UGHHH – How Do I Cash Out of This?

by J. Money - Published June 22, 2016[Edit]

marfa teepees

That was the subject line of an email I just got.

It was enough to get my attention, so hopefully it got yours too :) If not, I guess I can say anything I want right now and you’ll never see it? Hmm…

YOU LOVE JUSTIN BIEBER!!! HA-HA-HA!

I’m going to prank everyone tomorrow and you’re gonna fall for it!

Everyone gets $100 today, except for YOU!

Okay, that’s enough…

Let’s get back to more serious stuff like Whole Life Insurance… (you probably wish you didn’t click now, huh?)

I’ve literally had ZERO emails about Whole Life in the past 4-5 years of blogging, and then all of a sudden I get two emails asking for advice in the exact same week. Two! I generally shy away from stuff that downright bores me, but I figured it was a sign to share and that maybe some of you guys are going through something similar yourself?

Below are the two emails, along with my admittedly weak answers because I quite honestly don’t know jack about Whole Life other than the following:

  1. Everyone I know says it’s a rip off
  2. Everyone I know has Term Life Insurance instead – as do I.

Though I should point out that “everyone I know” means $$ bloggers and the online $$ community in general, which are also mostly in their 20s, 30s and 40s.

So it’s definitely skewed.

(Here’s a great article on the difference between Term and Whole Life btw. In a nutshell, Term covers you for a certain amount of time and if you die within that term it pays out (and is pretty damn cheap), whereas Whole Life covers you for your whole life and also builds up cash investments on the side. Though it’s significantly more expensive.)

What I was hoping for today is that YOU guys would chime in to better help out our readers, as I know many of you are more versed in this stuff and may have Whole Life yourself.

Both readers gave me permission to share, and said they’d greatly appreciate it if you did :)

So here’s the first question!

Since going through my finances with a fine tooth comb, I remembered I have a whole-life insurance policy (20-Pay Endowment at 65) with a coverage amount of $1,000 that my parents gave me.  It was purchased in 1971, when I was 4 yrs old.

I just checked it and it now has a face value of $1556.26. I receive a 1099 from it every year from dividends reported to the IRS.  I’m shocked and very disappointed at the low face value of this thing.

Do you have an opinion on what I should do with it?  Leave it?, Cash  it, to reinvest? Anything?

My answer to her was that I don’t know the ins and outs of Whole Life, but that if she’s anything like me she’s all about streamlining her finances.  So my opinion would be to get rid of anything that doesn’t make sense to her and re-invest it into something that does. Minding the possible fees/implications along the way (which are usually worth the end goal).

And here’s Question #2, a bit edited to condense more:

Hey J. Money!

My husband hates change, and it took the first two years of our marriage to get him to change his First Command accts (military family) to Vanguard, but he agrees that it was a huge improvement all around.

Now on to this awful Whole Life policy… We have been paying $198 a month since he bought it in 2002. He just can’t seem to part with it. $300,000 pay out upon death. But we have a million in term so don’t really need it. And term is MUCH cheaper than $198 a month!!! Do you see this all the time? People hanging on just because the salesman convinced them it was NECESSARY? I hate making that payment when I could be putting it into Vanguard.

Sooo, in all these years we have paid $38,016 in premiums. Cash value $29,100. (Not just a loss, but what a loss on a return investment if we had invested that money anywhere but whole life! :() Tough pill to swallow! BUT maybe a light at the end of the tunnel, with Reduced, paid up insurance at $147,000.

So, I thought, what would J. Money do? Yes, the whole life is said and done, bought and buried, so moving forward… If we cash out we pay taxes on it, but would put into our Vanguard investments. But still a tax hit and loss of almost $10,000 in cash. And my hubs still can’t seem to digest selling it.

Is doing the reduced paid up the way to go? That way no premiums but still has a payout when he, hopefully in his late 90’s, is laid to rest?

That’s all the pertinent info, except for one thing – he’s a pilot, and a lot of policies have exceptions and won’t cover aviation deaths if the policy holder is the pilot. BUT our term insurance doesn’t have that exception, except it’s stuck in his head that that’s the reason we need it still. And flying in places that aren’t known as being particularly hospitable, like the Middle East, ups his angst.

He makes a good income, we have well over $500,000 in investments and a million in term life insurance, so the $300,000 policy is a drop in the bucket compared to everything else. (Right now I stay home with our three kids 4 years old and under).

Sorry – this was probably way more interesting for me than you – but if you were ever looking for a case study to write about – thought you might like this :)

I told her it was definitely interesting! Haha.. Who doesn’t like reading about $$ numbers? But I also pointed out that it seems more of a comfortability thing than it does purely a financial one, though of course I’m totally on her side.

Here’s what I wrote back:

Tricky indeed! I think the answer here just relies on what makes you BOTH feel the most comfortable. And obviously for him he loves it even though it sucks dishing out $200/mo (and I’m exactly like you – I’d MUCH rather have the $$ flowing into Vanguard long term if I could! I also wouldn’t mind taking the tax hit either and ripping off the band aid and just investing that big clump as well – would feel so good!!! Not to mention keeping things simpler.)

But I guess that’s the “compromising” of relationships, eh? Figuring out which desire is bigger between the two of you and then going with that one?

If you guys have an accountant I’d totally call them up and ask them what it all would look like with hard numbers. I call mine up about once a month asking “what ifs” and they love it cuz it prevents me from doing something stupid which then prevents them from having to clean up my mess! :) And even if they think you’re crazy for doing it, at the end of the day it’s YOUR GUYS’ money and you can still do whatever makes the most sense for y’all.

So my advice would be a) talk to an accountant, and then b) see whose desire is more – yours for cashing out or his for wanting to keep. As your husband’s shown he usually wises up over the years, so maybe keeping low and revisiting is an option too if you get to a stalemate?

******

Okay, so those are the two situations…

What would you do in either of these cases? Have you gone through something similar? Do you just LOVE Whole Life and want to state your claim?? :)

Please share your thoughts below so our dear questioners can get some better advice outside of me just wanting to simplify everything :) There has to be some good reasons to keep Whole Life around right? So many people have it?!

