Variable Adjustable Life Policy

[inandoutoflove23]

Variable Adjustable Life Policy

Need some advice. I (54M) have a Variable Adjustable Life Policy for $250k. I've had the Policy for 23 years. Currently my monthly premium is $75 ($900 yearly). Insurance cost is $25.00 monthly, but the Policy carries a sales load fee of $5.25, admin fee of $5.00, a premium tax of $1.88, and a Face Amount Guarantee Charge of $1.13. ($13.26 in monthly fees). The remainder $36.74 is invested into 3 different funds (SFT S&P 500 (40%), SFT Growth Fund(30%), and Janus VIT (30%). Cash/Surrender Value of $39k, taxable portion is $18k. If I die, my Policy only pays $250k and they keep Cash Value.

I got this Policy when I was $31 and my wife talked me into it. I also have a Term Life Policy of $500k that expires when I turn 70 yrs old. I hate all the fees I've paid currently and in the past, but at $38.26 a month is half the price of my term life policy. So not a terrible deal now.

I currently don't have a need for the $250k Policy. No mortgage, 2 kids in college on scholarships and 529s. No debt.

Should I take the cash value out and pay taxes and invest the $75.00 monthly or should I keep the policy intact and continue paying monthly premium of $75.00? With 5% yearly growth the VAL Policy will expire at 90 yrs. old. I could change it to a cash protection policy that expires at 84 yrs old, but if I die anytime before that the cash value gets paid out on top of the $250k.(Peaks about 70 yrs old at $310k and decreases from there.)

 

[ativyl]

@inandoutoflove23 At the very least switch to annual instead of monthly.

Old insurance is almost always a good investment. This is going to be a good place to keep taxable fixed income. You didn't indicate your financial situation and how much taxable fixed income you need. I would definitely not take the money out. You can always slash the insurance and set the policy to minimum death benefit. You can then borrow from the policy if you need access to money and repay when convenient. Use the policy as a tax advantaged emergency fund.

 

[inandoutoflove23]

@ativyl Help me understand better. Why should I keep taxable fixed income in this policy? My understanding is that I can only take a loan on my Cash Value and not just a withdrawal. Wouldn’t I have to pay taxes on any withdrawal? What is the advantage of paying our premiums yearly? Only 1 sales load per year? Guessing the other fee will still apply monthly. Have other assets and probably never take a loan on anything. How would I use the account as a tax advantaged emergency fund?

Financial situation? We will be doing Roth Conversions for the next 8 years to decrease our RMDs when we hit 73 yrs old. So sizable taxable assets. We will be paying taxes with our income from each year.

We have a nice size of brokerage account and our number for successfully being able to sustain our retirement dollars is 99 on the Fidelity planning site.

 

[ativyl]

@inandoutoflove23

Why should I keep taxable fixed income in this policy?

Because you don't pay taxes on fixed income inside a life insurance policy.

https://www.reddit.com/r/IncomeInvesting/comments/14j82hw

My understanding is that I can only take a loan on my Cash Value and not just a withdrawal.

Correct until death.... You either borrow the money from yourself ("direct recognition" / "wash loan") or you earn inside the policy while borrowing at a reduced interest rate outside the policy ("non-direct recognition" / "participating loan").

What is the advantage of paying our premiums yearly?

You are likely paying about 9% interest over the yearly cost. Your fees may also decrease.

How would I use the account as a tax advantaged emergency fund?

Borrow money when you need cash. Repay loan when you have excess cash. Just like a savings account except you are "borrowing"

So sizable taxable assets. We will be paying taxes with our income from each year.

If you have sizable taxable assets then definitely keep the policy and slam money into it. You'll need to reduce sequencing risk of your draw. (

https://www.reddit.com/r/IncomeInvesting/comments/14npd58

,

https://www.reddit.com/r/IncomeInvesting/comments/dhb50v

). Very important next decade.

Have other assets and probably never take a loan on anything.

The loan is synthetic. This is a tax loophole it isn't really a loan.

We have a nice size of brokerage account and our number for successfully being able to sustain our retirement dollars is 99 on the Fidelity planning site.

Then you have more assets than you need. Either boost your spending or start worrying about estate planning. In which case whole different discussion about turning this policy into a split value trust for your heirs. While this policy is too small to do much it can offset some risk of death in annuities, and you might be able to make it bigger.

That's a more complex topic though where you are trying to get assets out of your estate rather than increase assets of your estate.

 

[jeshurun1111]

@ativyl Fantastic response 10/10

 

[ativyl]

@jeshurun1111 Glad you liked!