Whole Life as debt payoff plan

[bigoilman]

Hey everyone. We opened up a whole life account as a way to stash money away to pay off our house. Our strategy is to pay the minimum amount on our home loan while putting all the extra cash into the Whole Life until we have the entire amount needed to pay off our house 100%. This keeps our cash earning interest and keeps it liquid in case for some reason I need access to it.
Has anyone else done this? Are there any future pitfalls or challenges I should be aware of?

[snafu]

https://www.whitecoatinvestor.com/8-reasons-to-avoid-whole-life-i

[disneysteve]

I'm sorry to hear you fell victim to that scam.

How long ago did that happen? Those policies typically have a surrender fee that diminishes each year. Where in that schedule are you? How much will it cost you to get out of it right now?

Ultimately, you just want to get rid of that disaster as soon as you possibly can and just chalk it up to a life lesson learned. It'll cost you some money but not nearly as much as you will lose if you keep it.

If you need life insurance, get yourself a good term policy before you cancel the whole life. But once that new policy is in hand, ditch the whole life as fast as you can.

[amarowsky]

I'm sorry to hear you fell victim to that scam.

How long ago did that happen? Those policies typically have a surrender fee that diminishes each year. Where in that schedule are you? How much will it cost you to get out of it right now?

Ultimately, you just want to get rid of that disaster as soon as you possibly can and just chalk it up to a life lesson learned. It'll cost you some money but not nearly as much as you will lose if you keep it.

If you need life insurance, get yourself a good term policy before you cancel the whole life. But once that new policy is in hand, ditch the whole life as fast as you can.

Steve once again to the rescue of a whole life insurance victim.

You truly are the champion crusader to defend those who have been enticed by the false numbers of whole life. Keep fighting the good fight!

[Spiffster]

Come on guys... Whole Life policies are not bad for everyone. I mean, the person who sold it to you does quite well.

[disneysteve]

Come on guys... Whole Life policies are not bad for everyone. I mean, the person who sold it to you does quite well.

Scams are always good for the scammer.

[bigoilman]

So what other options would you guys suggest instead?

[Petunia 100]

So what other options would you guys suggest instead?

Is your goal to retain liquidity until such time as you have enough to pay the mortgage in full? If so, I would suggest a portfolio of total market etf(s) in a taxable account. An appropriate choice might be SCHB or VTI. (I'm assuming here this goal will take you a decade or longer to reach).

If you are OK with losing a bit of liquidity, you might also consider "saving" for this goal by making mortgage prepayments, thus guaranteeing your return on a portion of your savings. For example, if you plan to devote $500 per month to this goal, you might decide to invest $400 per month in SCHB and pay $100 per month extra principal on your mortgage.

If you are not already maxing your Roth IRA (and one for your spouse too, if applicable), do that first. Remember, you can withdraw your own contributions (but not growth) at any time for any reason, no tax or penalty. Thus, a Roth IRA can double as an extended emergency fund, a college fund, a pay-the-mortgage-in-full fund, or anything else.

[disneysteve]

This keeps our cash earning interest and keeps it liquid in case for some reason I need access to it.

So what other options would you guys suggest instead?

Putting the cash under the mattress would be better than a whole life policy.

Seriously, though, you need to work out your budget. If you are concerned that you will need the money that you're setting aside, that tells me that you don't have a sufficient emergency fund in place.

Once you have an adequate EF, you can direct extra money toward the mortgage if you choose. But be aware of what you're accomplishing by doing so. What is the interest rate on your mortgage? It's likely around 4%. After the tax deduction, it's closer to 3%. So by prepaying the mortgage, you are "earning" 3% on your money. Are you okay with that return? Or do you think you could do better by investing that money elsewhere? My S&P 500 Index fund earned 17.85% in the past year and has averaged 14.59% annually over the past 5 years. I don't expect those returns to continue but had I thrown money at our mortgage instead of investing the past 5 years, I would have lost out on all of those gains.

Just to be clear, I'm not opposed to paying extra on the mortgage. In fact, I do it every single month and have for years. But it's a relatively small amount. I'm comfortable taking more risk in hopes of getting higher returns elsewhere.