And thanks for reading my blog too btw, it means a lot… Not because of what we covered today or anything, but just for being here and making my life fun in general! It still surprises me to this day that someone can blog for a living, and it’s because of YOU GUYS that I get to. So thanks :)

*****
[Pic above from Marfa, TX… Nothing to do with article, just really liked it!]

Jay loves talking about money, experimenting, blasting hip-hop, and hanging out with his two beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!

{ 97 comments… read them below or add one }

1 Chris @ Flipping A Dollar June 22, 2016 at 6:47 am

We only have term life insurance. I can’t get behind a product that is recommended by people (financial advisers) who earn a commission on those products while having no responsibility to the end buyer. That term insurance is so cheap and is a nice bridge until retirement if something catastrophic were to happen!

Reply

2 Fiscally Free June 22, 2016 at 11:14 am

I am very suspicious of how eager insurance agents are to sell me life insurance.
Every time I visit my agent they push it hard, not to mention the several letters I get every year advising me to buy life insurance.
I have a feeling the agents get a great commission for every life insurance policy they write.

Reply

3 Chris @ Flipping A Dollar June 22, 2016 at 3:02 pm

Right? Or when the only people who talk well about them are either the insurance agents or the customers trying to rationalize why it’s a good deal. Glad I’m not the only one…

Reply

4 Matt @ Distilled Dollar June 22, 2016 at 6:53 am

I literally just cashed out my whole life insurance plan last week – so the timing of this article is perfect.

It was an ordeal because I drew up my battle plans, prepared my spreadsheets and analyzed the pros and cons before having TWO lengthy phone calls with the insurance agents. Who better to talk me into keeping my whole life insurance policy than the two agents themselves….right!?

Long story short, whole life insurance is NOT worth it. You might find yourself in my situation, asking the barber if you need a haircut. Of course the insurance agents will tell you, “Yes! You need this insurance, you’ll prolly need to pay more for even more coverage.” That’s what they told me.

At the end of the day, what I found out is insurance IS an expense, not an investment — as some would like us to believe. If we have new dependents and our family would be in dire straits without our income, then term life insurance is a great part time solution. As we build assets and as our dependents begin to fight for their own, the need for insurance will diminish.

With all that said, it is not easy to cash out a policy. My insurance agents very quickly switched their appeal to an emotional one to try and keep me on. Even though it sounds scripted, you can tell how it must keep most of their customers in the system.

Reply

5 J. Money June 22, 2016 at 7:24 am

Ughh, thanks for chiming in man… Timing was spot on! If you end up blogging about it more in depth, will you come back here and drop a link for us? I have a feeling a ton of people are going to be hitting this page as time goes on…

Reply

6 Matt @ Distilled Dollar June 22, 2016 at 10:41 am

Sure! I wrote up my blog post as a final collection of my view right before cashing in the policy. Feel free to edit my first comment to include the link or your readers can find it below.

I walk through my analysis and some of the back and forth with the insurance agents.

Here’s the link: http://distilleddollar.com/2016/06/13/cashing-life-insurance-policy/

Reply

7 J. Money June 22, 2016 at 1:31 pm

Beautiful, thanks!

Reply

8 Doug June 23, 2016 at 3:35 pm

Matt,

Just a note from the ‘other side’. A WL policy that was taken out on you at birth, and still has less cash value than the total premiums in, bears little resemblance to a well-structured participating WL policy from a large mutual insurer.

My opinion is that it’s not at all accurate to say “whole life isn’t worth it”, though it’s certainly accurate to say that YOUR SPECIFIC whole life policy isn’t worth continuing to pay into.

It’s just blatantly false (and frustrating for those of us who understand the difference) to see WL policies talked about as if they were all the same. Nothing could be further from the truth.

A good child policy could be handed to a young adult never needing to have more put into it, and maintain a greater than issue value DB. That obviously wasn’t the case for you, but the point remains.

I’m NOT saying that you made the wrong choice, but as I said further down this section, I get frustrated when complex subjects are distilled down so far that reality gets lost.

Reply

9 Chris @ Flipping A Dollar June 22, 2016 at 8:51 am

Perfect analogy. Life insurance is a bridge to when you can have enough savings to not need it!

Reply

10 The Green Swan June 22, 2016 at 6:57 am

I’d cash out for sure. I cashed out a policy about 5 years so that my parents bought when I was born.

Also, not sure you’d have to pay tax on the whole cash value, just the amount that would be considered a gain. So I wouldn’t think the second scenario would have a tax payment to make, but I’m not an accountant so double check me.

Reply

11 Fiscally Free June 22, 2016 at 11:08 am

I thought the same thing about the tax bill. It doesn’t make sense that they would owe taxes on what is essentially a money losing investment.

Reply

12 Roy Largo @ Band of Savers June 22, 2016 at 7:09 am

Hence the reasons that Whole Life sucks. After working as an actuarial analyst at a life insurance company my vote is always to get out of whole life as soon as you can because those people are bastards and have designed a complicated way to rip people off while disguising it as a good thing. That’s one of the reasons that I ran away from the industry and try to spread the word about how evil they are – hopefully it will atone for the time I spend working there. I think that at this point it’s best to cut the losses and stop the bleeding.

P.S. My whole life doesn’t suck – just the time I spend selling my soul to the insurance industry.

Reply

13 J. Money June 22, 2016 at 7:32 am

HAH! Good for you for being able to pry yourself away, man – this inside info helps!!

Reply

14 Roy Largo @ Band of Savers June 22, 2016 at 7:45 am

Luckily they asked me to leave because they could tell my “heart wasn’t in it” once I learned their secrets. I think that must the highest complement that they could offer and automatically qualify me as having a saintly level of compassion for others.

Reply

15 Apathy Ends June 22, 2016 at 7:34 am

I would cash out in both scenarios, invest and never look back!

I have a few co-workers that have whole life insurance and when they talk about them it sounds like a rip off

Reply

16 Dee @ Color Me Frugal June 22, 2016 at 7:48 am

We got suckered into a whole life insurance policy a few years ago. We found ourselves in a position where we were paying something like $200+ a month for it, and after a few years realized that the “cash value” was significantly less than we had paid in, and the surrender value was even less than that. Long story short, we wised up and ripped off the bandaid. It was a loss of over $10k, but in the end getting rid of it when we did saved us far more than that. It’s so sad that the financial industry preys on people’s lack of knowledge in this area.

