In the 1990s I managed to accumulate several insurance policies, mostly Variable insurance and a whole life policy. At the time I was fully funding my retirement plan and it looked like a good technique for deferring taxes on gains and appreciation.
Last month I reviewed my investments with my accountant. He strongly urged me cash out the variable polices and the whole life and replace them with term policies. I could invest the remaining cash in ETFs, which are fairly tax efficient. Frankly I was glad to receive the kick in the pants and after crunching numbers one evening I concluded the following:
a. The whole life policy averaged a rate of interest that was NOT competitive with current money market or CD options. If I recall it was about 2% or so - not so bad a few years ago when interest rates were very low, however, other options would have been better.
b. The variable policies - life insurance
The life insurance component of the variable policies was quite interesting. The premiums are not level, so they grow every year. At this point in my life, I compared what I would pay for the same monthly fee for the death benefit. I found that I could get a level premium 30 year term policy with twice the coverage for about 15% more per month.
Current $355 in combined monthly premiums required to cover death benefit
Proposed term replacement $394 per month with 2x coverage and 30 year level term
After reading through the illustration of the old variable policies, I learned that the fee per month would rise $10 per year for each month, sometimes faster. In five years, that would have made a huge difference.
c. The variable policies - investments
The investments troubled me in several ways
- Options were limited
- Administrative fees
- High investment fees
- Lack of transparency - no access to online quotes via quicken, etc....
- Enormous surrender fees - slowly (painfully) reduced over a fifteen year period
What I do give up by cashing these policies in is:
- Surrender charges - they end up eating about 16% of my investment cash value
- Creditor protection - life insurance assets are protected from creditors in case of bankruptcy, etc....
What I expect to gain:
- increased level rate insurance coverage for 30 years
- low cost investments (I plan to invest in ETFs) with minimal tax expenses
- investment transparency - I know what I'm investing in and what the performance is
Over many years I had read Personal Finances for Dummies by Eric Tyson. And I recalled his warnings about insurance investments, however, at the time, I made various excuses to justify my mistake.
At this point in time, I'm more upset with myself for not taking action sooner. What's odd, is that I talked with several insurance professionals and not a single one recommended replacing the policies with term and investing the cash. Not one. I listened to their arguments in favor of keeping the policies, but few were truly meaningful or convincing.
The most compelling points the insurance agents raised were:
- the ability to borrow against the investment - but hey I can do that with ETFs in a brokerage account
- deferred taxes on capital gains, dividends, etc... - which is a good point, however, the cost for doing so: higher insurance premiums, higher mutual fund fees probably doesn't effectively compare with a tax efficient mutual fund or ETF.
Has anyone else been in this situation before? What did you do?