Should You Keep Your Old Whole Life Policy?

Last week I wrote about the differences between term and whole life insurance. In general, I am an advocate for putting cheaper term policies in place and investing outside your insurance. With that said, I talk to many individuals with whole life policies they put in place years ago. In some cases, their parents bought it for them and they still own it 60 years later!

 If you have found yourself with one or several old whole life policies, you should start with a few questions. 

• Do you have a need for life insurance or have you self-insured? 

• If you do, are you unable to get a cheaper term policy? 

• Do you have an underlying medical condition that might lead to a short life expectancy?  

If you answered “no” to these three questions, as many retirees do, it may be worth analyzing cashing out your whole life policy by taking the following steps:

(1) Find out what your “cash surrender value” is. This is the cash value available to you after paying fees. 

(2) Find out if you have a taxable gain. If you are getting more back than you paid in, there is a taxable gain. In many cases, there are minimal taxes involved.  

(3) Find out what your required premiums are for the remainder of your life. In most cases, this is what you are currently paying, however in some cases, you may be able to use policy dividends to reduce premiums.  

(4) Find out your expected life expectancy using actuarial tables.  

(5) Calculate how much the cash surrender value and your annual required premiums grow at a certain rate over your remaining life expectancy. This calculator works well. 

Example  

Sally is 60 years old and has $89,000 in cash value on a $250,000 whole life policy. She is paying $1,500/year in premiums and using the life expectancy table, she assumes she lives 24 more years. She also assumes she will earn a 6% rate of return (not guaranteed) if she invested the cash value and future premiums.  

She estimates that at the end of year life, she could have $436,000, $186,000 more than the death benefit of her whole life policy! If she decides to do this, it does come with some risks. If she drops dead the next day, her beneficiaries are left with $89,000. In fact, she has to live until 75 in this example to break even with $250,000.  She also bears the investment risk as her returns are not guaranteed with investing, while it is normally guaranteed with the insurance company.

As you can see from this example, it can make sense in some cases for people who don’t need the insurance and are in relatively good health to cancel the policy and use the cash value now.

Thank you for reading, 

Alex 

This blog post is not advice. Please read disclaimers.