Reply

17 J. Money June 22, 2016 at 1:34 pm

Oh wow, good for you! $10k is no joke!

Reply

18 Kate @ Cashville Skyline June 22, 2016 at 8:17 am

This kind of reminds me of how I got duped into spending $60 on a home warranty for the first 4 years of owning my home. I feel like home warranties and whole life insurance are sold to us based on fear. There’s no way I would want to keep paying $200 per month. You’re smart to recommend chatting with a CPA to learn the tax implications of cashing out early!

Reply

19 J. Money June 22, 2016 at 1:36 pm

Hah! I actually loved our home warranty when we first bought – used it in month 3 when our pipes started leaking! Though I believe it was only a $200’ish yearly fee vs monthly one… All that $hit scares the crap out of me so it was well worth the peace of mind even if nothing did end up breaking… And so glad I’m back to renting again, haha…

Reply

20 Pat June 22, 2016 at 8:43 am

My mom had a $10K whole life policy she took out in the 1950’s which barely covered her funeral in 2009. She and my father never had investments. Growing up I didn’t know what stocks were and only received a few savings bonds from an aunt for gifts so my parents probably thought it was a good deal to have that policy. When I think of the money my parents paid out and what they could have done with it instead I would concur that whole life insurance is not worth it.

Reply

21 Fervent Finance June 22, 2016 at 8:47 am

I have a family member with a whole life policy. I’ve been meaning to do more research as I’m 90% sure they should cash out. Thanks for reminding me!

Reply

22 ZJ Thorne June 22, 2016 at 8:58 am

I have never heard a truly compelling case for whole life. I love how many people use term to get your family over a present potential hump. $200/month is a big expense, ugh. I hope your families agree on something that satisfies everyone.

Reply

23 Samantha Allen June 22, 2016 at 8:58 am

Whole life (agents) are such a ripoff. I mean, this “helpful” agent has been making thousands each year from suckering people into this ridiculous “investment”. That’s the part that makes me angry.

We have term. I would DEFINITELY sell the whole and get out of it immediately. $200/month could send you on a really nice vacation each year.

Reply

24 Free to Pursue June 22, 2016 at 9:06 am

What I’ve read so far in a number of US-based finance and investment books is that 99% of the time, term is better, partly because an investment vehicle tied to an insurance policy guarantees poor returns (can anyone say fees).

We’re self-insured, so I can’t offer advice on which type of term insurance, etc…plus the whole living in Canada thing :).

Reply

25 J. Money June 22, 2016 at 1:40 pm

I never even THOUGHT about self-insuring until today hearing from the early retirement crew! I wonder if people take that into consideration when planning future expenses? That’s a nice monthly savings whichever type of insurance you get – which of course goes right into investments ;)

Reply

26 Free to Pursue June 23, 2016 at 12:49 pm

Exactly! The question is “how much do I need to have aside so that I know my family is covered?”. Once you have that, what’s the insurance for?! :)

Reply

27 Laura June 22, 2016 at 9:14 am

Cash out, take the financial hit and move on. The only thing worse than realizing you make a really bad financial mistake is continuing to pay on it once you do. Drop the policies now, and you’ll look back on the decision in a few years with no regret.

Reply

28 Dani June 22, 2016 at 9:26 am

In both situations, I recommend cashing out. In the first one, it’s such a small amount that even the taxes will barely be a blip, but cash it out, save enough to pay the taxes, and either pay down debt or invest it, if there is no debt.
In the second situation, it sounds like if she would crunch some hard numbers and show them to him, he would see the benefit. Honestly, life insurance is only needed until it’s not needed…does that make sense? I mean, even if he keeps the policy and it pays out when he’s 90, but he’s got millions in the bank, I mean, is $300k really going to be worth much of anything down the road? Put that $198 into some investments, and let’s see what THAT looks like at 90. To get back to my point, tho; they’ve done VERY well with their investments if they have over $500k, and if, heaven forbid, something happened to him, combine that with $1 mil, and can she and the kids afford to live off of the proceeds from that? I think the obvious answer is yes! So, either way, dump that policy, take the tax hit, invest the rest (it can even be split among several tax-sheltered investments including college accounts for the kids and Roth IRA’s, etc), and chalk that one up as a learning experience. If he thinks of it as being self-insured, it might make it a little bit easier for him to swallow. Congratulations on finding a term plan that covers his unique situation; be sure to renew it when the term is up until the investments outpace insurance. Many prayers for his safety, and thanking him for his service, and the family’s sacrifice of time with him.

Reply

29 J. Money June 22, 2016 at 1:41 pm

Excellent excellent comment – thanks for taking the time!

Reply

30 Brandon Toft June 22, 2016 at 9:48 am

Um…wow. I don’t even know if I want to post this here. But here is the email I sent in response to this. Please don’t kill me!

J. Money,

I read your blog via email religiously each week and very much enjoy the insight and perspective on budgeting and have enjoyed implementing some of your suggestions into my own budget. So first of all, thank you for what you do!

Here’s the thing. I sell life insurance! (Please keep reading even though I know I’m now being pictured as some offspring of satan) This is the problem with how people view life insurance as well as how some of my less professional cohorts sell the stuff.

Life insurance is meant to be very specific to the buyer. Generally speaking (as much as I hate to do that after what I said in the previous sentence) term life insurance is used to cover things like debt, loss of income when the kids are still at home and other things if you were to meet your maker earlier than expected. Whole life insurance (I know, I know, everyone says DON’T BUY IT) is used for legacy building and estate planning. Yes, it is true, more often than not term gets the job done. That doesn’t mean that whole life doesn’t have it’s place.

As far as the two emails go, the very small policy should just be cashed out and moved on from. But the second email, I would have a laundry list of questions before I made any recommendation about the continuation of that policy.

Hope this helps!

Brandon

Reply

31 J. Money June 22, 2016 at 1:44 pm

Oh wow, you’ve got balls man – love it! I def. wanted to hear from all sides though so I’m glad you stopped by :) I feel like there are times where Whole could make more sense like you mentioned, I’ve just never heard of *when* exactly and since it doesn’t seem to match my situation I’ve never really researched it much… I hope we hear more from agents or others who actually do love their policies so we can broaden the discussion!

