cancel Whole Life policy in this situation?

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mesaverde
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cancel Whole Life policy in this situation?

Post by mesaverde »

A close friend recently began a Whole Life insurance policy with MassMutual. Her financial adviser signed her up. My friend makes a great salary ($230k taxable income) but readily admits that she knows very little about investing/personal finance.

She's 47 and hopes to retire by age 57. Her reason for signing up for the Whole Life policy is because she wants a tax free stream of income in her retirement... she does not have a pension but is currently maxing out all retirement accounts she can. She does not need or want life insurance. She is divorced and has two daughters, both of whom are in their 20's and financially independent.

She has agreed to pay $40,000 annual premiums for 10 years and made the 1st payment in December 2019.
In December 2020 the guaranteed cash value will be $12,821 and the guaranteed death benefit will be $884,174.
In December 2029 the guaranteed cash value will be $342,670 and the guaranteed death benefit will be the same.
After that the guaranteed cash value increases by approximately 3% each year.
There are non-guaranteed account values listed in the policy but these are hypothetical.

To me this appears to be horrible because in addition to her premiums being illiquid, she can probably earn a higher return by investing the $40k/year elsewhere.
My initial reaction is to advise her to cancel the policy and walk away with the current $12,821 cash value, which would mean losing $27,179 from a premium she paid just a few months ago. And going forward, do one of the two options below:
1. Invest the $40k/year in an intermediate or long term municipal bond fund. Perhaps use that money to start an immediate fixed annuity when she's ready for a steady stream of income.
or
2. Use the $40k/year to pay down a mortgage for a home she just purchased (loan amount $450k at 3.25% fixed 30 year mortgage).

What would you advise that she do? Any suggestions would be much appreciated!
"Learn from the past, live in the present, plan for the future"
Dottie57
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Re: cancel Whole Life policy in this situation?

Post by Dottie57 »

She lost the premium the day she “wrote the check”.

No guarantees -not good.

Have her save her money and purchase SPIAs when time comes. Or put money in life strategy or balanced funds. Pay down mortgage. Don’t get life insurance when it is not needed.
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David Jay
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Re: cancel Whole Life policy in this situation?

Post by David Jay »

1. She appears to have no need of life insurance. An insurance “wrapper” creates overhead cost for any investment, so investing without the life insurance is almost always superior.

2. She will give them $400,000 over 10 years and is guaranteed to have $342,000 at that time. I would have a hard time using the term investment for those numbers.

3. She will not get tax-free income from this policy. She will be able to “borrow” her own money and pay the insurance company interest for the privilege. But she will not be able to make cash withdrawals without surrendering the policy.

No. Just NO.

She has paid 27,179 in education tax. That should have educated her enough to leave this fraud of a “financial advisor”, at least the annuity people actually offer a legitimate income stream.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: cancel Whole Life policy in this situation?

Post by David Jay »

So what should she do?

1. Save all the money she can.
2. Don’t get fixated on “tax free”, her tax bracket will likely be much lower in early retirement.
3. She can look at annuities at retirement time (her age and low interest rate environment says that this is not the time to buy annuities) but simply withdrawing from investments will probably provide the largest “income stream” at age 57.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
TSR
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Re: cancel Whole Life policy in this situation?

Post by TSR »

mesaverde wrote: Tue Mar 31, 2020 3:54 pm A close friend recently began a Whole Life insurance policy with MassMutual. Her financial adviser signed her up.
I agree with others here that your friend needs to cut her losses. But I wanted to highlight this language because this is Mass Mutual's business model. Its sales-people pose as financial advisers, but they're just sales-people. Let me guess, she's a lawyer? Maybe a doctor? They go around pretending to be financial advisers, selling the idea of "tax diversity." They give some decent advice for about three sessions, then they introduce the notion of insurance to round out the third (after Roth and traditional) "tax-sheltered" form of investing: insurance! It makes me so mad. It happened to me, but luckily someone stopped me from moving forward.

