Whole life insurance dilemma

[anastasia-b]

Hi! I have been reading this blog & forum for a while but am posting for the first time now.

I posted my "dilemma" on another PF discussion forum.. Essentially those who replied, just said stop funding my whole life insurance policy and cancel now, since it is a ripoff/scam without saying why. I was in agreement until I thought it through a little. I don't think it would hurt anything to keep it. I would love to get some more opinions before calling my agent (who will convince me to keep it even if it's not great for me).

I have had a 50K (face value of death benefit) life insurance policy that my parents bought when I was one yr old, for 32 years now. The yearly premium is $338 which doesn't ever increase for the duration of the policy.

The policy has a cash value of around 16K-17K total, minus a loan principal of 9K (I borrowed against it to buy my first car in '06). The last few years of statements say I am earning a dividend of ~500 per year. (and then they also say total added this year = ~2K, I don't understand that part).

If I could have gone back in time, I would have convinced my parents not to get this policy, but here it is, I have it, and don't know whether to keep it.

It sure would be nice to kiss that loan goodbye and get a check for 7K which I could invest. Right now I don't have a spouse or kids, I have $ for burial costs, so I don't really NEED life insurance quite yet. I do need to pay off that loan, though...

My gut is telling me to hang onto the policy, at least till I need life insurance, at which point I would purchase a term policy with a much larger death benefit. For now, what's the harm in feeding the whole life policy $338 and let it accrue?

Am I totally missing the boat? Thanks!

[disneysteve]

1. You don't have any need for life insurance.
2. You have a whole life policy which, even if you did need insurance, is not the way to get it.
3. You can walk away from this mess with a check for $7,000.

Sounds like a no-brainer to me.

What's the harm in continuing to pay $338/year into the policy? The harm is you are paying a greatly inflated price for a service that you have absolutely no need for. Why would you possibly want to do that?

[Joan.of.the.Arch]

You know what? I just opened my mail and there is a life insurance offer. For me at age 49 I can get $250,000 for just $26.25 per month. ($315 per year). That's five times more than your policy, for less money. I presume you are l a lot younger than that, so I think you should be able to find a far better deal than you have now.

Yep, I would cash out for that $7,000 and buy better, cheaper insurance.

[disneysteve]

I would cash out for that $7,000 and buy better, cheaper insurance.

Nope. Cash it out and DON'T buy another policy. You are single with no dependents. You don't need life insurance. Perhaps you will some day, but for now, invest your money instead.

[maat55]

I ditto the response I gave you in the other forum.

[disneysteve]

I ditto the response I gave you in the other forum.

What is the other forum you guys are talking about?

[anastasia-b]

What is the other forum you guys are talking about?

It's at Get Rich Slowly (I guess I can't post a link yet). I found that one a while ago, before I found this one. Both are awesome.

[anastasia-b]

I ditto the response I gave you in the other forum.

Why would you ditto a completely worthless and mildly offensive response?

[disneysteve]

anastasia, I just read your post in the other forum. You gave a bit more info there which just further supports my response here.

"I totally know that this policy is a ripoff."

"I tried to cancel the policy once before. Wrote a letter to my rep stating my intentions. When he didn't call back for about 2 weeks, I called him. He said he just got back from vacation and hadn't gotten thru his pile of mail yet. I told him I wasn't born yesterday but he somehow talked me into not cancelling."

"My parents would be mad if I cancelled it."

So you readily admit that it is a rip-off. You've tried to cancel it and let the salesman talk you out of it. But you're afraid your parents will be upset if you get out of it.

If your parents really want you to keep the policy, let them pay for it. Otherwise, if it is up to you, cancel it. There is absolutely no benefit to keeping it.

[maat55]

Why would you ditto a completely worthless and mildly offensive response?

Your angry that I called it your Linus blanket. The fact remains, it is a lousy insurance-investment product. As Steve said, if your parents are that in love with it, let them pay for it. My guess is that you could end it and roll it into an IRA as you have mentioned, and they probably would not know it. Don't tell them, just do it.

Many older people are convinced this is a great product because it was all they were sold long ago. As you have heard on these forums, it is not. Don't take it personal, I think you are just persistant because you love your dad and just want to make him happy. Good luck with whatever you decide.