Reply

32 FinanceSuperhero June 22, 2016 at 4:29 pm

As usual, I’m late to the discussion, but when I saw Brandon’s brave comment above, I felt compelled to chime in. J, you are right that there are *some* times to keep a whole life policy. Right now, the only time I can think of is if you are otherwise uninsurable (just received a cancer diagnosis) or term would now be cost prohibitive due to age.

Despite what Brandon is saying above, the truth is term is always the best way to go if you’re starting from nothing; furthermore, if you can get a term policy to replace a whole life policy and then invest the difference in monthly premium, you’ll come out way ahead 99 times out of 100. I’m rarely this blunt, and I mean no disrespect to Brandon, as he didn’t specify his exact reasons for supporting whole life in some instances, but investing in whole life insurance for legacy and estate planning purposes is a really inefficient way to try to be a blessing to your family.

If I could pick one product to be eliminated from the insurance industry as a whole, it would be whole life, hands down. It is a really bad investment with a cool sounding name and nothing more.

Reply

33 jk June 22, 2016 at 7:13 pm

I’m about 5 yrs in to a variable life policy that I can’t cash out penalty-free for another 5 years. I have recently become aware that money put into this policy is one of the few places not included in federal college financial aid considerations. So that’s maybe another benefit to having such a policy although I’m certainly no expert about financial aid or life insurance policies. Brandon, have any thoughts on this?

Reply

34 Liz June 22, 2016 at 10:02 am

Hi – Insurance Agent, here. I hate whole life. I don’t even care for universal life. I will sell you either if you insist, but will try to steer you toward term all day, every day. I am not a financial professional so I prefer to help cover you for your more immediate needs (get the kids through college, income replacement of a spouse, etc.) and recommend you find a financial professional to help plan for the long term. Cash them both out – you won’t get the full cash value, just the surrender value, and take the money to someone who can help you make it grow.

Reply

35 J. Money June 22, 2016 at 1:45 pm

Awesome! Another agent – thanks!!! This discussion is getting good!

Reply

36 Eric Bowlin June 22, 2016 at 10:05 am

If they want the comfort of the insurance without paying the large fees, I would get rid of the whole life policy and get an equal amount term life insurance. I’d then take the difference and invest it until that amount matches the payout, then drop the term life insurance and invest the whole amount.

Reply

37 David June 22, 2016 at 10:08 am

Cash out. IMHO, buying whole life is like going to Subway for lunch and giving them extra money to invest for me. Sammiches are good. Investing is good. But they have nothing to do with each other. Buy insurance (term) for when you need insurance and invest when you need to invest. Keeping them separate allows you to go to the best provider for each, rather than get sub-par products just for the ease of buying them together.

Reply

38 Liz June 22, 2016 at 10:33 am

Love the sammich comparison!

Reply

39 J. Money June 22, 2016 at 1:46 pm

Hahahaah…

You just won the comment of the day, congrats.

Your prize is a free (non investable) sammich :)

Reply

40 PhysicianOnFIRE June 22, 2016 at 10:12 am

The White Coat Investor has written extensively on the topic. In his analysis, there are very rarely situations where it might be beneficial.

http://whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
http://whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

I had term-life until I became FI. No more life insurance. The bounty on my head has been lifted!

Reply

41 J. Money June 22, 2016 at 4:55 pm

Starring to read so I can bone up!

Love that you’re self-insured now – that’s a helluva place to be :)

Reply

42 Harmony June 22, 2016 at 10:16 am

We will be cashing out our whole term life insurance very soon. We just signed up for term insurance through my employer, so much cheaper! We’ve been paying premiums on whole life for about ten years – another bad money decision. I can’t wait to get that money and use it towards paying down our debt.

Reply

43 Jack Tripper June 22, 2016 at 10:46 am

In you tube type Dave Ramsey and whole life insurance. It’s quite entertaining to watch Dave rant on how bad whole life insurance really is. Whole life policies, indexed and variable annuities are snake oil. Stay away…

https://www.youtube.com/watch?v=9W68uqkEBiU

Reply

44 J. Money June 22, 2016 at 5:04 pm

Hah – will do…

Though not going to watch anything on his investing advice ;)

Reply

45 Joe June 22, 2016 at 10:56 am

I just have term life as well. The first case is easy – just cash out. :)
The second case is more complicated because it’s a family decision… Probably better to cash out. The monthly cost is pretty high. Can they get more term life with similar term?

Reply

46 Amanda @centsiblyrich June 22, 2016 at 11:00 am

I’m with everyone else – cash in the whole life policies and invest what’s left! I cashed out the whole life policies my parents had purchased for me as a kid when I was a broke grad student.

When my husband and I were in our mid twenties and new parents, we went to a financial advisor for college and retirement savings. The advisor drew up a “plan” for us to purchase a HUGE Universal life insurance policy to use as savings for retirement and college. Thankfully, we took a step back and did some digging and found out the advisor was getting a healthy commission for that particular policy. We also learned a ton about life insurance in the process and realized we would be much better off to invest our money in 529s, IRAs, 401ks and purchase term life insurance. So glad we didn’t go there!

Reply

47 Angie Burkhart June 22, 2016 at 11:56 am

Whole life insurance is not all bad. If you have the right agent that knows what you are looking for. You can actually sock extra money in it, that earns compounding interest, that is there for you to borrow against. Read “Farming without the bank”. Short read. Very informative.

But, regular whole life insurance, with no additional riders to do what you need to do, probably is not the way you should go.

Reply

48 Jack Tripper June 22, 2016 at 12:01 pm

There is no circumstance where whole life is good. The extra money you talk about can be invested in a low cost index fund with better returns.

Reply

49 Stockbeard June 22, 2016 at 1:02 pm

Angie, as others have stated, the “compounding interest” part of whole life insurances is extremely underperforming because of the fees. I don’t see how you can consider this as “not all bad”.

Reply

50 FinanceSuperhero June 22, 2016 at 4:31 pm

Cancel your whole life policy, Angie, but only after getting a term policy locked in place.

