What should I do with cash value life insurance?

[CygX1]

Years ago (1988) my father-in-law purchased Northwest Mutual cash value ("Adjustable Complife") life insurance on me, with my wife as beneficiary. I took over the premiums some point early in our marriage. At one point we were really strapped for cash and we borrowed against it. I have since paid off the loan, but I took the option of paying the premiums out of the annual dividend so I haven't been making any additional payments since. As a consequence, it has been growing very slowly.

Death Benefit $50,000
Accumulated Value: $25,283
Cost Basis: $9712.83
Taxable Gain if surrendered: $15,570.86
2022 accumulated value increase: $1025.65.
2022 Dividend: $611.25
2023 annual premium: $341.95 (paid from dividend)

I do have other cheap term life insurance 1,000,000 coverage for about $1500 per year until I turn 65, and basic FEGLI of about 170,000 until I retire from USG.

My question is should I (a) keep it running on autopilot, since it's not much money; (b) start paying the full premium directly again, so that it grows more quickly; (c) some kind of 1031 exchange; (d) cash it in and pay the taxes on the capital gain?

[UNCHEEL]

You should sell the cash value policy and shop for the amount of term you need. The cash value policy seems "easy," since the dividends are covering the premium, but the return built into the dividends is probably quite low. Also, it's doubtful that the current policy is the exact amount of coverage you and your family need, and there's cost breakage to having multiple policies. You will have to pay tax on the cash value gain, but you'll come out ahead in the end.

[Stinky]

Years ago (1988) my father-in-law purchased Northwest Mutual cash value ("Adjustable Complife") life insurance on me, with my wife as beneficiary. I took over the premiums some point early in our marriage. At one point we were really strapped for cash and we borrowed against it. I have since paid off the loan, but I took the option of paying the premiums out of the annual dividend so I haven't been making any additional payments since. As a consequence, it has been growing very slowly.

Death Benefit $50,000
Accumulated Value: $25,283
Cost Basis: $9712.83
Taxable Gain if surrendered: $15,570.86
2022 accumulated value increase: $1025.65.
2022 Dividend: $611.25
2023 annual premium: $341.95 (paid from dividend)

I do have other cheap term life insurance 1,000,000 coverage for about $1500 per year until I turn 65, and basic FEGLI of about 170,000 until I retire from USG.

My question is should I (a) keep it running on autopilot, since it's not much money; (b) start paying the full premium directly again, so that it grows more quickly; (c) some kind of 1031 exchange; (d) cash it in and pay the taxes on the capital gain?

You’re making about 4% on the cash value (1,025 / 25,283). If you’re satisfied with that, you can just keep the policy, not pay any more premiums, and let it chug along. That 4% earned rate might modestly increase over future years.

If you wanted to juice up the return and keep it in your fixed income bucket, you could consider doing a 1035 exchange into a multi year guaranteed annuity (MYGA). Many of those products are paying 5% and more, guaranteed for 5 years. You can see a wide variety of products at blueprintincome.com or other annuity seller sites.

Or you could just surrender the policy now, pay the taxes, and invest the proceeds per your asset allocation. I expect that a $50k death benefit and a $25k cash value are incidental to your financial life.

As to taxes - you’ll pay taxes at ordinary income (not capital gains) rates if you surrender the life policy now. You’ll pay at the same ordinary income rates when you withdraw from the MYGA after exchanging into it. Also, if you withdraw from the MYGA before age 59.5, you’ll pay an added penalty tax of 10% on your gain. The only way to avoid taxes on the gain is to keep the life insurance policy until you die. But, you can possibly reduce the taxes if you surrender/withdraw in a future year when you are in a lower tax bracket.

The dollars involved aren’t huge. There aren’t really any “bad” choices here. It’s really up to you.

Post back with questions.

[Valuethinker]

Years ago (1988) my father-in-law purchased Northwest Mutual cash value ("Adjustable Complife") life insurance on me, with my wife as beneficiary. I took over the premiums some point early in our marriage. At one point we were really strapped for cash and we borrowed against it. I have since paid off the loan, but I took the option of paying the premiums out of the annual dividend so I haven't been making any additional payments since. As a consequence, it has been growing very slowly.

