Should we keep paying the premiums for a whole life insurance policy and let the cash value grow until year 10, or do we get out now and invest the difference and hope to recoup the losses?
We purchased a whole life insurance policy at age 33 with high premiums to use as an investment for retirement. We are four years into the policy. Upon further research, I am not sure this was the best decision. I understand the penalties and fees for surrendering the policy to obtain the cash value are high. Do we keep paying the premiums and let the cash value grow until year 10, or do we get out now and invest the difference and hope to recoup the losses?
Personally, I like to see my clients buy insurance for insurance, and investments for investments.
If you look at your policy from a stricly investment point of view, at this time you have a loss. After the policy has been in force for years and years you may have an IRR on your cash approaching 5%. But if you look at this as strictly insurance, and the policy paid out (meaning the insured died) the IRR would be huge.
To answer your question: As with any insurance policy, you are paying for coverage. When your auto policy renews after 6 months, you don't look at the money spent as lost, do you? No - you paid for needed insurance. That's the issue here. The question becomes "Do I have the right insurance for my cirumstances?" If you are maxing out your retirement plans and looking for another opportunity for tax-deferred growth, and have an insurance need, this is a good choice. If not, and you have no health issues, I would consider replacing this policy with term insurance and investing into your retirement through IRAs work employer-sponsored plans.
It's never good to say never but ... whole life policies are unsuitable save for a fairly narrow range of circumstances. The floors on whole life policy value typically do not help real world investors. The guaranteed accrual is not high enough once surrender charges are factored in. By the time those surrender charges lapse, a dedicated investment portfolio would have delivered better results.,
Recently one of my clients shared a quarterly statement of a cash value policy along with current premiums for a coexisting term life policy. The mortality and investment charges on the former were more than 3x the cost of the term policy. Of course, your experience could vary but superiority of term insurance has been a recurring theme in the evaluations of cash value policies that I've undertaken over the years.
As one of your questions' other responders said, buy insurance for insurance needs and investments for your investment needs. Bundled products are confusing and often hide a bloated cost structure intended to provide outsized compensation to those who push them on customers. With a diversified passive investment strategy, you can build a highly efficient portfolio with a very low effective tax rate. Use some natural tax shelters like Roth IRAs and 401ks to provide cover for some of your fixed income holdings. And buy term insurance to provide for your children and spouse in the event of your premature death. 20 year term policies usually fit the bill.
It’s difficult to give the right answer without first viewing the policy. One of the reasons that a person purchases a whole life is for its tax advantage after he/she has maxed out all tax-advantaged plans through retirement accounts such as 401k, IRA, etc. and still has a large size of idling cash position. Even with that premise, I always believe a portfolio with the maximum tax efficiency can reach the same goal, if not a better result. After all, an investment return could be so much better than a fixed interest rate offered by the insurance company.
Having said that, you may still have two options for your current situation if the needs for a life insurance still valid: 1) Paid-up option. Use what you have paid to get a paid-up policy, albeit a much smaller amount of policy, but you won’t owe any more premiums. 2) An extended term. Convert the existing one to a term policy (if the company allows it) based on the premiums you already paid. With this option, once the term is up, the policy expires.
Upshot: call the insurance company to see what options you have, and consult with a CFP® to see what other suggestions best suit your current needs. Best!
What you have is probably the best product in the marketplace to grow cash on a guaranteed basis. Can you honestly find another vehicle that will give you the same guaranteed interest rate? Has anybody shown you a schedule of values over the next 10, 20 or 30 years that grows as much cash on a guaranteed basis, as this product? Plus, you have nonguaranteed values in the form of dividends. Have you come across conservative investments that historically match the dividend paying history of this carrier?
And, you have the death benefit on both a guaranteed and on a scheduled basis.
As far as I'm concerned, this is the primary value of whole life insurance. Give some hard thought as to whether you want to incorporate these financial benefits in your portfolio. If so, then stay put. If not – if you find that you really don't want these benefits – then you should cut your losses now.
We would love to be able to help you! However, to get started on the right foot, we have many ?’s to ask you first. We work very much like a doctor would. Keep in mind you just don’t walk into the Doc’s office and immediately get a prescription.
In fact we always say that prescription without diagnosis is malpractice.
So let’s get started…..
If you have whole life, there are no fee's for stoping the policy..... many ? for you here:
Who is the insurance carrier?
What kind of policy is it?
A whole life contract with a triple A carrier that pays dividends, is an awesome tool! You just need to know how to use it. Lets talk
Brett M. Sause, LUTCF®, LTCP®, CLTC®, RFC®, LACP®, FSCP®
Principal & CEO