Reply

51 Alex June 22, 2016 at 12:49 pm

Whole life is such a rip-off. 14 years into a policy and you’ve got a negative $10k return. There aren’t taxes on investment losses. If that second couple wants to really feel bad they should reverse engineer how much they would have if they bought term insurance and invested the difference over the last 14 years. The only reason to hang on to big whole life policies is if you are uninsurable, but with a million in separate term coverage they’re set.
Ugh, whole life, universal life, cash value, all basically the same, all a rip off. When compared with the alternatives only an insurance sales person could love them.

Reply

52 Gundomoney June 22, 2016 at 1:10 pm

This is such a contentious debate between personal finance people. It seems like the majority of us feel it’s a waste of money. Dave Ramsey says insurance shouldn’t be trying to do the job of other financial instruments. I agree. Aside from all the fancy things they try to say about whole life, I think it comes down to one simple fact:

-Term is cheaper and there are far better places to invest your money than “cash value”.

I wrote about this a few months ago:

http://gundomoney.com/2015/12/23/why-whole-life-insurance-is-a-bad-idea/

Reply

53 J. Money June 23, 2016 at 6:42 am

Thanks for dropping the link! Gonna be helpful for everyone as this topic is blowing up!

Reply

54 Gundomoney June 22, 2016 at 1:12 pm

To the well-meaning insurance salesman: I believe I heard a quote the other day “Don’t ask the barber if you need a haircut.”

Reply

55 Lee jazz June 22, 2016 at 1:19 pm

I don’t get why everyone says that whole life is a bad thing. Certainly, there have to be SOME situations where it works out for the best?

My husband is nearly 64 and I am soon to be 57. We have universal life and with the next 5-year increase, it will cost $500 a month (up $82 a month). We have a term life rider that will run out in just over a year for my husband, and in 8 years for me.

So, if I were to cash out the universal portions (or both), the money refunded would be added to our incomes, and taxed into oblivion, right? (Better to cash out after retirement if at all?)

Also, we both have a variety of health conditions that make it costly for me, and near-impossible for my husband to get life insurance at any cost at this point. My husband, in particular, developed a heart arrhythmia, had it fixed, but then had a totally unrelated heart attack. His family history is crap.

So at this point, instead of him having nothing in one year, had we just purchased the term policy to begin with), we have insurance guaranteed to pay out, and something that has cash value as well. Each of us still needs a certain amount of money to keep the house running and properly maintained, and having an guaranteed insurance payout could help cover various health- and senior living (nursing home or senior residence) costs for the survivor over the long haul.

Statistics say that I will be alive in 8 years too, when the term would have dropped out for me.
Would our situation not warrant how we have handled this? What about other people that acquire health conditions at any point in their lives that make them ineligible to renew their term insurance? In fact, I’ve heard of parents buying whole life coverage for their children before they are born, when a condition is anticipated?

What am I missing?!

Reply

56 J. Money June 23, 2016 at 6:48 am

I’d like to know too, Lee, and hope an expert chimes in here! From the convos going around it does seem that major health issues could be an exception to the hating? And of course having a policy vs having nothing at all is always best!

Reply

57 Lee Jasmann June 24, 2016 at 2:56 pm

Thanks for the validation. Thanks to your post, found out it was my husbands term attached to the universal policy that nearly doubled, and mine up a bit, for the next 5 year, a common occurrence apparently. Saw our life insurance guy and thrashed things out. We need the amount we are insured for but only until Gary retires, so we decided to use our commuted value to pay the upgraded difference until we decide to dump the Term policies at retirement. Thanks to your column, and me taking action, we saved $82 a month, using the cv we wouldn’t otherwise have had such a good use for anyway. Univeral/Whole Life has worked for us in our situation. Never did consider it as an investment tool, and still don’t. At the end of the day, we’re still insured and when we quit the term policies, we will be covered with need for medical testing or increasing fees. LUV YA! Lee

Reply

58 Lee June 24, 2016 at 7:21 pm

Should have written “without” at the end

Reply

59 Keith "Shin" Schindler June 22, 2016 at 1:33 pm

We were sold an outrageous whole life policy when we had a fair amount more income. Came a time when we couldn’t make the annual premiums. The options were to surrender, cash out at a loss, or exchange for a fully funded policy of a lower amount. We exchanged for the lower policy. Since it was paid for in under 7 years, the policy became a Modified Endowment Contract (MEC). Any distributions are taxable, with a penalty if distributed before the owner becomes 59 1/2.

We “Fired” the financial advisor that sold us that insurance. Term is the way to go and invest the difference in the premiums. Live and learn. DOH!!!

Reply

60 Sherrie Rose June 22, 2016 at 2:03 pm

This is a reponse to the second scenario. I would quit paying the premiums and let it ride. I did this on my DH whole life policy and they applied the surrender value to the premiums. At the end of the day you still have the policy and you don’t have the tax hit. Of course you won’t have the investment money either but your situation sounds like a stalemate anyway. My DH had to keep his whole life policy with his son as the beneficiary due to a clause in the divorce decree. After the son turned 18, we cashed in the policy. Just food for thought.

Reply

61 Rich E Rich June 22, 2016 at 2:16 pm

Hey J$ – Ironic that this post came up today. I just met with my financial adviser yesterday. In anticipation of him trying to sell me a whole life policy, I thought I should read up on it some prior to the meeting. Deep topic – a lot of talking points to make but a limited amount of space to make them.

IMO, the purpose of life insurance is to provide income to your loved ones in the event of your untimely demise. Term life insurance will cover you for X amount or years, whole life will cover you forever (providing you keep up with payments, etc). Term only pays out if you die, otherwise you get nothing out of it outside of peace of mind. Whole life will pay a death benefit and accumulate a cash value also payable upon death.

Term is much much cheaper. A prudent individual will use that difference in cost to live, to pay off debt, fund retirement and college savings accounts, etc. At the end of the term, the “need” for the replacement income should not be as great – you have paid off the house, you have raised the kids, you have sent them to college, the retirement accounts will now replace the income you once earned. The retirement plans and college savings plans out there are better vehicles to build wealth than buying into whole life. IMO – this is probably sufficient for a large percentage of the population.

