Advice on Cash Value Life Insurance Policy from New York Life

[johnemmett]

Hello,

I signed up for a whole life CVLI policy with New York Life about 4 years ago. Through my previous employer we had a NYL financial adviser and at the time, the way the adviser explained a CVLI to me, it may sense and seemed like a good investment.

After browsing r/personalfinance regarding CVLIs, I am trying to determine if this financially makes sense for me to continue having and, if not, what are my options moving forward.

I'm 31 years old, no dependents, no plans to ever have children - so basically I don't think the life insurance part makes sense to me any longer.

I work in the medical field making 130k annually, live in a high cost of living area and likely will stay here the rest of my life.

I have been questioning for a while if I should continue the CVLI, however I'm considering buying property and am looking at the cash value as a possible source for part of my down payment.

As mentioned previously, I have had the CVLI for 4 years.

My monthly premium is $185.

My current cash value is $5,670.91.

I'm wondering if I should:

- Continue paying into this account. If I pull a "loan" from my cash value to use as my down payment, my understanding is I am then basically locked into the CVLI until I pay back that loan.

- Cancel the CVLI. In this situation, I understand there may be fee associated with cancellation/surrender. I am awaiting a copy of my contract for the CVLI to see if it outlines the cancellation policy. My question here is, are there typically large fees/money lost with cancelling a whole life CVLI this early? Does anyone have experience with cancelling one of these policies through NYL?

- Change the policy to reduced paid up (RPU) - this is something someone on r/personalfinance mentioned. However my understanding is this would basically just give me a guaranteed death benefit of the cash value (which seems pointless at $5,670).

Thank you for any advice!

 

[tabinek]

@johnemmett You’ve outlined your options fairly well. You’ll find a lot more friendly voices on whole life insurance here than on r/personalfinance. Whole life isn’t the devil they make it out to be. When used correctly it can be a reasonable part of an investment portfolio as it acts similar to a Roth for tax treatment and has steady guaranteed growth but you have to hold the policies for many years (10+) to realize those gains.

To fill in the blanks you can call NYLI and ask for the surrender value of your policy and the reduced paid-up death benefit.

Whole life policies have a surrender penalty that slowly decreases each year. Your policy will show the surrender charge (normally a percentage of the cash value) and the schedule it decreases. The annual report you get should show other important values.

It may make sense to wait until your next anniversary to get the lower surrendered charge.

I don’t think a loan makes sense if you plan to terminate. The loan value is normally a percentage less than the surrender value.

Reduced paid-up insurance may be logical and the death benefit amount will be higher than the cash value. It may make sense to keep this policy as a burial insurance policy to cover your final expenses.

Best of luck in what you decide.

Edit: Since you were looking for a surrender penalty amount. I’d guess it is in the neighborhood of 6-8% in year four of your policy.

 

[vermillion]

@johnemmett Whole life usually does not have surrender charges like Universal life policies do. Your “Surrender charge” if you will, is the first couple years when you don’t have much cash value.

Here are the two uses for it that I see being the most highly effective that I haven’t found a great argument against.

• Over time, it can replace a portion of your liquidity in the bank and earn a higher interest. Say ideally you want 6 months income in cash in the bank, let 3 of that be in WL and then go invest the cash that you no longer have to hold in cash. WL is not a bank account so you don’t want all of your liquidity there.
• Volatility buffer in retirement. Have 2-4 years worth of retirement income in cash value at retirement. In bad years in the market, (worse than 10 % drops) take income from the life insurance. In better years, live off of your investments. It can systematically help you make good decisions in retirement and is better than cash for that purpose. Also your policy may have a critical illness rider which could supplement or replace the need for a long-term care policy depending on the company.

 

[resjudicata]

@johnemmett I'm actually considering a very similar plan (NYL as well). Leaning against it since they seem to take a lot for a small cash value.

You're in the hole for cash value for quite a while, whereas investing it would have put you ahead.

I'm probably just going to stick with term life (cheapest and covers the family if I die before our debts are taken care of).

Curious to hear what kind of fees you have to pay to close out the policy.

 

[hary89]

@resjudicata Generally no fees to surrender WL (no surrender charges like UL). Just want to watch out for potential tax consequences. If there is any gain in the policy the $ above cost-basis is taxed at ordinary income tax rates and potentially the 10% IRS early-withdrawal penalty. Term is a great option for young families looking for “bang for your buck” in terms of coverage/price - aim for 7-10x your income in coverage. WL/UL makes more sense when integrating with financial portfolio. You can also use a Term+WL or Term+UL blend for a more customized strategy depending on your goals.

 

[nitrolisis]

@johnemmett What is your death benefit? Also look your policy and try and find the MEC limit or Tamara-7 pay. From there it will be easier to tell you if what you have is set up properly or not. Your annual premium should match the MEC/tamara 7 pay.

 

[caspiansails]

@johnemmett Chances are your agent didn't set you up with the best option for what people who get cash value insurance are actually looking for, a cash value accumulation machine. If you want to understand this concept better there are a few good free resources that can explain it at great lengths (but still disguising it with terminology that makes it appealing before dropping the bombshell that it's actually just life insurance). The best I've found is Garrett Gunderson on his YouTube channel or his free book downloads. If you choose to look on YouTube the keyword he uses is cash flow banking.

I don't know what you would need to ask for from NYL to get this kind of policy, but in broad terms it would be a blended term and whole life product designed to allow you to front load it with additional premiums (which those agents are highly against because it kills their commissions). You just want to make sure if you get one it doesn't turn into a modified endowment contract because you would lose the tax benefits you normally have in accessing the cash value (this will happen to your existing policy if you take the reduced paid-up option).

 

[hary89]

@caspiansails This can be accomplished with a custom-pay (anywhere from 5 years to your age 75) whole life policy and adding two of the riders; dividend option term and option to purchase paid-up additions. The dividend option term is what allows the policy to pass under IRS section 7702 and not become a MEC. Option to purchase paid-up additions allows you to contribute more flexible $ in above your premium. Yes, the custom-pay whole life is a smaller commission than traditional whole life but if you’re working with an agent/advisor that is worried about commissions, it’s time to find someone else..

 

[messenger_of_truth]

@hary89 Hi, I am in the process of deciding whether or not my dad should cash out his whole life insurance policy. He has those exact two riders on his policy. I made a post here about his situation:

https://www.reddit.com/r/FinancialPlanning/comments/hdy5r8

I didn't even think of the tax repercussions of him taking out the cash value. I'm currently trying to find him a financial planner in his area, but if you don't mind, what are the benefits of these two riders in terms of cashing out?

 

[hary89]

@messenger_of_truth PM me and I can give you specifics for his policy