whole life policy - reviewing the numbers

How long have you been putting in 2000 a year? Thumper

To answer your question, need the following info:

*What was the initial death benefit?

*Is the "cash value" the net surrender value (what you would receive if you were to surrender the policy)?

*How long have you been paying the out-of-pocket $2000 annual premiums?

*What have you been doing with the dividend (accumulating, buying additional death benefits, reducing premiums, etc.)? If accumulating, what have been the total dividends over the years and is it in the "cash value"?

*When you say "increase from last year" ... what increased by $5400?

*Do you still need the insurance part (death benefit)? In other words, would someone be financially harmed by your death?

Give us the above and I suspect you'll get some interesting replies.

good questions.... established in 1991 - after son was born -

Dug out the policy from the filing cabinet, interesting reading... the projected increase in value/coverage didn't quite happen in recent years

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I'd also like to know your age and if you have any medical issues.

I am also one of those folks who'll tell you that insurance is NOT meant to be an investment and should not be treated as one or evaluated like one. Its comparing apples to oranges.

Most permanent insurance policies contain some feature that acts like an investment - like a guaranteed minimum rate of return on at least some part of your premium OR subaccount choices that either are or act like mutual funds. BUT the primary purpose of insurance is to provide a lump sum of cash upon your death - the other aspects are important, but they should NOT be what drives you to buy OR AVOID permanent life insurance.

You also need to keep in mind you anticipated future need. To do this gaze longingly into your crystal ball, or magic 8-ball, and try to divine the date, time, hour and method of your demise AND everything that might happen to you in between. Good luck with that.

For example, when I was still web behind the ears and the ripe old age of 23 I bought a $500K 10-year level term policy because the insurance agent said it gave me the most bang for my buck - I had a young wife and a new daughter and I could easily afford the premium. I avoided permanent life insurance because it was a BAD investment and it cost more.

Sadly, at age 26, just three years into the 10-year level period, I got cancer THE FIRST TIME. Now at age 53 I've survived FOUR bouts with cancer and one stroke. Oh how I WISH I had bought permanent life insurance way back then, even all I had bought was a $100K policy (as I recall that was the most perm ins I could get for the same premium outlay). IF I had done that I'd still have coverage today - alas, hindsight is always 20/20. I generally recommend that folks consider buying between 10% and 25% of their immediate insurance need in permanent insurance and cover the balance, plus anything extra that may come up, with term insurance.

Sadly, when the initial 10-year term was up the premium rose so much that it was actually more than my house payment. Not being able to afford both, and my wife insisting that we keep the house, we let the policy lapse.

So now the question, looking back, becomes - was permanent life a good investment THEN? What about NOW? Since I can't buy life insurance now, I sure wish I had bought the bad investment back then.

Gene E. Utterback, EA, RFC, ABA

After digging out the orig docs - it is interesting to reflect on the how & why ? Not to get into a huge academic discussion, as there are lots of those out on the web, but basically - we start out and for one reason or another - go wtih 2 prongs - coverage & investment Looking back of 19 years - we've paid out annually $2k for a total of $38k to get the orig $100k and now $156k of coverage (also have a larger Term policy).

At some point, as the balance between insurance coverage vs investment portfolio shifts and we have the capability to handle any financial issues, along with having a net worth more than the insurance policy that we "should" have modified what we were doing..... but didn't -

BTW - the original projections back in 1991 were a tad lofty, and my have been on target except for the recent financial disaster. Again, our yearly prem is $2k..

death bene - $156k - projected $180k cash value - $65k - projected $78k dividend - $1,800 - projected $4,200

Was it worth spending $38k for this over 19 years ?????? At some point yes, and at some point no...

SO - Should we continue to pay and hold ?????

Only you can answer that question. I have a WL policy from NYL that I plan on keeping. I think of it as the conservative part of my retirement. When I got it, I kept paying into my 401k and an IRA. Overall, the policy cash gain is pretty much keeping up with what a BTID plan would have done using the VBIIX index fund as as the investment part. See the 'Current Status' page of my site:

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  If you scroll down a little bit you'll see a chart showing performance of both the policy and my BTID model. The model assumes I had bought a 30-year term policy with an annual premium of 5. The rest of the cash I've been putting into my WL policy would then have gone to VBIIX within an IRA.

You might also be interested in seeing my actual annual performances with metrics:

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  Use the left and right arrows at the top of the table to page thru the years. The tables sort of stack on top of each other.

-- Rich

Since your cash value is increasing at an effective interest rate of over 5%, it doesn't make much sense to cash out.

Can you convert it to an annuity when you reach retirement age?

-- Ron

Another side issue - is how to handle the ever increasing premiums for the Term policy. At some point now .... since we are financially stable, does it make sense to drop the Term ?

I haven't really looked into the whole annuity area, as it seems to have it's own list of pros & cons - just like term vs whole -

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Before you let a term policy simply die and forfeit all your premiums (remember, Term life does not build cash value) you may want to do some research on the Secondary Market For Life Insurance.

