Hello,
Unfortunately, I took out a Whole LIfe policy through Northwestern Mutual Life in 2002 (at age 24). I've been watching premiums hit my account month after month, and have decided if I'm still doing this on the policy's 20th anniversary I should abdicate financial decision making to my spouse
At the time of purchase, I was convinced it would be a nice, stable fixed income portion of savings that would compliment my other retirement savings. For fun, I requested the NAIC Illustration update today, and was not surprised that the projected Cash Surrender value is significantly lower than it was projected to be 20 years ago (back when CD ladders and actually earned some interest). In any case, am curious if there would be any opinions out there to keep the policy in place.
Basic insurance amount: $100,000
Total Death Benefit (current): $118,637
Accumulated Value (current): $23,374
Cost Basis: $20,013
Annual Premium (current): $1,088
I have other term life policies in place and am thinking of adding a bit more (kids are 13, 11 & 5). Life Insurance to Income ratio is roughly 6.5 now, and my spouse just got back into work force full time.
Secondly, will want to try and put the cash value to good use if I do it. Max out 401k limits now, phased out of ability to contribute to a Roth. Do the max amount in HSA account and am trying to eliminate using that account to actually pay medical expenses. Have a good cash emergency fund, and presently do not have any taxable investment accounts. Have been putting any extra savings towards 529 accounts for each child, and am nearing point (at least for oldest two) where I may stop adding to their 529 plans as I project we're at 85%+ saved of their expected 4-year cost. Some options might be using the money to help refinance home mortgage down to a 15-year term to get one last bite at an interest rate reduction (currently have about 22 years left).
Thank you for any justification on keeping the whole life policy, and any thoughts on good uses for the ~$23k value if I surrender the policy.
Cashing in a whole life policy
Re: Cashing in a whole life policy
I don't think you'll find much justification for keeping the whole life policy on this Forum.
Given what you've posted, the only conceivable reason to keep the policy would be to consider the cash value as part of your "fixed income" allocation. The cash value is probably now earning (after 20 years of under-performance) somewhere around a 4% rate of return; that is, the increase in the total cash value year over year, reduced by the premium that you pay, all divided by the beginning of year cash value.
But given the competing priorities that you have (establishing a regular "taxable" account, fully funding tax-advantaged savings, refinancing mortgage), and given the relative inflexibility of using whole life as a savings vehicle, I think that you're best off surrendering the policy and directing the cash value elsewhere.
It's not surprising that the dividends over the past 20 years have underperformed the original sales illustration given to you at time of purchase. Interest rates have generally come down over that time. That being said, the current illustration is a much better projection of what the policy will do in the future than the original illustration. The current illustration may very well prove to be "aggressive", if interest rates stay near their current extremely low levels.
From the tone of your post, it sounds like you've pretty much decided to surrender the policy already, and are just seeing if anyone will take the opposite position. I think that you should follow your "spidey sense" and surrender.
Given what you've posted, the only conceivable reason to keep the policy would be to consider the cash value as part of your "fixed income" allocation. The cash value is probably now earning (after 20 years of under-performance) somewhere around a 4% rate of return; that is, the increase in the total cash value year over year, reduced by the premium that you pay, all divided by the beginning of year cash value.
But given the competing priorities that you have (establishing a regular "taxable" account, fully funding tax-advantaged savings, refinancing mortgage), and given the relative inflexibility of using whole life as a savings vehicle, I think that you're best off surrendering the policy and directing the cash value elsewhere.
It's not surprising that the dividends over the past 20 years have underperformed the original sales illustration given to you at time of purchase. Interest rates have generally come down over that time. That being said, the current illustration is a much better projection of what the policy will do in the future than the original illustration. The current illustration may very well prove to be "aggressive", if interest rates stay near their current extremely low levels.
From the tone of your post, it sounds like you've pretty much decided to surrender the policy already, and are just seeing if anyone will take the opposite position. I think that you should follow your "spidey sense" and surrender.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: Cashing in a whole life policy
One more favor - I tried doing a general search here, but if there are any favorite calculators on determining length and amount of term life insurance to buy i would appreciate any links.
Thank you
Thank you
Re: Cashing in a whole life policy
As to the amount of life insurance - here's a calculator that has been suggested in past threads on this Forum.
https://lifehappens.org/life-insurance- ... do-i-need/
As to the duration of the life insurance, I would look to when your "need" for insurance expires. You say that you have kids that are 13, 11, and 5. You might want to have some of your coverage go out so far as to take your 5 year old into (or through) college, which would imply at least coverage that extends 15 or 20 years from now.
Further, you'll want to look at what will happen to your spouse after the kiddos are out of college. If he/she has a job and would be pretty self-sufficient without your income, that's one thing. But if he/she is stay-at-home and plans to stay that way for the duration, you might want to have at least some coverage until your projected retirement date.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: Cashing in a whole life policy
One option is to stop paying premiums and allow the policy to pay for itself with dividends. I've done that for many years. I now use the cash value to pay my LTC premiums via a non-taxable exchange.
Re: Cashing in a whole life policy
Paying monthly incurred additional charges vs paying yearly
Dividends have been dropping for years so no guarantee the dividends cover premium in the future although they probably do currently
Dividends have been dropping for years so no guarantee the dividends cover premium in the future although they probably do currently
Re: Cashing in a whole life policy
Although buying a whole life policy is in most cases a poor idea, cashing in a whole life policy may not be a great idea either especially since Northwestern is probably the best of the breed. As suggested above, changing your dividend option so that the dividends reduce the premium may be your best bet. The dividends on a 20 year old policy might cover the entire premium. Also be aware of any tax implications of the surrender.