DIL, was given a paid-up whole life insurance. Face amount is $26,138, cash value is $6,217, interest 4%, cost appear to be $2.95 a month. No need for the cash. Limited family life insurance. Keep? cash out buy term (any tax considerations?)? cash out invest in a Roth? other?
I’d like to help but whole life is not my strong suite. Maybe I can ease into it .
So whose life is the insured life now? Is your DIL now having a death benefit from this policy?
Who are the beneficiaries if the insured life ends?
What does 4% mean? Does the cash value grow at 4%, or both the cash value and the death benefit?
And she pays $2.95 a month to keep it from lapsing?
What insurer? What is the AM Best rating?
It’s in effect, a 3.4% savings account that requires a nuisance payment. If she forgets the monthly payments it will probably be worth a lot less than the $6,217 current cash value.
I’d cash it out and invest it in a mutual fund. At 8% interest, in forty years, it’ll be worth 147,777.51.
The insured is my DIL, she will be naming her husband and or children as beneficiaries. 4% is the interested earned I’ll assume monthly, and I will assume the benefit as well. The $2.95 is taken from the policy as a maintenance cost. The insured is Equitable most likely a favorable AM Best rating.
It’s a paid-up product. The $2.95 is for maintenance only. I’m uncertain if the cash out would cause a tax event. 8% may be a stretch over the next few years most likely 5 to 6% but I do enjoy the Roth option. That said it may take 9 plus years to double the cash value
I really don’t see any downside to keeping it. Someone else here said “put it in a mutual fund and earn 8%” but that’s not a well thought out statement, stock mutual funds lost 50% twice since the year 2000. You can’t compare the cash value of a life insurance policy to any type of investment, it’s more comparable to a CD or high yield savings. It’s not even really comparable to a bond. It’s a contract. Also in the grand scheme of things $26,000 is not a lot of death benefit, so I wouldn’t over science and over stress about it. If her family doesn’t have adequate level term life insurance I would certainly go get that immediately. 10 times the insured person’s annual income.
Having said all that I would never start a whole life policy from scratch ever but since she is getting one as a gift I suppose it’s fine
Thank you and agree adequate term life insurance should be purchased
Vanguard’s Wellington Fund has returned an average of 8.2% for the last 92 years. If you are paying a maintenance fee of $2.95 and deducting it from the cash value of $6,217 that’s about .6% off the 4% she’s earning… that nets out to 3.4% earned in 2022.
If she took the $6,217 and invested it in the Wellington fund and added the $2.95 payment ($35/year,) in 17 years it would be worth $26,090.36. In 20 years it would be $33,423.76 and in forty years she would have $171,914.23.
For anyone but the the very wealthy, whole life insurance is a sucker’s bet. It’s where the big insurance companies get the money to build those impressive skyscrapers.
Agree whole life isn’t the best product out there but again its paid-up earning interest on both cash value and face value. I’ll present all to her and encourage her and my son to consider term life. Thank you
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