Whole life is much more expensive. Generally speaking, your early premiums go towards the commissions and fees making it unattractive. After a period of time (many years?) your premiums start building up a cash value that you can borrow against at any age tax free. You can even “deposit” additional funds into your life insurance. This cash is invested in mutual funds – so it grows like the stock market rather than a savings account. It takes some time to get to this point whereas funding a 401k or IRA starts paying off immediately. However, this can be an attractive option to an individual who has already maxed out all other retirement and tax-deferred accounts – think business owners and other high income earners. I would agree with an earlier post from Brandon – I would consider whole life as more of an estate planning tool rather than a life insurance vehicle.

I’m probably just glossing over the topic at a high level and not giving each side a fuller explanation that it deserves. Always do your own research and seek the advice of professional.

So… to cash out or not to cash out… I guess that depends on the individual and their circumstance. HA! Isn’t that what puts the “personal” into personal finance?

For both questions – determine if whole life has a place in your portfolio. If not, that’s a strong reason to cash out.

For email #1 – look into the details of the policy more. Determine if there is an investment portion you are overlooking, and if so, does it fit into your financial plan. I would be skeptical that these “whole life” policies aren’t really whole life – rather term policies that never expire. Also be skeptical that the policy is a dud – designed in the 1970’s to make the insurance company money and not comparable to today’s more attractive investment vehicles.

For email #2 – since the policy was purchased in 2002, the big hit on commissions and fees has likely passed and the policy is likely accumulating more cash value now. I think the answer on this depends on things like are they maxing out all other tax-deferred retirement strategies and how whole life factors into their portfolio. Don’t throw the baby out with the bath water. Believe it or not, $198 is cheap!!!

**Disclosure: I am NOT going with a whole life policy for myself.

Reply

62 J. Money June 23, 2016 at 6:52 am

Thanks for this!!! Such a great comment man, glad you told us at the end what you decided to do too :)

Reply

63 Doug June 22, 2016 at 3:17 pm

So, first, talking about Whole Life as if every policy is the same makes about as much sense as talking about cars as if they’re all the same. Whole Life from one of the major mutual insurance companies isn’t nearly the same as a non-participating policy from a regional insurer. Leaving aside other features/riders.

Second, Term insurance is for protecting your family in case someone isn’t there earning an income, or caring for kids. Whole Life isn’t for that purpose, so of course Term is better for that. Again for a car analogy, a Mercedes S-Class isn’t for hauling dirt, it’s built for other things.

The “right” insurance for a given family’s situation isn’t the same as every other family. For many folks, Term IS the right choice. For others, Whole can have meaningful benefits. Everybody’s different. If you aren’t willing to explore which one you are with an open mind, that’s on you.

For the two situations above, #1, cash it out, #2, like someone else said above, more data is needed, but the most relevant data is, “if I pay my premiums, how much will my cash value and death benefit increase, GOING FORWARD?” Aso with any other investment, the past is an irrelevant sunk cost, only the future cost/value matters.

Reply

64 FinanceSuperhero June 22, 2016 at 4:37 pm

Just curious, Doug: what would say *is* the purpose of Whole Life vs. Term Life? I don’t see how they are different in purpose, to be honest. And it doesn’t really matter what company underwrites the policy.

I appreciate your attempt at the above analogies, but they don’t stick.

If one is not already in a whole life policy, they should be looking into term. It is the wisest mathematical move.

Reply

65 Doug June 22, 2016 at 7:23 pm

My point above was abbreviated, as I was writing on my phone, and autocorrect had me on the verge of dumping my phone in a vat of hot oil.

To address your statement first, it actually matters a great deal what company issues a Whole Life policy, dramatically unlike Term insurance, where the carrier is of less importance. A _participating_ Whole Life policy from a successful company will return significantly more to its policyholders than a _non-participating_ policy. And since return on cash-in is one of the important features of WL, it makes for a meaningful difference in product value. The design of _participating_ policies matters too – Whole Life is NOT a product anyone should buy online.

Since text is poor at conveying sarcasm, I’ll just state that if we can’t agree on this premise, you shouldn’t read on, because nothing that follows will track for you either.

So, again, for the most center case, the purpose of Whole Life is to allow your money to do multiple things at once. A well-structured policy allows your money to simultaneously act as your emergency cash (over time, as cash value grows), a non-stock-market-correlated investment vehicle (again, with a _participating_ policy), AND provide a death benefit (tax free as long as it’s less than the IRS limit).

Note that for all but the very well-off, Whole shouldn’t be the only ‘if I die early’ policy. It should be paired with Term to have the total death benefit that makes sense for the individual/family.

Most analysis of Whole Life that I see focuses only on the cash-on-cash return of a Whole Life policy, compared to stock market returns (and usually pretty aggressive ones), and viewed that way, Whole is a poor performer. That analysis though, glosses over the death benefit, and the fact that a death benefit check is in fact, money (and tax free to the beneficiary at that). This is of less relevance to a single person, who will never marry or have children. But for married folks, chances are good that one of you will eventually die, and if that happens after a Term policy has expired, well, the surviving spouse gets nothing. With Whole, they get a check. There are also tax advantages on the growth in a Life policy, for those who have exhausted their Roth max contributions, but that’s a relatively small piece of the puzzle.

My car analogy probably wasn’t perfect – a better one may be to compare Term to a Screwdriver – fine tool, does what it does very well. Whole is a high quality Multi-tool – does multiple things very well – but it costs more.

I’m not anti-Term – I’m anti-simplistic analysis. NOTHING is the one right way for everyone. Everyone comes from a different set of resources/debts/assets/income/goals/etc. Excluding tools for success because they’re complex, or because someone else says so (not aiming that at you SuperHero, but some of the True Believers who have chimed in above) isn’t the path to success.

Reply

66 FinanceSuperhero June 22, 2016 at 9:15 pm

Doug, thanks for clarifying your initial point. Now I see where you are coming from.

Regarding the rest of your very thorough response: We can certainly agree to disagree. At the end of the day, personal finance is personal, and therefore, I agree with you, philosophically-speaking, that there isn’t one right way for everyone. However, in the case of whole life insurance, I still haven’t come across a compelling case to convince me that it is the way to go. As other commenters have pointed out, the returns are too poor to warrant it, in my opinion.