Death Benefit $50,000
Accumulated Value: $25,283
Cost Basis: $9712.83
Taxable Gain if surrendered: $15,570.86
2022 accumulated value increase: $1025.65.
2022 Dividend: $611.25
2023 annual premium: $341.95 (paid from dividend)

I do have other cheap term life insurance 1,000,000 coverage for about $1500 per year until I turn 65, and basic FEGLI of about 170,000 until I retire from USG.

My question is should I (a) keep it running on autopilot, since it's not much money; (b) start paying the full premium directly again, so that it grows more quickly; (c) some kind of 1031 exchange; (d) cash it in and pay the taxes on the capital gain?

The standard question is "Given the future cash returns, would you buy this product now?" If not, that's a strong signal to sell.

The main issue I see here is tax planning. When can you cash out at the lowest tax rate? Other posters have given you some ideas (I used to work for a Life Assurance company, but not in the USA).

TBH given that interest rates have risen, I would be against paying more money into the policy. Separate from just letting dividends fund it.

[Valuethinker]

Years ago (1988) my father-in-law purchased Northwest Mutual cash value ("Adjustable Complife") life insurance on me, with my wife as beneficiary. I took over the premiums some point early in our marriage. At one point we were really strapped for cash and we borrowed against it. I have since paid off the loan, but I took the option of paying the premiums out of the annual dividend so I haven't been making any additional payments since. As a consequence, it has been growing very slowly.

Death Benefit $50,000
Accumulated Value: $25,283
Cost Basis: $9712.83
Taxable Gain if surrendered: $15,570.86
2022 accumulated value increase: $1025.65.
2022 Dividend: $611.25
2023 annual premium: $341.95 (paid from dividend)

I do have other cheap term life insurance 1,000,000 coverage for about $1500 per year until I turn 65, and basic FEGLI of about 170,000 until I retire from USG.

My question is should I (a) keep it running on autopilot, since it's not much money; (b) start paying the full premium directly again, so that it grows more quickly; (c) some kind of 1031 exchange; (d) cash it in and pay the taxes on the capital gain?

The standard question is "Given the future cash returns, would you buy this product now?" If not, that's a strong signal to sell.

The main issue I see here is tax planning. When can you cash out at the lowest tax rate? Other posters have given you some ideas (I used to work for a Life Assurance company, but not in the USA).

TBH given that interest rates have risen, I would be against paying more money into the policy. Separate from just letting dividends fund it.

[Jack FFR1846]

You have a term policy so this policy is not needed.

While you will pay tax if you surrender, so what? You still end up with more money net.

4%? You can get 4.25% with a Redneck Bank (internet branch of All America Bank) mega money account up to $75k. I've got an account there maxed out. Beats the returns you're getting.

[petulant]

4% pretax is not the same thing as 4% on cash value in a policy that could be held to "maturity," at which point the IRR will likely be closer to 5% with no tax owed.

Stinky is right that given the small size, there's no wrong action, but some reasonings are less right than others.

[smooth_rough]

Years ago (1988) my father-in-law purchased Northwest Mutual cash value ("Adjustable Complife") life insurance on me, with my wife as beneficiary. I took over the premiums some point early in our marriage. At one point we were really strapped for cash and we borrowed against it. I have since paid off the loan, but I took the option of paying the premiums out of the annual dividend so I haven't been making any additional payments since. As a consequence, it has been growing very slowly.

Death Benefit $50,000
Accumulated Value: $25,283
Cost Basis: $9712.83
Taxable Gain if surrendered: $15,570.86
2022 accumulated value increase: $1025.65.
2022 Dividend: $611.25
2023 annual premium: $341.95 (paid from dividend)

I do have other cheap term life insurance 1,000,000 coverage for about $1500 per year until I turn 65, and basic FEGLI of about 170,000 until I retire from USG.

My question is should I (a) keep it running on autopilot, since it's not much money; (b) start paying the full premium directly again, so that it grows more quickly; (c) some kind of 1031 exchange; (d) cash it in and pay the taxes on the capital gain?

Real estate is 1031 exchange, insurance is 1035 exchange, right?

You could convert it to Fidelity variable deferred annuity, and grow it tax deferred. Fidelity provides choice from several dozen different funds inside their annuity envelope. You could potentially do better or worse than 4%. Fidelity annuity has mgmt fees. You can't withdraw until age 59 1/2. But if you are already close to that age or older, that becomes non-issue.