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Whole Life Insurance for Higher Incomes? Keep it or Dump it?

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  • Whole Life Insurance for Higher Incomes? Keep it or Dump it?

    Dear WCI and forum

    Thanks for your great work

    I have read your book and many blogs including those on Whole Life Insurance

    All motivated by my frustration about poor financial decisions in recent years, as I started getting higher incomes

    Here is my story:

    Whole LI since 2013 - 24K year premium - Total value 109K - Cash value 70K

    Once I got some extra income I was sold into:

    Variable LI (April 2017) - 30K year premium - Total Value 12K - Cash surrender value after charges 5,5K

    Income is about 750-800K before taxes; already maxing 401 and 457, and planning on opening 529 (x2) and Vanguard taxable account with 120K salary bonus I will get in weeks

    Embarrassed by my complete ignorance, I finally embarked into understanding a bit more finances thanks to White Coat Investor and Bogleheads

    I am thinking best plan is to do a 1035 transfer to a Vanguard VA - total value 121K - cash value 75K - and let it grow tax free and/or declare losses in 2-3 years - then invest in taxable account
    Additionally, invest the 54K in premiums in taxable accounts

    These are the reasons to stay based on the sucker from NorthwesternMutual (of course):

    1- the worse part is almost over and will start growing positive in 2-3 years
    2- gains will be tax-free (and taxes might be higher in the future)
    3- gains are less influenced by the market changes (when the stocks collapse, the insurance keeps growing)
    4- It is a good product to have in your portfolio when you have other areas covered (401, 457, 529, taxable accounts) - it is an additional asset for higher incomes

    I am trying to make predictions and comparisons - I am assuming a 5% return with 3% standard deviation
    Please help me out and correct my mistaken assumptions

    These are the policies parameters:

    1- WLI - $2000/ month for 25 years (total 600K)
    Guaranteed Cash Value 680K
    Net Cash (estimated dividends) – 1,160K
    No Taxes?
    Death benefit 1,2K

    2- 2- Variable Adjusted LI - $2500/ months for 25 years (total 750K)
    Max sales load – 5.2%
    Deferred acquisition cost – 1.3% of premium
    Premium Tax charge – 2% of premium
    Total: 8.5% ($213 / $2500) – $2287
    $2287/ months for 25 years at 5% (SD 3%)- $1,325 (879k – 2050 K)
    Sales Charge – 1.2%
    Other costs: $67/month (?)
    Death benefit 1,8K

    These are the predictions for investment in taxable accounts:

    1- WLI comparison
    $2000/ month for 25 years at 5% (SD 3%)- $1,150k (750k – 1750K)
    Reduce taxes – 15% - 1068K (727k-1,577K)
    Add Term Insurance – 2K/year – 50K

    2- VALI comparison
    $2500/ months for 25 years at 5% (SD 3%)- $1,450 (1000k – 2250 K)
    Reduce taxes – 15% - $1,345K (962K-2,025K)
    Term Insurance – 2.5K/year – 62.5K

    Conclusion: looking at the numbers, at this point and after having paying for huge commissions, keeping the VLI option will be nearly equal to investing it assuming the market growth is below 6%; but investing will be better with higher growth (??)
    For the VALI option, the numbers are also quite similar
    What am I estimating wrong? These estimations do not strongly support dumping the insurance policies

    Please help from the experts, I am just an initiate

  • #2
    Hopefully Rex and Wci will comment on your specifics. At some point you have to recognize this as a sunk cost and move on.  The sooner you quit investing in insurance the sooner you can start on building real wealth. All of us have made mistakes on the road to Dublin.


    • #3
      Just say no to Whole Life. You are not benefiting from these policies, your NWML salesperson is.


      • #4
        Please read these: (then read this one again!)


        Here are the main issues, feel free to ask if you have questions:

        1. You have 25 year policies. Will you still be working in 25 years? Do you need that much insurance now? How about in 25 years?

        2. You've been throwing money at these, and you have $0 in 529's today. madness.

        3. You aren't investing the money in low cost investor class mutual funds with low expense ratios. I'm positive that you could have lower ER's in your own vanguard account than in whatever your WL is in.

        4. Do you really need to leave $ to the heirs? You (if spouse) can leave 5.5 + 5.5 so 11 million to the heirs free of estate tax. Even if you'll have more than 11M, there are other better tools for that.

        5. Do you have a donor advised fund?

        6. You need an In Force Policy illustration. Ask for it today, you should have it tomorrow (sometimes you can get it online). Don' get suckered in to "meeting" to review it. Make them email it tomorrow morning ASAP.

