Whole life insurance help

[darlene5]

My spouse and I got married a couple years ago. At that point, we purchased some term and whole life insurance from a family friend through NYL.

As I read more and more, it feels like our situation may need adjusting. Hope some can help. I’ll try to give details that should help answer.

We both have solid careers, but my spouse makes almost twice what I do. Together we gross $180k/year. Between us, we have approximately $400k in our 401k and 403b retirement accounts. We have about $260k left on our 30 year mortgage that we took out when we bought our house 3 years ago.

We have about $1.4 million in term on her, and $600k on me.

Now, to my issue. We have a total of $300k whole life on her, and $200k on me. Total cash value of the policies is only about $1,500 right now because they are only 2 years old.

We don’t struggle to pay our bills or meet our obligations, and live fine, but the freedom for SOME added liquidity would definitely help (we are trying to start a family). What I mean is we both contribute up to our employer match to our 401k and 403b accounts, so we’re nowhere near maxxing them out. We have a car payment for about 4 more years, and about $19k in student loans we’d like to be aggressive about paying off (once the litigation is over and assuming no forgiveness).

Frankly, I also think the market generally performs better than the safer growth of a WL policy as an investment vehicle, from what I can tell? Someone can correct if not true.

Our WL premiums are a total of $570/month. Basically I’d like to be out from under the WL policy with that extra $570 going to our 401k/403b/HYSA/emergency fund, and giving ourselves a little more breathing room and freedom to with the $570 as we choose, depending on our needs at the time. We could do additional contributions, but those can be adjusted with one click should it be needed. We are disciplined so it’s not an issue of it just getting spent and getting nothing out of it long term.

What advice would you give/further info or questions you need to give good advice? Thanks all for reading

 

[tabinek]

@darlene5 It is my opinion, that whole life can serve as the conservative aspect of your overall investment portfolio but it probably isn’t time to consider that until you’ve maxed out other investment opportunities. Further it sounds like this is too large a percent of your current investments dedicated to a conservative investment tool.

Forget the last 2 years of premiums; those are sunk costs. Just ask yourself: If you had $570/month to utilize today would you put that in to whole life insurance or use it differently? Follow that answer.

 

[darlene5]

@tabinek Do you mind sharing your background a little bit? What you said is exactly how I feel and the opinion I’ve put together from reading and talking to people. From the sunk costs to the rest. Exactly where I’m at, and the answer would be I would initially put all $570 of that to some % of our HYSA emergency fund (to get it to a certain level), and then our 401k/403b retirement vehicles for the rest. None of it would simply go to our monthly budget, because that isn’t a need.

 

[peacewithin]

@darlene5 And yes you can call up NYL and ask for an in force illustration. That will give you projections for the future

 

[diamondoutofdust]

@darlene5 Honestly, I don't think you've done your research on what a WL policy can do for you vs the easy answer of what the added cash flow can do. Research your policy, evaluate it's pros and cons from this point forward and compare it to what the added $570/month cash flow will do for your family. Anything less is a disservice to your family. Harsh but true.

For instance, whole life policies are often used for estate building because the death benefit is tax free. That's IRS free $200-300k to the surviving spouse or $500k should something worse happen. Another is this policy is permanent and in force already, should either of you take up a high risk hobby or develop significant health issues it can't be canceled or modified as long as the premiums are paid. The point I'm trying to make, is there are benefits to them once you're past the beginning, and I think you need to better understand those benefits before you make this decision.

Follow the logic as it pertains to your life, and not the impulse.

 

[medialab]

@diamondoutofdust

For instance, whole life policies are often used for estate building because the death benefit is tax free. That's IRS free $200-300k to the surviving spouse or $500k should something worse happen. Another is this policy is permanent and in force already, should either of you take up a high risk hobby or develop significant health issues it can't be canceled or modified as long as the premiums are paid. The point I'm trying to make, is there are benefits to them once you're past the beginning, and I think you need to better understand those benefits before you make this decision.