[deadgoon]

As long as you have your final expenses covered, you should just drop this policy. The only reason you are hanging onto it now is that it has sentimental value for some reason. I'm in a similar financial situation and I'd drop this policy like a rock if I were in your shoes. You don't even have to tell your parents if that's what is worrying you. If they ask, just tell them the truth, they probably won't even think about it though.

[anastasia-b]

Thanks. I appreciate all your replies.

Now I am on the defensive. I know I admitted I thought it was a "ripoff" in my posts on the other forum. Meaning, I wouldn't get it for my kid. And I was frustrated because I was not making as much progress as I thought, paying down the loan "here and there". But in the process of posting on the other forum, I got to thinking about it a little more. I looked at my statements again. At this point, as the policy is 32 years old, I am getting more in dividends than I am feeding it. So, I kind of changed my opinion from "ripoff" to "not as great as investing the cash value elsewhere".

The fact is, if my parents find out I cancelled the policy, yes, they will not be too happy (mom moreso than dad - she is way more financially literate than he). Am I worried about it? No. Am I keeping the policy because I am afraid they will be angry? No. I am a grown woman. Been independent for a very long time. Hence the annoyance at the Linus blanket comment.

Just to be clear, I have no sentimental attachment to the policy. However, I do appreciate that my folks wanted to set me up with something that can benefit my descendents when I die.

Please no more jumping all over me. I get it.

[Joan.of.the.Arch]

Nope. Cash it out and DON'T buy another policy. You are single with no dependents. You don't need life insurance. Perhaps you will some day, but for now, invest your money instead.

Actually, this is better advice than what I gave! I meant that if you really felt you must have life insurance to please get a much better deal.

How would your parents even know if you were to discontinue this insurance? Is it something they ask you about? If you are thinking they would find out should you die before them, and you just don't want them to face knowing that you made a decision countering theirs, well, maybe it would help if you did at least get better insurance. If you need to tell them about it, may I suggest you say you "converted" it to another plan? Or you "re-moulded" it to another plan? Or you "translated," "transmuted," "re-configured," or "re-keyed" it? There must be a way to explain it that sounds like you astutely built upon their idea, rather than dumped their idea.

But, I do think your gut is misleading you. Let the numbers lead you.

[disneysteve]

At this point, as the policy is 32 years old, I am getting more in dividends than I am feeding it. So, I kind of changed my opinion from "ripoff" to "not as great as investing the cash value elsewhere".

I think that's a good point worth discussing. Whole life policies are the worst in the early years of the policy because of fees and commissions. Decades later, they can and do become self-supporting meaing the dividends are higher than the premiums. That still doesn't make it a good investment as to get to that point, you need to sink a large sum into the policy over the years, but it makes cancelling a little less clear cut.

You really need to run the numbers. Right now, you're paying $338 and earning a little over $500 (don't have the exact figure you gave in front of me). You have a cash value of $7,000. If you cash out, you can invest that $7,000 plus the $338/yr. you are currently spending.

Which is the better deal? It all depends on how you would invest the money if you took it out of the policy? If you want an investment where your principal is safe, like a CD, rates aren't so great today and you may actually be better off keeping the insurance policy for now. If, however, you want to invest that money more aggressively, now would be a great time to be buying into the stock market since the market is down 40-some percent from it's high. Your potential return long-term is a lot greater going that route.

[anastasia-b]

How would your parents even know if you were to discontinue this insurance?

Well, they would sure find out if I were to pass away! And I think, for that purpose, I am going to tell them about cancelling the whole life policy so that they are in the know. If I "went" tomorrow (shudder), they'd likely be the ones making arrangements.

A little off topic but - I would say that 5 years ago, if wondering whether to hold onto this policy - yes, I probably would have wanted to, for "sentimental reasons". My mom is very very attached to things. I bet she has saved every single article of clothing my bro and I ever wore, down to the last sock! Their house is extremely cluttered. I wouldn't say she's a hoarder, but pretty close. She also hangs onto stuff for "green" reasons (think the lady in the cell phone commercial scolding her kids for throwing out "perfectly good minutes")

When I realized that I had learned/inherited these tendencies, I have been working hard on detaching myself from "stuff". It's been liberating.