It is possible your friend has a real financial adviser, but I am guessing that she thinks the Mass Mutual sales-person is who she's referring to.
senex
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Re: cancel Whole Life policy in this situation?

Post by senex »

mesaverde wrote: Tue Mar 31, 2020 3:54 pm She has agreed to pay $40,000 annual premiums for 10 years and made the 1st payment in December 2019.
In December 2020 the guaranteed cash value will be $12,821 and the guaranteed death benefit will be $884,174.
Wow, this seems almost criminal. Sad.

WhiteCoatInvestor has a good series on the myths of Whole Life Insurance: https://www.whitecoatinvestor.com/debun ... insurance/

If it were me, I would fire the financial advisor, cancel, and look at the $27k loss as an expensive learning experience.
A good alternative may be to put the $40k/year with Vanguard's personal advisory service.
I personally can't imagine a scenario in which the Vanguard route would provide less after-tax spending power (or money to heirs) over a long time frame. Almost all life insurance (besides term life) are terrible products with terrible "returns."
SS Rambo
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Re: cancel Whole Life policy in this situation?

Post by SS Rambo »

I agree, this is going to be an expensive lesson that should have been avoided all-together. What’s the cash value in year two, three, etc? I can’t imagine the math looks any better in years 2-10, but each annual off-ramp has a different NPV based on the TVM of $40k each year minus the cash value at that time. And you definitely don’t want to exit right before the dividend. Without a full illustration no one can say mathematically year 1 is the best financial time to exit, but everyone is correct in that: the contract doesn’t fit the financial objective, it’ll be a loss either way, there’s a lot of headache saved by getting out sooner rather than later.
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Nate79
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Re: cancel Whole Life policy in this situation?

Post by Nate79 »

Very sad to hear about people getting scammed into buying Whole Trash insurance. Cancel and move on.
psy1
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Re: cancel Whole Life policy in this situation?

Post by psy1 »

I agree with the advice above. But I don't think she was scammed. If someone told me that for $400,000 they would give me back $362,000 years later and I agreed, then I am something but not scammed. Pay the $27K stupid tax and move on. For the record, I have paid my own stupid taxes over the years. Good lessons to learn ASAP.
Topic Author
mesaverde
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Re: cancel Whole Life policy in this situation?

Post by mesaverde »

Thank you for the comments, they're much appreciated.

I told my friend to ask the salesperson if he knows of an investment that has a guaranteed negative return for the first 10-15 years (-67% for the first year) and only a ~2.8% return after that.  Because that's what this policy entails. A high cost for a death benefit/life insurance that is not even necessary. What a horrible product.
"Learn from the past, live in the present, plan for the future"
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BL
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Re: cancel Whole Life policy in this situation?

Post by BL »

Is the surrender fee figured into the amount she would expect (cash value?) They must charge a fee so that the salesman's commission is covered. Be prepared to not get anything back, but I really don't know.

I would have nothing more to do with that salesperson!

Ask the company for an In-Force Illustration for more number facts.

I expect it makes sense to cash it or abandon it even if she gets nothing.
OnTrack
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Re: cancel Whole Life policy in this situation?

Post by OnTrack »

Did the salesperson say that the policy would provide a tax free income stream? That doesn't sound correct. The money paid in can be withdrawn without paying tax because the tax was already paid on that money before it was paid to the insurance company. It is not income from the insurance company. To the extent that money is withdrawn in excess of the premiums paid, there would be tax due on that amount. Of course there would not be any income tax on a death benefit, but that was not the purpose in this case.
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mesaverde
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Re: cancel Whole Life policy in this situation?