There are companies out there that can and will BUY your term life policy from you. You have to meet a very specific fact pattern and you MUST do your due diligence. If you qualify, they pay you to transfer ownership of the term insurance policy to them; they then make the subsequent payments and they collect when you die.

It sounds gruesome, but it is a legitimate industry and it is growing. It may be worth looking into.

Good luck, Gene E. Utterback, EA, RFC, ABA

For example:

I'll comment on the rest separately, but I wanted to note that Northwestern Mutual was NOT "on target" prior to the recent recession. Almost all participating whole life carriers have been suffering this same fate for well over 20 years now, and Northwestern Mutual is no different. At a recent seminar, a compliance officer for my firm demonstrated that Northwestern Mutual has only raised its dividend once in the past 20 years. The remaining 19 years were either "no change" or declines in rates (the decline being the slightly more regular occurence). When the study began, NWM's dividend rate was

10.25%. It is currently about 6.10%, but was 6.50% immediately prior to the recession. So you can see that most of the damage was not recessionary.

By the by, the compliance meeting was focused on providing clients with realistic expectations. New York Life and MetLife were equally guilty "dividend erosion".

Having some experience in the "life settlement industry", I'll try to provide some of those "very specific fact patterns". None of these are concrete rules by any means, but they are pretty standard. I'll explain why at the end...

1. You must be older than age 65.
2. Your policy must be larger than 0k
3. You need to be able to demonstrate some significant decline in health since the policy was issued.
4. You policy, if term, needs to be convertible to permanent insurance.

The reasons for the above are simple... The purchaser of your policy intends to profit from the purchase. If you are 45 years old and will likely live another 40 years, it is tough to convince someone to purchase a policy that they won't collect on for another 4 decades. Being young also means that they will be paying your premiums for you for a long time. The time value of money eventually catches up with them.

The policy needs be larger than $250,000 because there are some very significant fixed costs associated with the transaction. There are life expectancy calculations, requests for medical records, attorney's fees, commissions, etc.... Small policies simply aren't profitable to the settlement companies.

A decline in health is favorable because it means that the purchaser is going to pay for a rate based on a life expectancy of "X" while they actually know that you have a statistical life expectancy of "less than X". Look at it this way, if a healthy 45 year old purchases a policy, the insurance company may expect to collect premiums for 40 years. So they consider that when setting the price. Now what if that same man gets cancer at age 47? The insurance company likely won't get that 40 years they were expecting. Unfortunately for them, they can't change the premium after the fact. The settlement companies exploit this knowledge.

Lastly, NO life settlement company will buy a term policy unless it can be converted to permanent insurance. They have to be assured that you can't outlive the policy. They won't chance getting nothing.

As a side note, whole life policies typically make the worst life settlement cases. The reason is that the purchase offer has to exceed the cash value of the policy (otherwise you'd just surrender the policy). But whole life policies endow as they mature. So if you look back to #1 (above) you can see that most policies are close to maturing by the time they become settlement candidates. That leaves almost no room for purchase-negotiation.

Ignoring all that insurance history and "life settlement" mumbo jumbo I posted earlier, I'll get to your original question:

Assuming all the premiums were paid, in full, at the beginning of the year, you're average annual return on investment has been 4.42% thus far (tax deferred, I might add). Given the relative safety of the investment, that's not too bad, IMO.

But it's really not fair to ONLY look at it from that perspective. For the past 20 years you've had protection. Although you never collected on it, you (your heirs) had the possibility of collecting a very large some of money in exchange for very little. To focus on the fact that it didn't actually happen is "Monday morning quarterbacking". It COULD have happened. As a matter of fact, that possibility still exists today. For instance, if you died tomorrow, your HEIRS' return on investment would be closer to 12% and it would be entirely tax free. That's got to be worth something, right?

But just to be fully clear, you do know that you don't actually get the death benefit AND the cash value, correct? There are universal life policies that do that, but they are the exception. Your policy is a combination of a "base" face amount plus "paid-up additional insurance" that is purchased with the dividend. For long, complicated, and boring reasons, the cash value increases faster than the total death benefit does. So even though your policy went up by $5,400 this year, it is unlikley that your death benefit increased by that much. Furthermore, loans taken from the cash value and/or partial policy surrenders reduce the death benefit by an equal or greater amount. So long story short, you don't get both the cash and the death benefit. You get one or the other.

Furthermore (it never ends, does it...) those paid-up additions are not guaranteed. If, tomorrow, the insurance agency raised their cost of insurance to the maximum legal levels and simultaneously lowered the dividend rate to the legal minimum, you'd quickly find yourself with only $100k of coverage and much less cash value.

At this point, I'd highly recommend you request "in-force illustrations based on both current and guaranteed assumptions" from your NWM agent or their home office. This will tell you how your policy is currently anticipated to perform and the absolute worst it could do. You may want to request an "illustration reflecting earliest premium offset based on current assumptions". I'd bet dollars to donuts that you can keep this policy and not have to pay for it any longer. The reason being that the next dividend will likely be larger than the required premium.