In terms of glossing over the death benefit, I will agree with you again; too many analyses of whole vs. term DO fail to factor in the death benefit. I have always believed that a vast majority of people who can afford WL premiums could and probably should become self-insured by the time their 20-25 year term policy expires, considering the significant monthly savings.

At any rate, I’m glad to have had this discussion with you.

Reply

67 J. Money June 23, 2016 at 6:55 am

I’m glad y’all are diving into it too!! Such good stuff for us ALL to consider regardless of the original stance we had before coming here today… And I’ll be the first to admit I def. like to oversimplify stuff :)

Reply

68 Doug June 23, 2016 at 12:38 pm

Superhero (and/or J. Money of course),

Since this has been the rare pleasure of a civil discussion in an internet comment section, let me ask a couple of questions to better understand where you are coming from:

When you say, “self-insured”, specifically what does that mean to you?
When you say that returns on WL are too poor (even including the DB), compared to what benchmark?

I’d hate to assume answers before commenting further.

Reply

69 Mary June 22, 2016 at 3:48 pm

I have both. One whole life insurance policy and a couple of free term insurance policies through work. If I had kids, families or significant assets that need protecting I’d up the term but I’m kind of in a unique position with the whole. My parents bought it back in 1987 when i was born because it was the “thing” for IBM parents to do. Long story short, it was paid in full, I think when I was 12, before I turned 18 and took over managing it. It pays out dividends every quarter and the dividends are always more than the fees so they just get reinvested to increase the policy. Its honestly probably the only account I don’t pay much attention to because my thoughts as a 20-something are “well if I die in a freak accident all the funeral expenses and then some” are covered.

My advice for the $1556 person it to cash it in and invest for that small amount. It’s not worth dealing with a 1099 every year.

Reply

70 J. Money June 23, 2016 at 6:57 am

That’s awesome that your parents did that for you :)

Reply

71 AnnMarie Johnson June 22, 2016 at 4:36 pm

I agree with most about term insurance, but I do have two whole life policies. One, my parents bought when I was a child. There are no more payments on it (the interest/div pays it and I get a check each year). The cash out value, when I check about a decade ago, was no more than a couple thousand. So I left it, as I don’t think I can make that much in investments compared to $10k at my death. For my parents, it was a cheap way to pay towards a funeral, I think.

We also bought a whole life when my daughter was born. Paid a few thousand up front, no more payments ever, and it would allow us to almost afford to adopt again should she die.

I do pay monthly for a term policy; I wouldn’t call it cheap, however–over $100/mo starting when I was about 32 (healthy, non-smoking woman).

Reply

72 Carla June 22, 2016 at 5:16 pm

Just an amateur here, but 3 1/2 years ago I stopped putting $18K into my 401K and instead put it in a specially structured whole life policy. Game changer for me in a good way.
The problem is you have to work with an agent who is willing to bypass much of his commission to structure it right. It took me a lot of years of research and trying to get my head around it before I jumped. If you have an open mind, check out http://www.partners4prosperity.com.

Reply

73 Bonnie June 22, 2016 at 5:34 pm

Term insurance is better, and if you are young and in excellent health, it’s not expensive. Any “blips” health wise and you may pay more, but it’s still the way to go. Just make sure to get new policies in place before cancelling old ones. Also be sure to get level term policies so your premiums don’t go up each year.

I have a universal life policy my employer took out 30 years ago on me (against my advice). It was $50k policy (what good would that do my husband anyway) and I still have the sheet showing the company’s projections for how the cash value would accumulate. What a joke! If those projections had materialized, that cash value alone would go a long way toward FI for me. Instead, it’s worth about $13k I believe. When I had my kids a few years later, my boss realized I needed more coverage. This time I insisted on term, and he got a $250k policy (over the insurance agent’s objections). Unfortunately he did not get a level term policy, and last fall I had to make the decision to let that policy go. My husband had lost his job of 35 years, and it had simply become too expensive given our new circumstances.

Reply

74 Rachel June 22, 2016 at 7:47 pm

A bit of a tangent, but just to add my wee story. I had a uni summer job making penny policies ‘paid up’. This small insurance firm had realised that collecting the monthly/weekly premiums for many of their historic ‘penny policies’ (some literally cost 1p pcm, taken out in 1950’s) cost more than the premium. My job was to explain to people that they no longer had to pay the premium, we would do it for them, and the policy would keep increasing in value. Some people were furious that we wouldn’the take their money any more. It was crazy!

On a side note, my partner is an underwriter. From both our work experiences we easily decided on decreasing term policies. If/when we have kids we’ll reconsider but right now paying off the house and a little extra if one of us dies would see the other ok, which is ultimately the point of insurance.

Reply

75 J. Money June 23, 2016 at 7:01 am

I agree you can never go wrong paying off the house :) Peace of mind in so many different levels!

Reply

76 Mel @ brokeGIRLrich June 22, 2016 at 8:39 pm

My dad (who also makes some weird financial decisions) got a whole life insurance policy on me when I was a child. He gave it to me when I finished up school and the first thing I did was cash it out and dump the money into paying off my student loans. I don’t have any reason to have any life insurance. There’s enough in my savings to pay for a funeral and no one depends on me.

Reply

77 J. Money June 23, 2016 at 7:03 am

Haha… I love all your hustling over there :)

Reply

78 debbie June 23, 2016 at 3:28 am

When my former husband was diagnosed with terminal cancer (making him uninsurable) he went on disability. His job automatically offered him a “conversion” so his term insurance was converted to Whole Life. After 5 years it was paid up. He passed away a year later & I was ever grateful for that policy. I collected the Face Value tax free. He was only in his 40’s when he passed. PS he could not keep the term policy as it was for employees only so he had no choice but to loose the insurance or convert it to Whole Life. We jumped all over the option to convert it to Whole Life.

Reply

79 J. Money June 23, 2016 at 7:02 am

I’m so sorry to hear, too damn young :(

Reply

80 Jane June 23, 2016 at 10:06 am

Every investment is good for someone and whole life policies are good for people who are so bad at saving that they can’t even accumulate money in a savings account.

