrender fee?  Policy loan from missed payments?

Unless there is some pot of gold coming real soon at the end of this rainbow, I think you're throwing more money away.

[shogun0660]

Thanks for the quick reply.
It looks like  the surrender value goes up by about 700 dollars per monthly 1000.
Looking at years i wasnt contributing, the monthly withdrawl for fees/actual premiums was about 350 dollars.

I'm thinking you're right....

[Craigy]

For what it's worth, at least you still have that $7,000.

It seems like the big killer of these policies is policy loans and missed payments.  Once you miss enough payments the math stops working well.

You could ask for an in-force illustration for more insight.  If it's a net $300/month cost that's about $10 a day to keep it alive, so you don't have to be in a huge rush to cancel.

If it's otherwise a good policy and you have a need/desire for permanent insurance, it could possibly be better to keep this one than to replace it with a new one. But if you don't need a policy then yeah, payoff your loans, start your HSA, invest in a taxable account, etc. before throwing money on this.

[shogun0660]

thanks. i agree, but just to clarify i didnt take loans on the whole life. I stopped paying the premium while transitioning to a new job, wife stopped working temporarily, moved to a new location, etc.

[Ivy]

It sounds like you should take the loss and move on.  A net $6,000 loss is not a retirement killer.  Unfortunate, but I've made bigger mistakes.

You can get an in-force illustration from the insurance company and have it evaluated.  I used this company (James Hunt) www.evaluatelifeinsurance.org/  There are others out there as well.  I think I found him through the bogleheads forum.  I found his advice very helpful for very little cost ($150 iirc).

Overall, sounds like you're heading in the right direction.  Knock out those student loans.  Getting totally out of debt really is a freeing experience.

[The White Coat Investor]

shogun0660 wrote:

Yet another question on what to do with a full life insurance account.
For background,
I’m five years out of residency, maxing out a 403B, 457b, have a taxable investment account I contribute to montly, wife working and maxing out her 401k. We contribute to 529 plans for our kids each year.
I do have residual student loans, most in the 4% range, but about 35k sitting at 5.5%.
In terms of insurance we have a 10 year 1 million dollar term policy for me, a 20 year 500,000 dollar term policy for me, and a 20 year term 1 million dollar policy for her.
On top of that, we have a 1.5 million dollar whole life policy, to which I started contributing in 2012. (sold to me mainly as an investment tool since we had maxed out work accounts, and were using a taxable investment account as well). For last half 2012, all 2013, and part of 2014 I contributed monthly. For rest of 2014, all 2015 and 2016 I did not contribute due to changing jobs, moving, other expenses. I just started contributing again about 1k per month.
Looking at current values on the account, in total I have put in 42,000, and value now sits at 29,000. Surrender value is 7,000. Ouch.
Any advice on how to proceed?
1. Just cut my losses, and use that money on a monthly basis instead to pay down my 5.5% rate loans, and start an HSA too.
right now that’s how I’m leaning.
2. Stick it out, since I have 5 years into this thing and will take a considerable loss? Though it seems at this point I’m not even remotely close to breaking even on this account.
Any advice is appreciated!

thanks for any advice

Click to expand...

Oh man that's painful. This post is for you:

https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

Get an illustration. Figure out your likely return going forward. Decide if that's acceptable to you or not. If not, then consider doing the VA thing to at least have Uncle Sam share the loss.

Personally, I think recommending whole life to someone who still has student loans is malpractice, but remember that the decision to keep a policy is not the same decision of buying a policy in the first place. The poor returns are heavily front-loaded.

[noraz123]

The White Coat Investor wrote:

...remember that the decision to keep a policy is not the same decision of buying a policy in the first place. The poor returns are heavily front-loaded.

Click to expand...

+1.  Read through both WCI's blog post, "How to Dump Your Whole Life Policy" as well as the comments.  It was that article and comments sections where I learned how to move forward with the two policies sold to her by her (now ex-!) financial advisor.

As Dr. Dahle mentioned, it isn't your past return that you need to think about on this policy (which to date has been a big loss).  It's your returns going forward on this investment.  I found whole/universal/cash-value insurance VERY confusing.  I got an in-force illustration and then engaged with James Hunt (he's recommended a few times in the comments section of that blog article).  For less than $100, I was able to get my policies analyzed, and made the determination to keep on policy and dump the other. If you aren't sure how to evaluate the policies, I highly recommend contacting James (his information is in the comments section, and is also recommended on the Bogleheads forum too).

The great news is that there is some tax relief if you do get rid of your policy.  Read the above mentioned blog article AND the comments.  The process of being able to claim the loss is multi-stepped, and how to claim loss on your taxes is also a bit confusing (mostly because there is debate on how to claim the loss - again read the comments section on the above article).

[The White Coat Investor]

Rex wrote:

you have to 1035 exchange it into an annuity to do that.  the permanent insurance loss can not be deducted.

 

There is about a dozen of those james hunt types folks around.  you can google non commission life insurance typically to find them.  nothing wrong with hunt though.

Click to expand...

Maybe I ought to go looking for a few as blog advertisers. But a Google search on those terms didn't pull up any specific agents, including Hunt, for me.

[shogun0660]

thanks everyone for the great advice. this website/blog/forum has been invaluable.

My brother is a tax attorney so I'm going to discuss with him doing a 1035 exchange. I'll also touch base with the guy that sold me the policy to get an illustration Will follow up with my final decision in the coming week.

cheers