Help Me Understand My Policy!

[pancaker]

I'm a recent college grad and was recently handed a whole life insurance policy by my parents. They didn't seem to have a great understanding of its value and I certainly don't either, so I'm looking for some advice and my options before I speak with the insurance agent. Assume I have little understanding of what I've got here!

The policy is Northwestern Mutual 65-Life Whole Life Insurance. It was taken out more than 20 years ago. It's a pretty tiny policy but obviously has been growing for a long time. Not sure if I should cash it out or keep "investing."

Here are the details:

Basic Coverage: $25,000
Current Death Benefit: $38,000
Current Cash Value: $4,500
Annual Premium: $200

2014 Dividend/Cash Value Increase: 160/350
2013 Dividend/Cash Value Increase: 95/335
2012 Dividend/Cash Value Increase: 95/320

Would love to hear any thoughts!

Thanks.

 

[FEX Quotes]

Keep it. You won't be sorry

 

[pancaker]

Keep it. You won't be sorry

Again I'm a finance rookie so any explanation would be very helpful

 

[scagnt83]

I'm a recent college grad and was recently handed a whole life insurance policy by my parents. They didn't seem to have a great understanding of its value and I certainly don't either, so I'm looking for some advice and my options before I speak with the insurance agent. Assume I have little understanding of what I've got here!

The policy is Northwestern Mutual 65-Life Whole Life Insurance. It was taken out more than 20 years ago. It's a pretty tiny policy but obviously has been growing for a long time. Not sure if I should cash it out or keep "investing."

Here are the details:

Basic Coverage: $25,000
Current Death Benefit: $38,000
Current Cash Value: $4,500
Annual Premium: $200

2014 Dividend/Cash Value Increase: 160/350
2013 Dividend/Cash Value Increase: 95/335
2012 Dividend/Cash Value Increase: 95/320

Would love to hear any thoughts!

Thanks.

I second keeping it. No reason to speak to an agent unless you want to add on an extra policy. But do not let an agent talk you into replacing it. Also, you might be able to increase your premiums to increase the growth of the Cash Value (CV) /Death Benefit (DB).


Explanation:
This policy will be "Paid Up" at age 65. That means no more premiums will be required after age 65 and it will stay in force for the rest of your life after that and will keep increasing in value.

The policy started out with a $25k DB and has grown to a $38k DB.

The policy started out with a $0 CV and has grown to a $4,500 CV.

Obviously $200/y is a very small premium. To get $38k in DB in your 20s would cost more than double that... assuming you are a non-smoker... and the new policy would have zero in CV.


This policy receives Dividends that are based on the performance of the insurance company. That is what increases your DB & CV.
From what you wrote, the CV increase is already more than what you are paying in premiums. So you pay $200 and they give you $350+. The CV increase will be larger each year you keep the policy.

You can access the CV by Withdrawing it, or taking it as a Loan. The CV is essentially part of the DB, so any withdrawal from the CV will decrease the DB dollar for dollar.
I would highly suggest that you do not access the CV until much later in life. And if you do I would suggest taking a Loan and then paying it back over time as you are able to. This will help the performance of the policy if done that way.

The CV grows Tax Deferred and can be accessed Tax Free with Loans.
You can Withdraw up to the Basis (the amount of premiums you have paid in) and get the money tax free. After that you must take Loans to keep it tax free.
I suggest just doing Loans. The interest is paid internally, you do not have to pay it out of pocket.


Being young, you may not see a whole lot of value in the policy right now. But in 10 years I promise that you will. You will be sorry in the future if you cash out this policy.


At some point in your life it is likely that an agent will suggest that you "transfer" or "exchange" or "1035 exchange" this policy for a larger one. They will tell you that the CV will transfer over and the policy will perform better... in short do not do this. You would be trading a policy with VERY low internal costs (what they are charging for the DB, "cost of insurance & admin fees"), for a policy with much higher internal costs. Just add on a new policy but never exchange this one into a new one.

It is true that the CV will transfer. And the Basis (the amount of premiums paid) will transfer too. But like I said, the Cost of Insurance will be MUCH higher on a new policy at an older age. This will create more of a drag (expense) on the current CV.

If you do anything with the current policy it needs to be adding extra premium. You can call the company and have them tell you how much extra you can add each year without the policy becoming what is called a "MEC". A MEC means that you loose the tax advantages of the CV. You dont want that to happen.


Long story short, keep the policy. There is no reason not to.

 

[FEX Quotes]

Again I'm a finance rookie so any explanation would be very helpful

Actually, scagnt83 gave you a very accurate and detailed explanation, but I will offer a very simplified view and opinion..

First the opinion - Your parents deserve a big hug and thank you for what they did by purchasing this policy.

Now a simplified view - You have an asset that pays you 155% tax free interest (based on the current dividend) that comes with a tax free death benefit.

NEVER LET THIS GO

If you do want to cash out, contact me and I will buy this policy from you.

 

[AlTheGud1sRtakn]

I second keeping it. No reason to speak to an agent unless you want to add on an extra policy. But do not let an agent talk you into replacing it. Also, you might be able to increase your premiums to increase the growth of the Cash Value (CV) /Death Benefit (DB).


Explanation:
This policy will be "Paid Up" at age 65. That means no more premiums will be required after age 65 and it will stay in force for the rest of your life after that and will keep increasing in value.

