I’m 26 and my parents got me a 200k life insurance policy when I was a baby. The current cash-out value is about 15k. My job provides me with a life insurance policy (just under 200k). I did some future growth calculations, and assuming an 8% return, it would reach 200k by the time I’m 60 with the current $600 yearly contribution. I don’t have a wife or kids, so no beneficiaries needed. My parents are financially secure.
Am I missing anything important besides the tax benefits for beneficiaries? I’m thinking about cashing it out.
Usually, whole life policies aren’t worth it. It’s often smarter to save the money and invest in your own brokerage or retirement fund. Term policies can offer something like $2M coverage for around $500 per year.
You only need life insurance if you have someone depending on you financially. No wife or kids? No need for it right now. But if you think you could have health issues and might want a family later, getting it early can lock in better rates.
While work policies are fine, it’s smart to get your own plan. Your current job’s policy might not follow you if you leave or if company benefits change. A personal policy stays as long as you pay.
At 26, paying $600 a year for 200k for some unknown future beneficiary doesn’t seem worth it.
It might be best to surrender and pay the taxes, but this depends on your case. Let’s say you don’t pay taxes since your basis is higher than the value and continue investing $600 yearly. By age 66, with an 8% return, you’d have nearly $500k. Pulling 4% from that gives you about $20k a year. Not too bad.
Check the original policy details before making a choice. See how the cash value is managed or invested. I’m older and have a variable whole life policy with growing value, costing about $150 a year. I have a big term policy for my family, and I think of the whole life one as a backup.
I view it as a source for a personal loan or emergency cash. When I pass, it’ll help my family.
If you cash out and pay 25% tax (worst case), you’d have $11,250. Investing that at 7% annually with $600 contributions for 50 years grows to $575k. Watch for taxes; you might need to report the cash value as income. I’m no tax pro, though.
Your parents meant well, but investing it in an S&P 500 fund might have been better for college or other needs. I’m not a fan of insurance companies, as they always profit from premiums. Why not take what they’d charge you and invest it instead? My brother even skipped car insurance by posting an interest-bearing bond.
Why are you thinking 8% growth? Life insurance often offers more like 2-5%. It’s better not to see permanent life insurance as an investment since it can’t match those returns. It’s more for when a death benefit is important beyond standard term coverage.
Check out the book The Retirement Miracle by Patrick Kelly. Consider a 1035 exchange into an IUL and fund it until retirement. You’d have a tax-free account to use later, and if you pass, it leaves money tax-free too.
No dependents? No need to keep it unless your company’s policy doesn’t follow you if you switch jobs. If it isn’t portable, a health diagnosis could make it hard to get coverage later. In that case, you might keep it for a future partner or kids.
If you’re saving enough for retirement, a policy of this size might not be needed.
If you’d like, I can explain the advantages of keeping and funding the policy as an asset. If not, instead of cashing out and paying taxes, you could do a 1035 exchange to a variable annuity to keep deferring taxes and have more investment choices.
@Peyton
The tax isn’t on the payout itself over 50k. It’s the imputed income on the W2 each year for premiums on anything above 50k of coverage. It’s included as income if you can also cover a spouse or child.
No tax on the payout if paid with after-tax dollars.
Peyton said: @Isle
So do you mean it’s taxed upfront and later too? Can you explain that part again?
No, employers can offer group term life insurance. If the coverage is above 50k, there’s an imputed amount added to W2 as income since it’s seen as a discounted premium. Sometimes employees pay for extra coverage, and this extra part is considered taxable income.
The actual payout when the policyholder dies isn’t taxed if premiums were paid with after-tax money.