        7. From the policy illustration, you'll see you don't break even until year 10 or 15. This is partially due to all the fees you pay on day 1:

        2- 2- Variable Adjusted LI – $2500/ months for 25 years (total 750K)
        Max sales load – 5.2%
        Deferred acquisition cost – 1.3% of premium
        Premium Tax charge – 2% of premium
        Total: 8.5% ($213 / $2500) – $2287
        $2287/ months for 25 years at 5% (SD 3%)- $1,325 (879k – 2050 K)
        Sales Charge – 1.2%
        Other costs: $67/month (?)
        Death benefit 1,8K

        8. You can't get any of this money until you die! You don't care if you have money on that day! At least if you had the money in the ground, or 529's, or houses, or a taxable account you could actually use it in the meantime for something meanful.

        9. Your #'s are off because: WL has higher ER's than taxable acct. Stock market historically returns better than you accounted for (even for inflation). You are only looking at the end total. You won't be around at the end. You are assuming tax level now vs retirement. No way you'll be paying taxes so high in retirement. You aren't factoring in the loss of inflation for your WL. You (likely) don't need term insurance for 25 years. How long until you can afford to self insure?


        Let me know what you think. That's a start.


        • #5
          Your question is so common that I've written not one blog post but two about it:

          Why did you buy the policy? If it's as an investment, have you calculated the guaranteed and projected returns going forward using an in-force illustration? If so, are they acceptable to you? If so, then keep it. If not, then dump it, probably via  VA exchange so you can use the loss to your benefit.

          Personally, if there were a mandatory expense of $2K a month that I could get rid of, I would get rid of it. Might want to check out this thread too (to which I've just added your example):

          But the lower the expected return, the better this whole life policy GOING FORWARD will compare against it. If you really think you're only going to get 5%  with this money over the long run, then you may do just fine keeping the policy. That seems a pretty conservative way to invest money you don't need for decades though.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011


          • #6
            Dear Colleagues

            Thanks so very much for taking the time to reply

            When I bought the WLI policy 4 years ago I was in need of getting life insurance to protect my family (several children) and also wanted to start saving regularly the extra income; I did not know how to invest or what to do, and the "financial advisors" (NWM suckers) showed up at the correct time (for them)

            In fact my priority was to get life insurance, 3 million to cover my family -  and they tried to sold me a WLI at 4K/month

            That was too much I thought, and stupid of me I ended up buying 2K/month WLI with 1.2 mil of death benefit plus term-life for 1.8mil to cover the rest

            To get things worse a few months ago as my income increased (and my financial knowledge stayed the same), I wanted to increase my savings, and again they sold me a variable LI (2.5K/month) with 1.8 mil death benefit and cancelled the term insurance

            I always knew, deep inside, that these NWM agents were not trustable, but I never thought their commissions were so outrageously high and their products so low in returns

            I was sleeping well at night until I recently saw a post by WCI at Doximity about finances that caught my eye

            And here we are, not sleeping so well now, but thankful to WCI for educating me on financial matters

            I have the In Force Illustrations for the WLI with me - and I calculated rates of return at 25 years of less than 2% for guaranteed cash value and about 5% for the projected estimates -STARTING AT YEAR 5 (if I calculate since year 1 it will drop to less than 1% for guaranteed and about 3% for projected)

            Rex - as you pointed out these rates are in line with bonds, and yes I initially thought this product would provide both life insurance and savings for retirement or future needs

            WCI - I have tirelessly read all these posts - they are very informative and I am thankful - I even read Javier Alba's painful posts...

            I guess at this point is a matter of risk versus return - If I want to be very conservative with return rates between 2-5%, then keep it and swallow my pride

            However, not just that I understand there is an opportunity on the long run to get much higher returns at 8-10%, but having to deal with the 2 NWM agents suckers that filled their pockets with my earnings...that I cannot do for sure - I am cutting the middle man and doing things on my own now

            I also value the liquidity and flexibility of investing out of these insurance policies

            My plan is to get term insurance as I get rid of the WLI and VLI - 3 million - 25 years

            But I have not decided whether to cash the policies or do a 1035 exchange

            In your opinion, will it be more productive to invest 75K in a Vanguard VA with the benefit of growth until 120K with no capital gain taxes or just go for 75K investment in low cost index funds

            It does hurt accepting this financial loss, so I would love to hear from others that have been in my situation and have seen the light of good returns at the end of the WLI tunnel

            Good night!