Should I surrender indexed universal life insurance policy?

[vincey]

Reposting here from r/personalfinance:

Family friend sold to me when I was 21 and I've been paying $100/month for about the last 7 years now. After reading up on it a little more, it seems like it makes sense to surrender the policy and invest more into a 401K/IRA since I'm single with no kids...

The only reason I'm hesitant is the $2,700 surrender charge...is it worth keeping until I can withdraw the full cash value? Or cut my loses and say "lesson learned"?

Death benefit: $150,000

Cash Value: $6,238.12

Surrender Value: $3,538.12

Total Premiums Issue to Date: $8,828.76

Monthly Guaranteed No Lapse Premium: $50.12

Edit: Currently a grad student so no employer matched 401k but I do have a Roth IRA that I try to contribute the max amount to each year.

Updates as of 2/2/24:

surrender charge expires at 15 years

cost of insurance is $35.75 with excess going towards index

Minimum no lapse premium: $50.12

here's some info from the inforce illustration, definitely leaning towards closing the policy...

https://preview.redd.it/yo33snuh59g...bp&s=bff28a300fbdc630300aa764fcd34fe4244e1346

https://preview.redd.it/zyg2vsuh59g...bp&s=46001930e6e4ee71c429256259b5c9be6a0e13ee

https://preview.redd.it/zqlg70vh59g...bp&s=93b75d3353346d86af6ece1ce652ecbaa31f1451

 

[dory69]

@vincey Don't surrender it. Switch to option 1 (level death benefit). Your cost of insurance will go down with each passing year and you'll get tax free growth which you won't get with 401k and IRA. Those will be ordinary income when you start taking RMDs one day.

 

[vincey]

@dory69 But I wouldn't be able to use that money for my own retirement, right?

 

[dory69]

@vincey You DO have access to the cash value in retirement with loans from/against your policy. There are two loan types that most IUL's offer.

The first type is called a non-participating loan, which is often referred to as a wash loan. The carrier will transfer the loan amount to a separate account, and within that account, they will charge you 2% interest annually (example) and, at the same time, credit you back 2% interest annually (example). Hence, the term wash loan because they wash each other out. It is important to note that the loan amount is no longer investable in point-to-point segments. If you took a $100k loan (example), this $100k is now essentially a lien against your death benefit. If you never pay it back, your heirs will just get $100k taken off the top of the death benefit they will receive.

The second type is called a participating loan, which is also sometimes referred to as an index loan. The carrier will now be charging you a higher amount of interest, let's say 5%, for example, but the loan amount is staying invested in the point-to-point segments meaning you have the potential to earn more than the 5%, let's say 7% for example, and create a little positive arbitrage. Participating loans are a double-edged sword because if market conditions aren't favorable, you could be paying 5% interest and earning 0% in interest crediting and at the same time paying for COI (cost of insurance) and whatever other internal expenses are in your IUL. But then again, where else could you go right now and get a 5% loan? As of January 2024, it's pretty much nowhere. So if you look at it purely for what it is....a 5% interest loan, then you realize that even the worst case scenario (markets are flat or down) is better than paying 28% marginal tax on ordinary income from qualified retirement account RMDs.

 

[easternpresent]

@dory69 I hope you are a trainer because this is better explained than carrier manuals.

 

[dory69]

@easternpresent I'm just a regular Joe that has an IUL and has helped family members with their IULs. Would love to work for a carrier but I don't imagine I'd ever get a call back because my job history is in the customer service/retail field.

 

[carolmariev11]

@dory69 You could definitely get a job with an insurance company.

 

[dory69]

@carolmariev11 Maybe I'll screenshot this post and send it to a recruiter

 

[bandan]

@dory69 As someone who has worked for a major U.S. life insurance carrier and explained types of policy loans to financial advisors and insurance agents many many times, I can confirm you would be strongly considered.

Would only add that if OP has $150,000 DB it’s already almost certainly option 1.

 

[dory69]

@bandan Very nice of you to say that. Maybe I should seriously look into it as I do feel like I have a strong understanding of the mechanisms/levers within an IUL.

My assumption on OP having option 2 is based purely on his age and that a 21 year old male would have minimal COI (assuming good health) and his friend would have sold it to him under the premise of being able to change it to option 1 down the road if he were to ever find himself in a tight financial posotoon and couldnt continue to contribute as much and therefore needed internal expenses to decrease.

 

[bandan]

@dory69 Intuitively that would be the IUL design for cash value accumulation but with a flat number like $150,000 there’s virtually no way it’s an option 2 as initial DB would have to be $143,761.88 to have current DB at $150,000 with option 2.

 

[blondie2]

@dory69 Do you think IUL is truly an investment vehicle? Considering the fact that insurance have that power of changing ur cost of insurance and determine the cap and floor for your policy?

 

[dory69]

@blondie2 If an individual has maxed out their tax deferred accounts and already is sheltering income with real estate, then I see no problems with a well funded, properly structured IUL as one additional avenue for tax sheltered growth. The thing is that so many bad actors in the space sell people IUL that have no business having an IUL.

 

[blondie2]

@dory69 You right! At what point do you think one should switch from increasing death benefit to option 1 you mentioned earlier on? And what's the benefit of doing that? Currently I have a policy I structured using increasing death benefit and low face value.

 

[plantlover]

@dory69 I think you can definitely get a job. I got a job in sales with just CS experience. LOL

 

[dory69]

@plantlover What kind of sales job do you have? Like an internal wholesaler?

 

[plantlover]

@dory69 Lol yes. I'm an internal wholesaler. So, not directly to clients. I sell through agents. Great starting point though!

 

[kim5398]

@vincey I wouldn’t unless you are in an emergency cash need and don’t need the death benefit. If accumulation is the goal the premium should be as close to the maximum as possible. You can also reduce the DB or do a tax free exchange to a new policy with a lower DB.

 

[vincey]

@kim5398 I definitely don't need the death benefit at the moment...or anytime in the foreseeable future for that matter.

 

[kim5398]

@vincey Then technically you can surrender the policy anytime.