I second that. I think life ins is largely under utilized these days as a retirement tool. Most of the posts on reddit is about how to save for 401K, or which stock or ETF to invest in etc, very few talk about the important of life insurance.

Many overlook the tax free benefits of life insurance policies. The key is to start early in life when you are youung in order to keep your monthly or annual premiums low. I regret I didn't start sooner.

Besides tax free death benefit for the surviving spouse, with the appropriate riders,people can also take a tax free loan against the policy and this could be a huge advantage for retirees especially if he/she is the remaining surviving spouse on the policy. The tax free loan against the policy does not count as income on the return, so it will reduce the likelihood that your social security benefits will be subject to tax. You don't plan on paying off the loan, the goal is to bleed the entire policy cash value down in the form of a tax free loan before you pass away, (again assuming you do not need to leave anything for your spouse or children). Say if you start early and manage to accumulate a permanent policy with $2M in cash value, you could potentially draw down the $2M tax free in the form of a periodic loan against the policy (minus any interest vs dividend offsets and the carrier's minimum cash value requirement).

Also, most life insurance also comes with chronic or terminal illness rider that provides tax free benefits against the policy value, super important IMO.

IMO, I think life insurance (either term or WL or a combination) should be the most important retirement planning consideration immediately after emergency funds.

Once you have your emergency funds and life insurance taken care of, then you can look into investing in 401K, individual brokerage account etc etc...

PS: I do NOT sell insurance, and I am NOT a financial advisor. Just sharing what I have learned from years of research before buying my first whole life policy. This is not financial advice, do your research.

 

[rayeli]

@darlene5 The policies you were sold do not seem like they were set up to maximize cash value growth, given that you only have $1500 after the first two years on ~$14k in premiums paid in. Why did you discuss with your family friend getting these policies in the first place? Have your needs changed in two years?

Going forward, you will be seeing much more of your premiums show up in cash value. You can look at this cash value as the emergency fund you said you wanted to build, while it's at the same time giving you a life insurance death benefit.

Canceling the policies now really will be throwing away a lot of money - it's not a sunk cost fallacy, its a sunk cost truth.

I would keep the policies, even though I probably would have set up my policies differently if I were trying to use this as a savings/emergency fund tool.

 

[darlene5]

@rayeli I would be throwing away the sunk premiums yes, but do you keep making what seems like a mistake just because you spent time and money making it? That’s where I’m at. I get what you’re saying, and I’m just trying to figure out what’s best. The other poster had a different idea, but both of what you said are things I’ve considered. I wish there was just a slam dunk answer here, lol.

 

[rayeli]

@darlene5 You need to look at your illustration and see how your cash value growth will be going from this point forward as compared to your premium. That cash value is your emergency fund. Depending on how much is showing up vs your premium should hopefully give you a comfort level on which direction to go.

These policies do eventually end up being a great savings tool, but the first years can be ugly, especially if the policy was set up for maximum death benefit (which it sounds like yours was).

 

[darlene5]

@rayeli Is an illustration something I can usually get online or do I have to get from my agent?

 

[suezq3]

@darlene5 Depending on your state, they should've given you an illustration with the current values and an illustration with the guaranteed values when the policy was shown or delivered.

 

[jeshurun1111]

@darlene5 You’ll have to contact your agent. In fact, that’s exactly what you should be doing. Tell them your concerns and see what they recommend.

The first couple of years have the most sunken costs and it’s not uncommon to have this feeling at this point. Looking at the projected future of the policy will help you either remember why you bought it in the first place and feel better about the expense, or solidify your inclination to let it go. You also have the option to split the difference and reduce the policy size, perhaps in combination with adding some paid up additions to increase the earlier cash value.

Bottom line: none of us here know enough about you or your exact policy to give advice. Speak with your agent, that’s what he’s there for.

 

[peacewithin]

@darlene5 Your NYL agent most likely put your entire premium towards target premium and didn’t set it up to maximize cash if that was your goal. You will most likely see a dollar for dollar equivalent around year 10-12 Until then you will always be behind They most likely set it up to maximize their commission not your cash. Sorry