The policy started out with a $25k DB and has grown to a $38k DB.

The policy started out with a $0 CV and has grown to a $4,500 CV.

Obviously $200/y is a very small premium. To get $38k in DB in your 20s would cost more than double that... assuming you are a non-smoker... and the new policy would have zero in CV.


This policy receives Dividends that are based on the performance of the insurance company. That is what increases your DB & CV.
From what you wrote, the CV increase is already more than what you are paying in premiums. So you pay $200 and they give you $350+. The CV increase will be larger each year you keep the policy.

You can access the CV by Withdrawing it, or taking it as a Loan. The CV is essentially part of the DB, so any withdrawal from the CV will decrease the DB dollar for dollar.
I would highly suggest that you do not access the CV until much later in life. And if you do I would suggest taking a Loan and then paying it back over time as you are able to. This will help the performance of the policy if done that way.

The CV grows Tax Deferred and can be accessed Tax Free with Loans.
You can Withdraw up to the Basis (the amount of premiums you have paid in) and get the money tax free. After that you must take Loans to keep it tax free.
I suggest just doing Loans. The interest is paid internally, you do not have to pay it out of pocket.


Being young, you may not see a whole lot of value in the policy right now. But in 10 years I promise that you will. You will be sorry in the future if you cash out this policy.


At some point in your life it is likely that an agent will suggest that you "transfer" or "exchange" or "1035 exchange" this policy for a larger one. They will tell you that the CV will transfer over and the policy will perform better... in short do not do this. You would be trading a policy with VERY low internal costs (what they are charging for the DB, "cost of insurance & admin fees"), for a policy with much higher internal costs. Just add on a new policy but never exchange this one into a new one.

It is true that the CV will transfer. And the Basis (the amount of premiums paid) will transfer too. But like I said, the Cost of Insurance will be MUCH higher on a new policy at an older age. This will create more of a drag (expense) on the current CV.

If you do anything with the current policy it needs to be adding extra premium. You can call the company and have them tell you how much extra you can add each year without the policy becoming what is called a "MEC". A MEC means that you loose the tax advantages of the CV. You dont want that to happen.


Long story short, keep the policy. There is no reason not to.

Every single thing he said. I'd also like to emphasize the NEVER DOING AN EXCHANGE on this. It's paying well and costing you little. Even if you eventually take out another policy down the road keep this one. You're never going to get coverage that cheap again. Don't loose it.

 

[DHK]

Definitely keep the policy going.

For the cash component of the policy, don't think of it as an "investment". Think of it as a cash reserve - in the event of emergency or opportunity. Then you can borrow against it and repay it back over time... or just do a withdrawal from policy values. It's just an extension of your savings... with a much better return than you'll ever get from your bank.

Learn to harness your policy as you need to, but don't give it up and never gonna let it go.

 

[JosephDeacon]

Absolutely keep this policy and do not ever exchange it or 1035 it for another life contract. Everything stated is accurate.

 

[Robert Barney]

I'm not seeing a lot of numeric analysis here. I would need more facts to comment intelligently.

The facts would be revealed by obtaining an "in force" policy illustration, showing a projection of values from this point forward.

Some basics to remember:

Life insurance is INSURANCE, it is NOT an "investment". Hence the use of the word insurance.

Insurance is NOT FREE.

If you die, the life insurance company does not pay the death benefit AND the cash value, it pays the death benefit.

The only way to get the cash value, without quitting the policy, is to borrow it. If you have to borrow it, it's not your money.

Dividends are NOT guaranteed.​

Now those who have talked about how great the policy is, may be correct. But I don't see how anyone can comment intelligently without having more facts.

Once again, ask the company to email you an "in force" policy illustration.

 

[DHK]

Robert...

It's called "net amount at risk". The death benefit = net amount at risk + cash values - any outstanding loans.

The cash value IS paid out at death.

----------

What is net amount at risk? definition and meaning

Amount at Risk Definition | Investopedia

----------

And you're correct... life insurance is NOT free. But having had his parents pay for that policy for 20 years... makes it very good... plus level premiums from that time makes it a great asset to have and to continue.

And you're correct... the money is "not his" if he has to borrow it. Why is it not his? Because the money is funding the death benefit. When a loan is taken out, it will reduce the net death benefit.

In short, you will have taken out a loan... and it is repaid first from the total death benefit before the check is disbursed to your beneficiaries. Responsible people would have enough life insurance to resolve all their debts, so this really shouldn't be an issue.

While it's "not his"... he has full control over that asset, as long as he knows what his options are and the consequences of those options.

----------

Northwestern Mutual has had a great history of paying dividends. The dividend SCALE is not guaranteed... but receiving A dividend for the foreseeable future is very likely.

Dividends are not guaranteed because they are based on four primary factors:
1) Mortality experience of the company (if more favorable, means more profitability)
2) Investment results of the company's general account
3) Sales of new policies and receiving new premium into the company. You'll notice that dividends are scheduled to increase every single year, and must be fueled by new premiums coming into the company.
4) Policies that lapse. Yep, that helps the company because they get to keep the policy costs and add them to their bottom line. In short, yes, life insurance companies are a great, moral ponzi scheme that serve the interests of their policyholders.


But Robert saying these things without explanation doesn't help anyone have any idea behind those statements.