Reply

81 Jane June 23, 2016 at 10:19 am

So, it probably doesn’t apply to any of us. The kind of people who are so bad at saving that they can’t accumulate money in a savings account are so anxious about money that they are not able to read money blogs or have a calm conversation with a friend about money. What doesn’t get talked about on these blogs much are issues like: If you want to manage your money you need a job, even if you are your own employer. (Thievery and inheritances don’t apply to most and don’t count.) Before you invest, you save (for emergency fund and for enough money to be able to invest). Before you save, you make sure you have insurance (so your dependents survive if the worst happens). So for most reading this blog, it’s a “There but for the grace of God (or my willingness to research) go I” situation when it comes to whole life. BTW, I just read the post immediately before this one. There’s a reason for whole life I never thought of. My sincere sympathies to Debbie in the loss of her former husband.

Reply

82 J. Money June 29, 2016 at 6:38 am

Great insight, Jane!

Reply

83 Taxama June 23, 2016 at 11:25 am

I was in a similar situation Jan 2015 and paying about $1500 a month in premium for whole life insurance. I went the Boglehead way in Jan 2015 and cashed out. I am sure I lost over $10,000. Honestly a year later and I cannot even remember how much I lost. I figured I was better off counting my losses earlier than later. Best decision and no regrets.
I am now solely with term life and investments are now very separate from insurance.
My advice, cash out count your losses as stupid tax and that will keep you from ever making the same mistake in the future.

Reply

84 J. Money June 29, 2016 at 6:39 am

Oh wow….

Reply

85 Crystal June 23, 2016 at 12:03 pm

Yep, for $200 a month, my husband could pay for my funeral in full in 4 years or less. And if I last another 30+ years, that’s $72,000 he’d have banked just by hiding the cash instead of getting whole life.

I much rather pay less than $15 a month per person for term life insurance to get $250,000 if we die accidentally or $40,000 if we die naturally. We’re upping that if we have kids, but honestly, us dying in 10+ years wouldn’t affect the other one that much financially since we are close to being financially independent by then…

Reply

86 J. Money June 29, 2016 at 6:40 am

Yeah girl!! Getting closer every year, too :)

Reply

87 Jane June 23, 2016 at 1:50 pm

Love this conversation! So rational! So civil! I would like to be able to use a Like button for many of the comments here.

Reply

88 J. Money June 29, 2016 at 6:40 am

I’m glad, Jane :) We’ve got a great community here no doubt!

Reply

89 Paul June 23, 2016 at 2:03 pm

I could see how whole life would be appealing to people who have a grim outlook for their future. What I mean is life insurance is usually just for between ~30 – ~50. When you have dependents and a spouse who would be utterly devastated financially if something happened that stopped your income. The idea being in your 50s you no longer need the peace of mind since you now have enough money for your spouse to live comfortably and your kids are all grown. If you don’t foresee a time where you ever have an excess of money, I could see whole life being appealing.

That being said I have a $1M term life which will end at 50. the idea being that my wife could pay off our house and live off of 4%. If something happened to me in the next 5 years it would probably not be enough for her to be FI but when I took the policy out I was making less than I am now…either way it most certainly is enough for her to get through at least the next 20 years. I figure if I outlive my policy and don’t have enough socked away then barring any unusual circumstance it is just poor planning on my part.

Reply

90 Rebekah June 23, 2016 at 2:24 pm

INSURANCE IS INSURANCE AND INVESTMENTS ARE INVESTMENTS. They should NOT be mixed, as with whole life insurance. Life insurance is necessary when you’re young, have dependents financially reliant on you, and before you have built up wealth to cover costs of your departing this world. Term life insurance is the only life insurance people need and you should get rid of it when you have enough wealth built up to cover funeral costs and debts that are left behind, when your kids are grown and financially independent, and when your widow has sufficient retirement and savings to last.

To Question #1: cash in the $1,556 policy and reinvest in a proper investment.

To Question #2: cash in the whole life insurance policy and take the $10,000 hit…then reinvest in a proper investment.

Reply

91 EL June 23, 2016 at 5:22 pm

I would cash it and move on immediately, they are the worse investments as you can see with the numbers, and it just gets worse with time. Tell your husband you don’t need insurance when you have millions in the bank, and that is the trajectory you are on if you invest the lump sum, 500K, and the 200 dollars you are just wasting away in a whole life insurance scheme.

Reply

92 Super Millennial June 23, 2016 at 9:14 pm

Great read, I’ve been debating on term this year (28 years old) just haven’t found a huge reason for it yet (can I leave the money to my dog haha?). These comments are great I’ll definitely be going term life when I enroll this year!

Reply

93 J. Money June 29, 2016 at 6:41 am

Glad it helped, man :)

Reply

94 Millennial Moola June 24, 2016 at 1:20 am

Agents receiving trailing commissions that are small compared to the initial upfront payout, but it’s the dream sold to the young agents by the older ones. I think it’s something like 7 years of trailing payments for each policy that stays in good order. By year 7 in the business , you could have that many years’ worth of policies flowing into your bank account. The agent is always going to tell you to keep paying. More money for him or her

Reply

95 J. Money June 29, 2016 at 6:42 am

Holy crap – no wonder they push it so much!

Reply

96 JV June 24, 2016 at 2:23 pm

What I’ve learned is that if you have Whole Life already, you’re “answer” of what to do varies greatly. For Q#1- I’d drop it because there really isn’t any value to keeping it.

Q#2 – My suggestion would be to hold on to it until you break even on your contributions and the cash out value. I had the same thing happen to me and I had to wait 8 years to break even on it. That way you are getting your money back dollar for dollar and not taking such a huge hit. Also, you could see if there are any riders that you could remove in hopes to make the cash value higher.

Reply

97 Master Duke April 1, 2017 at 10:14 am

I’d recommend to reader #2 a cash out. Yes it is a loss, and yes it sucks to lose money, but its better than losing more in the future.

My mother had a whole life policy that switched to me paying it. It was around 500 a year, 10K payout….instead we canceled it and got term! Much cheaper and higher payout.

Reply

Leave a Comment

Previous post:

Next post: