Whole life again

[mlc7]

As many of you I was sold Whole life insurance from NWM at age 37 with 600K death benefit. Later I also purchased a 20-year term life for 1.1M coverage [11 year left]. Both cost me approx. 10K per year (whole life $8800 and term $1200).

I have been agonizing what to do with whole life insurance for a while. Current cash value is around 106K and as much as I can figure out, I broke even two or three years ago. I am now 52 and have no debt with one child age 12. Our savings are big enough to feel comfortable if anything happens to us, but I still feel I should have some life insurance just in case.

Should I continue with whole life insurance or cash it out and invest? Should I try to purchase additional term (I plan to keep current 1.1 term) if I sell whole life? I don't think annuity is the right thing for us since we will have enough income from our 401k when we retire. We likely won't have estate tax problem either.
I know many of you have asked this question before, but I think I kept mine longer than most and is somewhat different situation.

[jz-]

I would cash out during your first year after retirement. The interest ( but not the basis) will be subject to ordinary income taxes. Do not let this continue into your late decades of life. Until your retirement, you might discontinue paying premiums.

[Bev]

Cash out
Buy term
Don't look back
Breathe

[childay]

I have been agonizing what to do with whole life insurance for a while. Current cash value is around 106K and as much as I can figure out, I broke even two or three years ago. I am now 52 and have no debt with one child age 12. Our savings are big enough to feel comfortable if anything happens to us, but I still feel I should have some life insurance just in case.
Sounds contradictory. What is your net worth etc. What do you mean by savings? What do you mean by happens to "us?"

[GasFIRE]

Usual advice on this forum is to surrender permanent policies and buy term for actual insurance needs. But I would get an in force illustration from NWM first. If you’re “broke even” now does the yearly dividend make this functionally a bond? Possibly. Surrendering the policy may still be the right decision but know where you stand financially prior to deciding.

[mlc7]

Thank you all for the input. Here is the in-force illustration GasFIRE. Not sure if I understand it completely but would appreciate any input.

[Scott at MD Financial Services]

Can the whole life self support itself with no further premiums and still grow?
If you took the $107k out and invested it what would you think the yield would be on the $107k?
Based on your age now, assuming great health today, the $600k can be bought in term on a monthly rate for:
10 years $60 +/-
20 years $100 +/-
30 years $195 +/-

[mlc7]

Thank you Scott at MD.
I think dividends are not high enough to pay for premium as much as I can tell.
If I invested 106K + $8800 (premium) for 20 year with 5% return it would yield around $530000. I believe you have to pay taxes on the gains, correct?
But then you have to deduct the cost of term insurance: $1200 x 20 years = $24000.

Based on in-force table the death benefit at age 70 would be $938301.

If my assumptions and calculation are correct, would't keeping whole life insurance be better?

[GasFIRE]

But to “win” the $938K at age 70 you have to die. A better comparison would be the investment estimate of $530K plus the $600K term life death benefit. Or preferably you live past age 70, so an apples to apples comparison would be the $530K with gains subject to CG tax vs. $472K cash value ($308K guaranteed) subject to your marginal tax bracket in excess of your basis. Unless the CV can continue to grow without further premiums as suggested by Scott @ MD, i.e. functions as a bond, I would lean towards surrendering the policy and investing the proceeds.

[racelari]

it seems reasonable to either surrender the policy, or continue to pay into it as the poor returns are past you and the returns going forward are now positive, and get very good toward the end. seems your premium outlay of $8798 per year increases your cash value guaranteed by $9368, for a return of 6% which isn't so bad, just as long as you can afford the $8798 a year as mentioned above. The dividend can be used to decrease your premium as well. Money is fungible and you would have to consider the $107K of current cash value as your emergency fund where you can borrow against it in an emergency in order to maximize your overall portfolio.

Otherwise, upon surrendering the policy, you could invest the cash value and easily get $9368 on the money in taxable but with todays low interest rates might have to invest in something a little riskier like bond fund and with us docs being in high tax brackets would consider tax exempt or muni bond fund. If you don't need a $100K emergency fund, and only need half of that or so as your e-fund, well I would cash out and invest as per your chosen asset allocation.

also, you said you would like to still have life insurance- is your child disabled and is in need of the death benefit upon your death at anytime? If so would favor keeping the whole life policy. term life gets very expensive if you live into your 70's and older as Scott mentions above.

btw as Scott mentioned above you can get term insurance for 10 years much cheaper than the term you have now. did NWM dupe you into a "Term to 80 convertible" policy like they did me? If so, get a 10 year fixed level term at the price Scott mentioned and get rid of term to 80 convertible- you are paying extra for ability/trap to convert the term to whole life.

well done on still being in a great financial situation despite being duped into buying whole life. I was not so lucky and 7 years into my NWM policy I was $25k underwater, and was no brainer to 1035 exchange it to preserve the cost basis.

[racelari]

also, think about using whole life cash value as a "buffer" asset as per Wade Pfau. Idea is when you retire you can use whole life cash value as a source of income until you claim social security at age 70, or not draw down your stocks in retirement during a bad bear to avoid SORR

[Scott at MD Financial Services]

Thank you Scott at MD.
I think dividends are not high enough to pay for premium as much as I can tell.
If I invested 106K + $8800 (premium) for 20 year with 5% return it would yield around $530000. I believe you have to pay taxes on the gains, correct?
But then you have to deduct the cost of term insurance: $1200 x 20 years = $24000.

Based on in-force table the death benefit at age 70 would be $938301.

If my assumptions and calculation are correct, would't keeping whole life insurance be better?

I think you should figure out if you are most focused on. Is it the net value to you (living) at a certain point in the future or if you are most focused on net value to your estate (dead) at a certain point in the future. Once we know what the goal/focal point is then it is much easier to plan/decide what path is the most efficient to get there.

[Mitchel674]

You can exercise the reduced paid-up nonforfeiture option, keeping $300,000 of permanent death benefit with no further premiums payable. The policy will continue to pay a dividend and accrue cash value.

You can keep the face amount the same and surrender paid up additions to cover the entire premium. You should have more than enough.

You could apply the dividend to the premium and pay the rest out of pocket.

Any of these options are better than surrendering the policy.

This is what I did with a similar policy 5 years ago. It's actually been pretty good to this point. The dividend pays the premium on the life insurance, and I've had some growth with the excess dividend going back into the cash value. My growth has been close to 5%/year. I plan on continuing with this until I retire and can cash out the policy at a lower tax bracket.