Post by mesaverde »

OnTrack wrote: Wed Apr 01, 2020 1:59 am Did the salesperson say that the policy would provide a tax free income stream? That doesn't sound correct. The money paid in can be withdrawn without paying tax because the tax was already paid on that money before it was paid to the insurance company. It is not income from the insurance company. To the extent that money is withdrawn in excess of the premiums paid, there would be tax due on that amount. Of course there would not be any income tax on a death benefit, but that was not the purpose in this case.
I suspect she was mislead by the salesperson because yes, that was what she wanted- no tax paid on any of the withdrawals (including earnings). Like a Roth.
"Learn from the past, live in the present, plan for the future"
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retired@50
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Re: cancel Whole Life policy in this situation?

Post by retired@50 »

mesaverde wrote: Wed Apr 01, 2020 10:08 am
OnTrack wrote: Wed Apr 01, 2020 1:59 am Did the salesperson say that the policy would provide a tax free income stream? That doesn't sound correct. The money paid in can be withdrawn without paying tax because the tax was already paid on that money before it was paid to the insurance company. It is not income from the insurance company. To the extent that money is withdrawn in excess of the premiums paid, there would be tax due on that amount. Of course there would not be any income tax on a death benefit, but that was not the purpose in this case.
I suspect she was mislead by the salesperson because yes, that was what she wanted- no tax paid on any of the withdrawals (including earnings). Like a Roth.
I think the misleading began the moment the sales-person (adviser) brought up life insurance. Divorced/Single people, with grown, financially independent children, DO NOT NEED LIFE INSURANCE.

Regards,
This is one person's opinion. Nothing more.
capjak
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Re: cancel Whole Life policy in this situation?

Post by capjak »

confirm that if she cancels she loses the surrender fee as it has been only a few months since first payment. She may have a period where she can get most of her premium back or transfer it to some other option.
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Nate79
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Re: cancel Whole Life policy in this situation?

Post by Nate79 »

mesaverde wrote: Wed Apr 01, 2020 10:08 am
OnTrack wrote: Wed Apr 01, 2020 1:59 am Did the salesperson say that the policy would provide a tax free income stream? That doesn't sound correct. The money paid in can be withdrawn without paying tax because the tax was already paid on that money before it was paid to the insurance company. It is not income from the insurance company. To the extent that money is withdrawn in excess of the premiums paid, there would be tax due on that amount. Of course there would not be any income tax on a death benefit, but that was not the purpose in this case.
I suspect she was mislead by the salesperson because yes, that was what she wanted- no tax paid on any of the withdrawals (including earnings). Like a Roth.
I think what they are referring to is not tax free income but taking loans against the cash value which would be tax free. This is a commonly sold strategy by these snakes.
ralph124cf
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Re: cancel Whole Life policy in this situation?

Post by ralph124cf »

Do you get the idea that people on this board really detest whole life insurance salesmen?

Ralph
petulant
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Re: cancel Whole Life policy in this situation?

Post by petulant »

The reality is not as grim as the guaranteed illustrations indicate since most mutual whole life insurance companies pay dividends well in excess of the guaranteed crediting rate. While that's not "guaranteed" to continue, neither are equity outperformance nor low default rates by bondholders. Further, a mutual life insurance company like MassMutual has no other shareholders to which they will give away the money. Value in excess of the guaranteed rate all goes to the participating policy owners. Nevertheless, this was almost certainly a bad choice.

The bad choice may have started with the friend's focus on a tax-free source of retirement income. Permanent life insurance policies certainly are a tax avoidance mechanism, but the internal costs to achieve tax avoidance almost always overwhelm the tax savings. Instead, the friend should focus on the total aftertax return for given risk. A basic stock/bond portfolio, or a single fund, would be best if you can recommend one.

Further, the friend might be well-served by paying down debt. Paying off mortgages or other loans can have a similar impact to investing the money, but the return in avoided interest actually is tax-free.

In the short term, the friend should probably go ahead and surrender the policy. Doing so will be painful and make clear that the majority of the $40,000 in the first payment was an expensive mistake. However, it needs to be done because there will continue to be a significant drag over the next 10 years due to the cost of insurance being high, even with a high dividend rate from MassMutual.
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Re: cancel Whole Life policy in this situation?

