LIfe Insurance with life change ..need help

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Topic Author
Habbernator
Posts: 11
Joined: Tue Feb 16, 2021 6:54 pm

LIfe Insurance with life change ..need help

Post by Habbernator »

Good Morning!

Back almost 20 years ago I purchased a UL policy from my local agent. At that time I was newly married, thinking of a family, and a home. I also purchased a 30 year term policy at that time. The term policy expires when i am 58 and is for 1m.

My UL policy is making 4% interest, has 5% fees, cash value of about 19k and a surrender value of about $600. The policy is for $350k and costs me $1601 per year. I was just given the option to increase to $375k per year (premium increased to $1950) but was informed the guarnteed would take me to age 66 and be non guarnteed in force until age 79.

Sounds to me the policy will soon start eating its cash value to offset COI increases. When i purchased the policy i thought it was a WL but either way I have ​read term is the only form of life insurance recommended via boggleheads.

I am 43, have just over 1m in 401k, 457, Ira and roth, PERA and HSA funds. Current debt is about 220k land and credit card debt. I have no children and am currently engaged. I can purchase additional portable WL and term through my employers and they both provide term insurance, for free, equal to my annual salary.

Now what concerns me is I have had melanoma removed and many precancerous lesions since 2013. I am clear at the moment but uncertain if it will return.

Im torn if I should keep the UL policy since Ive had it this long and my history of melanoma. Right now I am leaning, strongly, to cancel the policy but am looking for a little reassurance before I do so.

Thank you!
Rex66
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Re: LIfe Insurance with life change ..need help

Post by Rex66 »

If it’s an invasive melanoma and not just in situ then you likely won’t easily qualify for a new policy at reasonable rates.

You should request an inforce illustration with max funding up to MEC limit and then actually calculate out the return on cash value. See if you are happy with it both under guaranteed and current assumptions. It will be less than the interest rate.

If you haven’t been told by your physician then it’s pretty easy to Google survival rates based on depth of melanoma assuming no other factors were present to give you an idea of the risk. It’s obviously not a guarantee.
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Stinky
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Re: LIfe Insurance with life change ..need help

Post by Stinky »

I'm a little confused about a couple of things in your original post.

--- You say that your UL policy has a cash value of $19k and a surrender value of $600. I would think that a UL policy that is "almost 20 years old" wouldn't have any more surrender charges. Do you have a policy loan on this policy in an amount equal to the difference between $19k and $600?

--- You say that you purchased a 30 year term policy about 20 years ago, and that the policy expires when you are 58. That implies that you are currently about 48 years old. However, you say in your post that you're 43 years old. Something doesn't line up here.

You say that you're inclined to cancel the policy. I tend to agree, since you have $1 million of level term and workplace life insurance inforce. It would also be attractive if you're able to get more insurance through your workplace without providing evidence of insurability.

I'd like to hear more about whether you have a policy loan before making a more solid recommendation. I'd be especially interested in the interest rate. Some older UL policies had policy loan rates of 8%, and if your policy had a rate that high, it would make no sense to keep the policy unless you had the cash to pay off the loan now.

If you have them, please let me know about the policy loan.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
Habbernator
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Re: LIfe Insurance with life change ..need help

Post by Habbernator »

I purchased the policies when i was 27 and 28 so 16 years ago for exact math but the surrender policy frees are because it had a increase you could do every 3 years of 25k and i elected to do that 3 years ago. Now I learned the increase reset the surrender policy time to 15 years from the increase date. There are no loans on the policy or cash withdrawals.

I did verify the interesf rate is locked at 4
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Stinky
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Re: LIfe Insurance with life change ..need help

Post by Stinky »

Habbernator wrote: Thu Dec 02, 2021 11:31 am I purchased the policies when i was 27 and 28 so 16 years ago for exact math but the surrender policy frees are because it had a increase you could do every 3 years of 25k and i elected to do that 3 years ago. Now I learned the increase reset the surrender policy time to 15 years from the increase date. There are no loans on the policy or cash withdrawals.

I did verify the interesf rate is locked at 4
Thanks for the clarification in the surrender charge. That sounds like a pretty dirty trick from the insurance company to impose an $18k surrender charge just because you increased the policy amount by $25k.

But what’s done is done. Now your job is to look at the policy going forward.

I’d definitely NOT accept any future increases in face amount if they’re going to assess new surrender charges.

You could choose to look at this policy as a part of your fixed income asset allocation. If you choose to do so, then get an inforce illustration from the company or the agent. The illustration should be prepared on the basis that you don’t accept any more face amount increases, and that you keep paying the currently scheduled premiums.

When you get the illustration, pull together a little spreadsheet to calculate the annual ROI on the surrender value that you’re getting. The equation to use for each policy year is - (next year surrender value minus current year surrender value minus current year premium paid), all divided by current year surrender value. You can also look at the absolute increase in the surrender value year over year, compared to the premium paid.

I expect that the ROI percent will be pretty attractive for the next few policy years, since the surrender value is so low and the surrender charge is burning off. It sounds like the surrender charge may have 12 more years to run.

It might very well be a money-good proposition to keep the policy for the next 12 years, if for no other reason than to recapture the surrender charge. After that, you can decide whether the policy is worth keeping.

You’ve got to get an inforce illustration to assess whether this makes sense.

Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
Habbernator
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Re: LIfe Insurance with life change ..need help

Post by Habbernator »

Ok, I got an in force illustration from my agent. Current illustration shows using the Non-Guarnteed values paying the current $1601/yr will allow the policy to be in effect until 79 and the Guaranteed Values show the policy will be in effect until age 66 when the cash value will be depleted.

Looking at the Guaranteed Values, the cash component would increase to $26666 at age 54 then decline to $0 by age 66. The surrender fee wouldn't end until age 56 it appears. Additionally, I have paid $22905 in premiums since I started the policy.

Non-Guaranteed Values max cash value at age 67 of $49091 then decline to $0 at age 79. By age 67, my total annualized premium will be $59736 and $78953 at age 79

Stinky, could you explain the difference between guaranteed and nonguaranteed? How would the nonguaranteed stay in effect if I pay the $1601 per year and the policy eats the cash value up by 66 in the guaranteed portion?

Why should I keep the policy?
Oh! The surrender charge is $585.60 currently, not 18K. Current cash value I would receive if I surrendered the policy would be $19053
twh
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Re: LIfe Insurance with life change ..need help

Post by twh »

It's just unbelievable how they behave.

You have no kids and no wife. Unless you have obligations you haven't mentioned, you don't need life insurance at all. You still have your term policy up until a decent point. Don't keep paying them good money after bad.
exodusNH
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Re: LIfe Insurance with life change ..need help

Post by exodusNH »

Habbernator wrote: Thu Dec 02, 2021 11:32 pm Ok, I got an in force illustration from my agent. Current illustration shows using the Non-Guarnteed values paying the current $1601/yr will allow the policy to be in effect until 79 and the Guaranteed Values show the policy will be in effect until age 66 when the cash value will be depleted.

Looking at the Guaranteed Values, the cash component would increase to $26666 at age 54 then decline to $0 by age 66. The surrender fee wouldn't end until age 56 it appears. Additionally, I have paid $22905 in premiums since I started the policy.

Non-Guaranteed Values max cash value at age 67 of $49091 then decline to $0 at age 79. By age 67, my total annualized premium will be $59736 and $78953 at age 79

Stinky, could you explain the difference between guaranteed and nonguaranteed? How would the nonguaranteed stay in effect if I pay the $1601 per year and the policy eats the cash value up by 66 in the guaranteed portion?

Why should I keep the policy?
Oh! The surrender charge is $585.60 currently, not 18K. Current cash value I would receive if I surrendered the policy would be $19053
The guaranteed value is what they're contractually obligated to provide. The non-guaranteed is their best guess at what you'll earn. The actual value will be somewhere between the two values.
Topic Author
Habbernator
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Re: LIfe Insurance with life change ..need help

Post by Habbernator »

General consensus is to terminate the policy. I have had many precancerous and invasive melanomas removed since 2013. That is what my hang up on the decision to cancel is. Reality is, my investments should cover my burial expenses, my employers provide a life policy equivalent to my year salary for free payable to my beneficiaries, and I do have a 1m term policy until age 58. Prob best to cash it out and buy Ibonds.
exodusNH
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Re: LIfe Insurance with life change ..need help

Post by exodusNH »

Habbernator wrote: Fri Dec 03, 2021 12:11 am General consensus to terminate the policy?
I would calculate your yearly guaranteed and non guaranteed returns. Your actual will be somewhere between the two. You can then decide if that's a reasonable fixed income return. If so, you can consider it part of your bond allocation.

You can see the effect of the increasing cost of insurance where it will spend down the entire cash value of the plan in 12 years.

You can also see why these plans are popular for the insurance companies. You've paid in 23000 and will only get out about 18600. That missing $4.5k went to your insurance salesman and to the cost of providing the insurance.

Afaik, if you cancel it now, you will owe no tax because you haven't made any money.
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Stinky
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Re: LIfe Insurance with life change ..need help

Post by Stinky »

Habbernator wrote: Fri Dec 03, 2021 12:11 am General consensus is to terminate the policy. I have had many precancerous and invasive melanomas removed since 2013. That is what my hang up on the decision to cancel is. Reality is, my investments should cover my burial expenses, my employers provide a life policy equivalent to my year salary for free payable to my beneficiaries, and I do have a 1m term policy until age 58. Prob best to cash it out and buy Ibonds.
I think that your instincts are correct. I’d also cancel. It sounds like you have plenty of other assets and options to deal with “final expenses” at such time as you pass away.

On your question about “guaranteed” and “non guaranteed” -

Most UL policies have three elements where the insurance company, in its discretion, can treat you more favorably than the basic policy guarantees. Those three areas are. -

—- Interest rates.
—- Cost of insurance (COI) charges.
—- Expense charges.

Your non-guaranteed illustration shows that the policy has better results than those that are guaranteed. In your policy, it’s likely that current COIs are less than guaranteed, and it’s likely that that practice will continue. On the other hand, if your policy has a 4% guaranteed rate, it’s highly unlikely that the insurance company is projecting that there will pay you more than 4%.

exodusNH correctly described the tax implications of a policy surrender. “Taxable income” at the time of surrender usually is the excess (if any) of surrender value over cumulative premiums paid. It sounds like your policy taxable income is zero.

To repeat - you’ve said a couple of times in this thread that you are inclined to cancel. I agree with you. Don’t throw more good money after bad.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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