Life Insurance

[coryroth24]

Didn't know where else to throw this, but I need some outside opinions. My fiance and I are looking to buy a house. I currently have two life insurance policies (I'm 28), one that my parents took out on me when I was born and signed over to me recently, the other, is paid for through my job and is worth a few more bucks. Problem is that I'm torn with the policy that my parents took out on me. Should I keep it or cash it out? We could use the extra cash to put towards our down payment on the house or the closing costs.



Thanks!

[disneysteve]

Virtually nobody needs whole life insurance, which is what your parents bought for you. Get rid of it and replace it with a low cost term policy. Having coverage through work is fine but it is rarely adequate coverage and it isn't portable - if you leave the job, you lose the coverage - so you need to insure yourself.

[Robert742]

No one should give you advice without knowing more about your situation and what is important to you. Whether you should drop permanent life insurance is a very different question than whether you should buy it.

You need to know the tax consequences of cashing out the policy.

The monthly premium may not be too expensive for maintaining the policy. since you have had the policy since you were a child. You need to compare the cost of keeping the policy with the cost of replacing it with term insurance, and consider the cost versus the benefits of permanent coverage.

[MonkeyMama]

Virtually nobody needs whole life insurance, which is what your parents bought for you. Get rid of it and replace it with a low cost term policy. Having coverage through work is fine but it is rarely adequate coverage and it isn't portable - if you leave the job, you lose the coverage - so you need to insure yourself.

Agreed.

Just to clarify - term life insurance is VERY cheap for someone your age and in decent health. I would buy a term policy and then cancel the whole life policy. Life insurance through work is not the best idea (can slip through the cracks if you change jobs - it probably renews annually so would get more expensive every year over time?)

My spouse has a whole life insurance policy which is completely useless. His mom refuses to drop the policy. I'd rather give the money to the kids for college, honestly. We pay $500 per year for $1 million in life insurance coverage (30 year term) and his mom refuses to drop this $25k policy with a $4k cash out value. She has paid thousands into the policy over the years, I believe, so clearly she doesn't want to sell it for $4k. But since he can't get the money until he dies, and it no longer served the purpose of why she bought it...

The point of getting it was so he could have insurance if he had bad health as he aged, but considering inflation, the insurance does not amount to a hill of beans to us. We bought term life policies in our 20s. A MUCH better deal.

As far as Robert's advice, I am assuming you can find a decent term insurance deal. I highly doubt there would be much tax consequence from what I understand of these type policies. Even if you owed taxes - I'd get rid of it.

[Robert742]

Agreed.

As far as Robert's advice, I am assuming you can find a decent term insurance deal. I highly doubt there would be much tax consequence from what I understand of these type policies. Even if you owed taxes - I'd get rid of it.

I believe in weighing your options and crunching the numbers to make the best decision. Permanent policies vary a lot from horrible for everyone to good for some people. If the OP has a permanent policy from one of the better dividend-paying whole life policies, the dividends might be sufficient to pay the annual premium. I would think about keep this type of policy.

You don't want to make an assumption about the tax consequences of cashing out the policy. The ownership has changed from the dad to the child, so you may have to pay taxes at your ordinary income rate on the entire cash value. I don't know.

Even those people that buy term, and invest the difference, instead of spending the difference like a lot of people, often find they still need life insurance once the term policy period is over. Savings you intend for your spouse or family after you die could be depleted for various reasons from stock market losses to long term care and medical costs not covered by insurance. Life is hard to predict, no matter how well you plan. Deciding to have a child later in life, or taking care of dependent parents can create life insurance needs when you are older that you can not possibly predict when you are young.

Cashing out the policy may be the best thing for you, if you know how much money you will have after taxes, you can buy a 30 year term policy with more coverage for what you are paying now for the permanent policy, and you are saving enough money to be fairly certain you will not need life insurance after age 58.

But if you are getting permanent coverage now for the same or a little more than a comparable term insurance to age 65 policy for the same face amount, you may want to consider keeping the permanent policy.

[disneysteve]

the dividends might be sufficient to pay the annual premium. I would think about keep this type of policy.

This is one point worth discussing. If the policy is self-sustaining, it is basically free insurance. At that point, the questions are what is the death benefit, what is the cash value and are there any tax consequences to cashing out? I would not keep it just because it is free insurance if you have better uses for the money.

[jpg7n16]

And the biggest question:

- are you still insurable?

If not, you essentially have to keep the policy. If you are insurable, then you can discuss numbers.

[dczech09]

My dad had a situation where he was choosing between cancelling a universal policy and taking an additional term. After crunching the numbers, he realized that in a few years the policy will become self-sustaining whereas the cash value alone will pay the premiums.

I suggest doing the same thing. Since you already have the policy, the question is no longer "what type of insurance do I buy?" The question is "do I keep this policy?" Do you need additional insurance? Take this into consideration too. Life insurance questions are easy to answer if you do not have a policy already, but can be difficult if you do have a policy in force that may have hit the point where cancelling will have a long-term cost.

[baptiste.tyrell]

Agreed.

Just to clarify - term life insurance is VERY cheap for someone your age and in decent health. I would buy a term policy and then cancel the whole life policy. Life insurance through work is not the best idea (can slip through the cracks if you change jobs - it probably renews annually so would get more expensive every year over time?)

+1 from my side.