Keeping my Universal Life Insurance, for now

FacebookTwitterPrintShare
A bird in the hand...
A bird in the hand…

Now that I’ve left my “full pull” job ~ that’s what I call a full-time career ~ I shouldn’t need Life Insurance anymore, right? ¬†Right.
Mr. SustyThemes and I don’t even have any kids, so it should be obvious. No dependents to support, both retired, so no further need for life insurance.
But…here’s my thinking.

(Note: I’m no insurance expert! But maybe sharing my thinking will trigger some ideas, or useful feedback.)

A long time ago, in what seems like another lifetime, I bought (or more accurately, was “sold”) a Universal Life insurance policy. I haven’t paid any (flexible) premiums since 2002 when I had other expenses and realized this wasn’t a good “investment” vehicle as policy interest rates continued to be reduced each year. It’s been out of sight, out of mind. I left my career almost 4 years ago, but have been busy enjoying life and doing some part-time work projects, so didn’t get around to reevaluating my insurance situation until this year. That’s the life of a joyfully semi-retired person ~ if I do one thing a day I’m satisfied ūüėČ But I digress….

100 Dollar Question

I began by trying to learn about just what I really owned, including reading my policy closely, consulting with an expert, and referring to articles like these: Retirement Disaster Looms for Universal Life Policyholders, Life Insurance Estate Planning: 7 Costly Errors to Avoid, and others noted below. Granted, I should NOT have bought a policy I didn’t really understand in the first place, but I was 25, and I’m pretty sure I’m not alone in admitting to being sold a high-commission insurance product?

Universal life is a modern invention that takes the ‚Äúsure‚ÄĚ out of insurance by tying the benefits to the performance of stock and bond markets. In contrast, mutual whole life has ancient roots, enduring the millennia because it‚Äôs a simple and safe way to grow a nest egg while providing for one‚Äôs heirs. 
       John E. Girouard, Retirement Disaster Looms....

Should I Keep It, Sell It, or Convert it to an Annuity?
These decisions are very individual and situations vary. Plus there seem to be many¬†similar-sounding insurance products, so this may not apply to you, but I‚Äôll share my thinking. I‚Äôm 55 and I opened this Universal Life “Cash Value” policy 25 years ago (not a Guaranteed Universal Life).

‚ÄúCash value‚ÄĚ policies such as whole life, variable life, and traditional universal life combine life insurance with investment vehicles. These policies are relatively expensive and generally charge high maintenance fees. These policies combine life insurance with investment vehicles. The ‚Äúcash value‚ÄĚ is difference between the amount you‚Äôve paid in and what‚Äôs required to cover the life insurance portion.
            Cliff Pendell, ...7 Costly Errors to Avoid

If I had this decision to do over again, I¬†would probably buy Term insurance if¬†needed to have something portable to supplement my employee insurance benefits. ¬†The expert I consulted with is a¬†relative who is an insurance agent and his¬†general advice is for people to buy term life if/when they need it, and to never consider life insurance to be an “investment”. But ‚Äď since I already have it, I needed to decide what to do now.

We¬†looked at the current numbers together¬†and his opinion was that there‚Äôs no absolutely right or wrong decision‚Ķhis advice was to factor in¬†my¬†own estate planning goals and¬†remember there’s no need to rush a decision. That helped me, because I was afraid I had done really poorly with this product¬†and may need to act fast to minimize the damage. Without trying to explain details I’m still not an expert on, let me just show you the kind of policy information that we discussed in order to evaluate my¬†situation.

UL Insurance Summary Info

Death Benefit of Policy: $110,000
Total Acct Value as of Oct 2015:$13,353  (also my surrender value)
2015 Cost of Insurance :$312 (includes a $57 waiver of monthly deduction until I'm 60)
Annual Expense Charges:$48
Annual Interest Credited :$520
Interest rate:Currently 4%, which is the guaranteed minimum for the policy 
Total Premiums Paid to date:$8,396 ($7,774 net)
Total Interest Earned to date:$11,214
Total Expenses to date:$5,593
Maturity Date:2056 (95 years of age)
Death Benefit Option 1:Basic Amount of policy, without refunding cash reserves
Waiver of Monthly Deduction:Waives future monthly deductions if insured becomes disabled (I plan to cancel this since not working)
Coverage projection from insurance company statement:If no further payments are made, policy will provide coverage until age 67 at guaranteed rates and age 78 at current rates. 
If planned payments of $600 each year are made, policy will provide coverage until age 74 at guaranteed rates and age 88 based on current rates. 

Now What? After looking at the numbers, I stepped back and considered things like this:

  • whether I feel I need life insurance ‚Äď I‚Äôm essentially retired, and ended up having no dependents.
  • my husband is very unlikely to need this money due to our other assets.
  • ¬†but, you never know what‚Äôs going to happen in life (or to your assets in the market), and when‚Ķ
  • if I were to die tomorrow I’d be happy I didn’t cash it out. The ROI on this would be good since I‚Äôve invested much less than the¬†$110K benefit that would go to my heirs, and additional¬†premiums are optional. But there‚Äôs still an opportunity cost of not investing this money elsewhere.
  • right now there would be some minor AGI and tax implications of canceling (I have some gain).
  • eventually, if I pay no more premiums, that gain and all the accumulated account value will be eaten away by the quickly increasing cost of insurance mapped out in the policy’s rate-by-age table (beware of this fact in UL policies).
  • I learned that some people with large estates use life insurance payouts as a way for their families to pay estate taxes. I briefly looked into whether this is relevant,¬†and for now I’m ignoring it.
  • I believe I could also look into the option to use a 1035 exchange to convert to an annuity, but my basis value is small, so that doesn’t entice¬†me much right now.
  • Lastly, I know the insurance agent will try to convince me to keep it, which makes me want to cash it out¬†it even more! But, I‚Äôm not going to sell just to spite my insurance guy ūüėČ I‚Äôve got to assess my own goals‚Ķ

Since this policy will stay in force for at least another 12 years based on guaranteed rates (or 23 years based on current rates) even if I don’t pay any more premiums, I’ve decided to let it ride until it doesn’t pay for itself anymore. 

The opportunity cost is that I could invest the surrender value and earn higher returns (or lose it in the market). Let’s say in that same 12 years at 6% return I could roughly¬†double my $13K account value ~ nice, but not compelling.¬†Left in the policy the account value¬†earns 4% in interest, but less after considering expenses and the cost of the insurance.

I’m looking¬†at it as “a bird in the hand” ~ I parted with the $8K in premiums years ago so I don’t miss it, plus let’s not forget¬†they’re supplying me with¬†insurance. Although it’s not a huge amount, it would be nice to¬†provide a $110K payout to my beneficiaries¬†if I can do so without paying any more premiums. As the account value approaches zero, I’ll need to reevaluate whether to reduce the death benefit to extend the policy life, or just let it expire.

A lot to think about…and I might still change my mind. I’ll let it simmer in the back of my brain for a while before doing anything ~ any obvious points I’m missing?

Thanks for sharing your thinking ~ it always helps to hear the insights of others.

Can a Life Insurance Policy be Switched to an Annuity?
5 Life Insurance Strategies for Retirement Planning
Retirement Disaster Looms for Universal Life Policyholders
Life Insurance Estate Planning: 7 Costly Errors to Avoid
Life Insurance Can Bite The Wealthy When It’s Time To Pay Estate Taxes

Leave a Reply

Your email address will not be published. Required fields are marked *