Looking for some advice - navigating a whole life insurance product for the first time. My in laws got convinced into buying a whole life insurance policy for my wife years before we got married. As I’m reading more about this I realized it was a terrible investment so looking to get out of it. Here are the numbers. Is my calculation of “stupid tax” correct?
Policy Date (assume that’s the start date): Jan 1, 2011 Face amount: $1 million Death benefit: $1,073,676 Annual premium: $7,325 Total premiums paid: $102,550 ($7,325 x 13 years)
Is the stupid tax effectively around $14K (88K - 102K)?
Or should I be deducting from the full surrender value in which case we would have a gain of $6K ($108K-102K)?
Few more details:
The way it was set up it looks like dividends being generated from the investment portion are being reinvested to grow the cash value.
I modeled it out in the online portal and it doesn’t look like there are any fees being charged to surrender the policy.
Am I thinking about this the correct way? Would appreciate any suggestions on whether we should move to another vehicle (vs. taking it all out and sticking it in VOO or VTI).
You have a lot of equity in the policy, and the dividends will keep growing and compounding. It sounds like a well-structured whole life policy from a company that pays dividends. It’s doing exactly what it’s meant to do. Instead of surrendering, let it grow and let the dividends work for you.
You have an old policy with decent value. Skip the judgment and focus on making the best decision.
The “stupid tax” isn’t $14K. Your wife got $1M of life insurance for 13 years. A term policy would cost around $500-$1,000 a year, so you could credit $10K for the term insurance.
The policy likely had high upfront fees and commissions, but dividends reinvest to grow cash value, which is good. There are no surrender fees, and you are currently under cost basis, so you can take out the money without owing taxes.
Consider keeping the policy as a bond fund or borrowing against it to invest in stocks. The policy can outperform corporate bonds and has tax benefits.
The real “stupid tax” is getting financial advice from someone on the radio who doesn’t know you and just wants to sell you a book. If your wife owned a million-dollar apartment building, would you sell it just to rent an apartment?
How much is the cash value increasing now year over year as compared to the premium? How many years until the policy is paid off? Generally, old insurance is good insurance.
First, stop judging based on the paper. Your agent set up something that you may not fully understand. You should ask the agent for clarification. Whole life insurance is a fixed type of insurance. Some people like it, and some don’t. With a 15-year paid-up policy, the insurance will be paid off. Review the illustrations to see if it meets your goals.
Please don’t surrender your policy, or you’ll lose the $20K difference. Instead, consider a 1035 exchange to an Indexed Universal Life (IUL) policy with dividend interest based on market growth. My IUL earned 8.75% in 2023, and it’s tax-advantaged. You can also redesign the policy to maximize cash accumulation with minimal death benefit. This cash is easily accessible within a few business days, without needing a loan application. An IUL can include long-term care and critical care riders for extra coverage…Expaliner video about IUL here. (note: not my company, not my video) https://youtu.be/v3rEL-ok4ys?si=wuTNSpP5ekhBB3eJ