Need to know which options you can use when exiting your whole life insurance policy? Well you’ve come to the right place!
Here at Huntley Wealth, we’ve assisted numerous people with all their life insurance needs and we know all the ins and outs of how you can opt out of a whole life policy contract.
Quick Guide for Exiting Your Whole Life Policy
- Surrendering Your Whole Life Policy
- 1035 Exchange
- Holding On to Your Policy
- Calculate Your Whole Life Policy Return
- Need Personal Help?
In regard to exiting your whole life policy, you have a few options moving forward which include:
One simple approach is to simply cancel your policy and take the cash surrender value.
You may want to buy a term or guaranteed universal life insurance policy prior to cancelling your whole life policy, though, if you still need life insurance coverage.
NOTE: There can be tax ramifications cancelling a cash value life insurance policy. Always talk to your tax adviser first to find out if there will be any tax issues.
This allows you to alternatively transfer your cash value into a new permanent life insurance policy.
I suggest you consider Guaranteed Universal Life.
Section 1035 of the IRS code permits you to transfer the cash value of your existing policy into a new cash value policy. There are no tax implications to do so.
The cost for guaranteed universal life policies are very low since they focus on providing you one thing… guaranteed lifetime protection WITHOUT the cash value buildup and investment component that makes whole life so expensive.
In fact, exchanging a whole life for a “GUL” might actually lower your premium by as much as 50% – 75%.
You can also keep the same amount of death benefits. Another option is to maintain your premium “as is”, and ask your insurer for additional coverage if you need more.
WhiteCoatInvestor.com, also advises that you use a 1035 exchange to prevent losing money if you opt to surrender your current policy. I’m not fully versed in this approach, but you can read more about that concept here.
Should you want to continue your existing policy, you can increase the performance by paying your premiums annually. You need to ensure your dividends are set to purchase Paid Up Additions, and that your existing policy has a “Paid Up Additions” rider. This allows you to use as much of your premium that you can afford to buy paid up additions without the policy becoming a MEC. Alternatively, if you find your premiums to be too expensive, then set your dividends to offset your premiums.
Before you decide what to do, you should ask for several “in force illustrations” from your current life insurer. Your need to learn what is guaranteed by your policy and what how these projections work if you choose to do any of the following:
1. Don’t pay additional premiums and don’t pay any amount to policy loans
2. Maintain your regular premium
3. Ask for an Illustration
If you’ve never previously missed a premium payment or taken a loan against the cash value, you should ask for an illustration showing how it will affect your policy if you do so. You could already be thinking about how you could use a loan from your policy. Estimate how much you might want to borrow. Even if you aren’t considering this option, you should still pick an arbitrary amount and the time frame you want to borrow the money for to see how it could affect your policy.
This will give you both the “best and worst case scenarios” as you look down the road.
Analyzing Your Illustrations
Using this information, you should also consider the following:
• Your Current Health Situation
Has your health improved or degraded since you first bought your whole life policy? Would you qualify for a new policy if you were to apply for one?
• Your Present Financial Situation
Is your income variable or inconsistent? Can you afford your annual premiums, or do you foresee a time when you might not be able to afford to pay your premiums? Ask yourself if you still have an actual need for a policy? If you didn’t need to pay a premium, are there other investments you could invest your in money instead? Be honest when answering these questions as it will go a long way to ascertain your long term financial plan.
• Estimating Your Future Return
This will clearly be different for each insurer and will depend on the length of time you’ve owned the policy. In the first 10 years a person owns a policy, the returns are awful, but they may improve the longer you hold onto the policy.
I generally snicker when folks say they’ve been earning a dividend of 5% or 6% for 6 years while their cash value only equals the premium amount they’ve already spent. Let’s be very clear about this point! That’s a return of 0%!
If you want to estimate your future return, it has to be determined by the actual values (which we hope is in the plus zone), not the policy’s stated dividend rate!
To figure this out you need to ascertain the following values, which you can obtain from your illustrations:
- Current Cash Value
- Annual Premium
- Future Guaranteed Value
- Future Projected (Non-Guaranteed) Value.
For example, let’s say you have a current cash value of $50,000, a guaranteed cash value of $400,000 20 years from now, and you’re paying $10,000 per year.
How to Use Excel to Calculate Your Return On A Whole Life Policy
This is how you set this up using Excel:
Note: Your current cash value is minus as it expresses all the money you’ve paid up to this point in time. Your premiums are in the minus column as this is all the cash you have already spent.
Now use the financial function: RATE, and set it up like this:
NPER = Amount of Periods (in this case, years)
PMT = Premium
PV = Present Value/ Current Cash Value
FV = Future Value
In the above example, you would set it up in Excel like this.
Click ok and you would find the RATE = 3.9%
I suggest you run these calculations both for the guaranteed future value, and the non-guaranteed value. You’re actual future value will likely be somewhere in the middle of these 2 values. If you need any help with the calculations above, here’s a link to a great guide.
Now have figured out the approximate returns you might receive from your policy, all you have to decide is what to do with the cash you will save. Some of your options could be to invest the savings in a 401k with a match, or an HSA, or maybe something else. It’s up to you to decide which is best.
I repeat – if you’ve owned the policy for 10 years, you may also discover that the policy might make 5% to 6% over the next 20 or 30 years based on the schedule. If you can’t earn more from other investments and can afford to pay the premium, you might want to hang onto your whole life policy instead!
Alternatively, I would highly suggest that you get rid of your policy, and buy a term policy to satisfy your life insurance needs. Before you switch, buy the new policy first so you have coverage in place before you cancel your existing policy.
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