Using accumulated value from a variable universal or whole life insurance policy

[cchoukal]

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Okay, so let's just say a friend of yours got talked into a small whole life policy when fresh out of training (as a small part of a larger investment strategy). And let's say your friend has come to realize the growth in that value hasn't been that great, and he doesn't want to play into the sunk cost fallacy of keeping the policy. What's the best way to use the accumulated value? Can't the value be "borrowed against" with no tax (The whole point of the policy as an investment vehicle)?"

 

[abolt18]

Okay, so let's just say a friend of yours got talked into a small whole life policy when fresh out of training (as a small part of a larger investment strategy). And let's say your friend has come to realize the growth in that value hasn't been that great, and he doesn't want to play into the sunk cost fallacy of keeping the policy. What's the best way to use the accumulated value? Can't the value be "borrowed against" with no tax (The whole point of the policy as an investment vehicle)?"

How To Dump Your Whole Life Policy

You probably shouldn't buy a whole life policy. But if you already did, deciding whether to keep it, surrender it, or exchange it can be difficult.

www.whitecoatinvestor.com

 

[BLADEMDA]

A very low cost variable annuity (VA) from Vanguard. You are allowed to "exchange" the insurance policy for an annuity. That is your best option.

 

[cchoukal]

Is this the 1035 exchange alluded to above? How does "my friend" use the money in the VA? Is it invested somehow, or pay out monthly/yearly (that's my only conception of an annuity)?

 

[OneFellSwoop]

It used to be after the 1035 exchange to a variable annuity, you could cancel the policy, take the cash value and then deduct the loss from the basis (the total amount you've put in) on your taxes. However, that changed with the new tax law and you can no longer do this (thanks Trump!). Nowadays, you can still do the 1035 exchange to a VA, but since you can't deduct the losses, you just allow the cash value to grow back to your basis, then cancel the policy, and take the cash tax free. That's probably the best thing to do as you'll be net zero. It should grow faster than the whole life policy, and you won't have to pay anymore premiums. You could also just take the surrender value and call your loss a "stupid tax" (direct quote from WCI) and then just do whatever your want with the money.

 

[cchoukal]

And if the value is above the basis currently?

 

[DM27]

I had a whole life policy when I first finished residency, I realized the value it was giving me was minimal, I ditched it about 3 years out by just cashing out of it. I honestly just wanted it gone. I contacted the person who sold it to me and said I wanted to cash out, signed some forms, that was pretty much it.

 

[cchoukal]

I had a whole life policy when I first finished residency, I realized the value it was giving me was minimal, I ditched it about 3 years out by just cashing out of it. I honestly just wanted it gone. I contacted the person who sold it to me and said I wanted to cash out, signed some forms, that was pretty much it.

and presumably you had to declare the cashout as income that year?

 

[BLADEMDA]

and presumably you had to declare the cashout as income that year?

Call Vanguard and talk with an Annuity Rep. That's the route I recommend as a low cost annuity from Vanguard is a reasonable choice.

 

[Ferrismonk]

I think it depends on your cash value. If you've got a substantial sum, do the tricks listed above. If you're talking not much, just cash the thing out and get rid of it. Get enough term insurance to cover expenses if you die and invest the rest in real, simple, investments. Annuities aren't that great for most people either.

 

[cchoukal]

Call Vanguard and talk with an Annuity Rep. That's the route I recommend as a low cost annuity from Vanguard is a reasonable choice.

Great, thank you. I just spoke with Fidelity. I, er, my friend, can 1035 to an annuity. The annual fee is 0.25% of assets held, which sounds kind of steep, no? The alternative is to cash it out and pay capital gains and a 10% (of gains) early withdrawal fee, Gains are about 12K on a total surrender value of about 112K. Then invest it in mutual funds with fees less than 0.25% (not hard to do, obv).

Still think my friend should 1035 to a VA?

 

[DM27]

The cash out value was minimal, around $1000, I fortunately had not paid very much into the policy and had it for only a short time, yeah declared as income but it was insignificant.

 

[BLADEMDA]

Great, thank you. I just spoke with Fidelity. I, er, my friend, can 1035 to an annuity. The annual fee is 0.25% of assets held, which sounds kind of steep, no? The alternative is to cash it out and pay capital gains and a 10% (of gains) early withdrawal fee, Gains are about 12K on a total surrender value of about 112K. Then invest it in mutual funds with fees less than 0.25% (not hard to do, obv).

Still think my friend should 1035 to a VA?

I would pay the annual fee of 0.25 percent and avoid the tax bill as long as possible. This is a small fee and Fidelity has very low cost funds to choose from. FYI, once the annuity is worth $1 mil the fee drops to 0.10 percent .

Guide to annuity fees | Fidelity

Before making an annuity purchase, you need to know the rules. Here's how to ask the right questions up front to help get a sense if one may fit your needs.

www.fidelity.com

So, if you don’t mind the concept of an annuity Fidelity is an excellent choice.

 

[BLADEMDA]

Trade an Annuity for a Better One | Kiplinger

Consider trading annuity contracts to save thousands each year.

amp.kiplinger.com