Post by pkcrafter »

mesaverde wrote:
She has agreed to pay $40,000 annual premiums for 10 years
I think you mean 40k over 10 years, not annual. None the less, whole life insurance is a bad, expensive deal. To take it one step further, it is your friend's responsibility to learn how to handle her own money and invest. It isn't that difficult--the Boglehead way is the best strategy for average people. It is simple and highly efficient. In addition, shame on the paid advisor who recommended whole life.

https://momanddadmoney.com/why-whole-li ... nvestment/


Paul
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OnTrack
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Re: cancel Whole Life policy in this situation?

Post by OnTrack »

pkcrafter wrote: Wed Apr 01, 2020 10:37 pm mesaverde wrote:
She has agreed to pay $40,000 annual premiums for 10 years
I think you mean 40k over 10 years, not annual. None the less, whole life insurance is a bad, expensive deal. To take it one step further, it is your friend's responsibility to learn how to handle her own money and invest. It isn't that difficult--the Boglehead way is the best strategy for average people. It is simple and highly efficient. In addition, shame on the paid advisor who recommended whole life.

https://momanddadmoney.com/why-whole-li ... nvestment/


Paul
Given "In December 2029 the guaranteed cash value will be $342,670", I would say it is $40,000 annually. It is not possible to get$342,670 guaranteed for paying $40,000 over 10 years.
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Re: cancel Whole Life policy in this situation?

Post by pkcrafter »

OnTrack wrote: Thu Apr 02, 2020 12:17 am
pkcrafter wrote: Wed Apr 01, 2020 10:37 pm mesaverde wrote:
She has agreed to pay $40,000 annual premiums for 10 years
I think you mean 40k over 10 years, not annual. None the less, whole life insurance is a bad, expensive deal. To take it one step further, it is your friend's responsibility to learn how to handle her own money and invest. It isn't that difficult--the Boglehead way is the best strategy for average people. It is simple and highly efficient. In addition, shame on the paid advisor who recommended whole life.

https://momanddadmoney.com/why-whole-li ... nvestment/


Paul
Given "In December 2029 the guaranteed cash value will be $342,670", I would say it is $40,000 annually. It is not possible to get$342,670 guaranteed for paying $40,000 over 10 years.
Ok, I see she is committed to purchasing 40k/year in whole life. That is very expensive way to accumulate retirement assets. Also, you didn't mention IRA/Roth contributions.

https://money.usnews.com/money/retireme ... ut-a-401-k

This is a typical taxable account allocation recommendation from Vanguard

Vanguard Total Stock Market Index Fund Admiral Shares CURRENT 38% RECOMMENDED 39%
Vanguard Total International Stock Index Fund Admiral Shares CURRENT 0% RECOMMENDED 26%
Vanguard Limited-Term Tax-Exempt Fund Admiral Shares CURRENT 10% RECOMMENDED 4%
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares CURRENT 18% RECOMMENDED 18%
Vanguard Long-Term Tax-Exempt Fund Admiral Shares CURRENT 13% RECOMMENDED 13%

Paul
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Re: cancel Whole Life policy in this situation?

Post by Wiggums »

David Jay wrote: Tue Mar 31, 2020 4:28 pm So what should she do?

1. Save all the money she can.
2. Don’t get fixated on “tax free”, her tax bracket will likely be much lower in early retirement.
3. She can look at annuities at retirement time (her age and low interest rate environment says that this is not the time to buy annuities) but simply withdrawing from investments will probably provide the largest “income stream” at age 57.
I agree.
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Stinky
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Re: cancel Whole Life policy in this situation?

Post by Stinky »

capjak wrote: Wed Apr 01, 2020 10:37 am confirm that if she cancels she loses the surrender fee as it has been only a few months since first payment. She may have a period where she can get most of her premium back or transfer it to some other option.
If she got the policy in December 2019, that period is closed.

She got absolutely hosed. So sorry for her.

And the agent probably made $20k or more for selling her this piece of trash.
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