If you still want to stash money somewhere so that you maintain access to it in case of some catastrophe, I'd suggest a good diversified investment portfolio.

[bigoilman]

We have plenty of cash stashed for an emergency. I am making an extra payment each month toward our mortgage as well. What I am putting into whole life is just extra cash we have left over each month. I have only had the policy for two years. Is it better to get out now and pay the penalty? If another correction in the market is coming (which I believe is due later this year or early next), then where can I safely invest the cash and get decent returns? Current cash surrender value of the whole life account is around 106K.

[disneysteve]

What I am putting into whole life is just extra cash we have left over each month. I have only had the policy for two years.

Current cash surrender value of the whole life account is around 106K.

You've only been contributing for 2 years and already have $106,000? Wow! Great job.

Still, whole life is NOT an investment vehicle. It has outrageously high fees and sub-par returns no matter what rosy projections the sleazy salesman showed you when he convinced you to buy the policy. That info simply isn't true, not even close to true.

What would I do? Dump the policy. Take the money and use a big chunk of it to pay down the mortgage if that's the intent. If you want to keep some of it as additional emergency funds, nothing wrong with that, though from what you said, I'm not sure why you need to. Just park it in a good online savings account like Ally or Capital One or Discover. If you don't think you'll need to touch it any time soon, you could earn a little more in a 1 year or perhaps 18 month CD. I wouldn't go out any farther than that since rates are likely to continue rising.

[Gailete]

We have plenty of cash stashed for an emergency. I am making an extra payment each month toward our mortgage as well. What I am putting into whole life is just extra cash we have left over each month. I have only had the policy for two years. Is it better to get out now and pay the penalty? If another correction in the market is coming (which I believe is due later this year or early next), then where can I safely invest the cash and get decent returns? Current cash surrender value of the whole life account is around 106K.

Are you sure about that??? When I married my husband he had a whole life policy and he also had this idea that at some point in a few years he could cash it in for a stack of money. I got ahold of the policy and read it and looked and the surrender value and my honey had been taken big time. Partly because he has poor vision and can never read the fine print of anything. I do. I think he had had the policy for something like ten years at the time and we cashed it in and I think got something on the order of around $1000! We did get him a term life policy tht was much cheaper.

What to do for paying off your house, pay even more on your mortgage like you are already doing, or invest it in the stock market. Whatever you do, you will NEVER find or get 100% safety in anything you do. The stock market may 'correct' itself, but over the course of years, if you are careful, you will evenutally have a nice stash of cash, but the secret there is buy low and sell high. The time to sell your stocks is NOT when they drop 50% but when they have gone up 50%! Most folks get that backwards. When the stock market is down, then stocks are on sale and when something is on sale, we stock up.

[disneysteve]

106K in 2 years would mean you've put in over $2,200/month on top of the premiums. Does that sound about right?

ETA: Correcting my math: You would have had to put in over $4,400/month for 2 years. Somehow I suspect that isn't the case and this policy isn't worth nearly as much as you think it is.

[Snydley]

DH and I hired a financial planner after we bought our house and he convinced us that whole life insurance policies were the way to go. After about 8 months of contributing I became suspicious and did some searches online.

I cancelled our policies and we were out $16,000. It was rough but I am so glad that was all I lost. Then I found this site and I've been managing all our investing on my own.

Get out of that policy NOW.

[Gailete]

DH and I hired a financial planner after we bought our house and he convinced us that whole life insurance policies were the way to go. After about 8 months of contributing I became suspicious and did some searches online.

I cancelled our policies and we were out $16,000. It was rough but I am so glad that was all I lost. Then I found this site and I've been managing all our investing on my own.

Get out of that policy NOW.

Makes you wonder how much the 'planner' earned for getting you guys into that policy, and then all the other people that kept on paying. This is why so many of these folks are up in arms about the new law that makes these guys unable to do that. Instead of their own pocket, they are now supposed to be thinking of their customers pockets! About time. So many people thought these guys were giving out advice for the customers good and they weren't.