SECOND THOUGHTS on Whole Life Insurance 1 Year in - ADVICE???

[DHK]

In making the comparison of cash flow, I see the difference of direct recognition of dividends because dividends are reduced when a loan is taken from an Assurity policy.

Compare the dividend columns and you'll see that, and you'll also notice that I mentioned that in my blog post:

Year 11: Is the year we take out the loan.
- Notice the lower dividend compared in year 10 vs year 11, as this is a direct recognition policy. That means that when dividends are paid, it takes the outstanding loan into account as to how much of a dividend to pay.
- The loan interest per year is calculated to be $2,115 each year based on current interest and loan rates. (Notice that the payment per year increased from $10,000 to $12,115 to account for the loan interest.)

 

[DHK]

That example you are showing is very misleading, first off the illustration is a MEC and you did not show an illustration with no policy loans which is needed. The loan payments people make on a whole life policy is paid to the company and NEVER gets back into the policy, you must be thinking of a 401k or 403b. What you are seeing on your illustration is not people keeping the interest they pay but the effect of the unpaid interest being added back into the loan. If you run a illustration showing no policy loans and compare it to the one showing loan repayments you will see the payments made for interest is not being applied to the policy.

No interest was added back into the policy because it was paid out of pocket in my first example. That's why the first year wasn't $40,000 ($50,000 loan - $10,000 annual payment), but it was $37,885 to account for the interest due. The additional annual payments increased from $10,000 to $12,115 per year each year the loan was outstanding - showing the interest being paid "out of pocket".

And at the bottom of the blog post, I did post the 'caveats':

Why does this work like this?
1. The loan is only 50% of the cash values at the time the loan is taken out. If the loan was larger, you might not have a gain.

2. Premiums on the policy are still being paid and new premium is earning more and more return as the policy ages. Just as when we take out a home equity loan or line of credit, we don't stop making our regular mortgage payments.

(However, unlike with a home, you CAN skip payments if you need to, as long as you have cash values to help sustain the policy for a period of time.)

3. Additional policy riders may impact policy performance. This policy had no additional riders at a cost.

Bottom line: Yes, you are paying to borrow your own money. However, as you can tell, you DIRECTLY BENEFIT from the cash flow of the payments you are paying back into your policy.

Do all policies work like this? I cannot say for certain. Some policies will pay you a given dividend regardless of outstanding loans!

If you would like some additional information on the subject, here is an excerpt from The Tools and Techniques of Life Insurance by Stephen Leimberg on the subject of life insurance policy loans: Click Here

 

[Norwayguy]

Before everybody beats their chest and bruises themselves can the OP come back and actually tell us what product they actually bought and from whom?

I am seeing criticisms with no product to criticize.... How bout we find out what the person purchased and what company it is?

Good luck with that reasonable approach.

 

[Golfnut2112]

Before everybody beats their chest and bruises themselves can the OP come back and actually tell us what product they actually bought and from whom?

I am seeing criticisms with no product to criticize.... How bout we find out what the person purchased and what company it is?

The name of the whole life policy he bought and company is not important, my criticism is to do with suitability. The OP said he has ample term insurance with a combined income of $240,000, for someone to recommend a whole life policy over a 529 does not make sense, why would someone put $10,000 a year towards a college fund only to have to loan it out and pay yearly interest payments year after year when they can get that money out tax free? The money they are paying in interest can go to their own retirement.

The only advantage with the whole life is the waiver of premium which can be solved by buying a small disability policy that pays out $6,500 a year, which he may or not need. Bottom line when you factor in the negative or very low rate of return in the first 15 to 20 years on a whole life policy then factor in the interest you are going to pay he would be better off using a safety deposit box.

My question is this, if this were to go in front of a judge how would someone justify using a whole life over a 529. Once again I own two large whole life products one with Pru and the other NYL and I have absolutely no problem with whole life and sell it today.

 

[DHK]

Cash value of whole life is not included in the FAFSA calculation, while a parent or (heaven forbid) child-owned 529 plan would be an includable asset.

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Multi-purpose asset does not HAVE to be used for college expenses.

 

[xrac]

Cash value of whole life is not included in the FAFSA calculation, while a parent or (heaven forbid) child-owned 529 plan would be an includable asset.

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Multi-purpose asset does not HAVE to be used for college expenses.

With a disability rider at death or disability it will be self funding. if kids become ungrateful derelicts the money can be used for any purpose you chose not education.

 

[DHK]

I have uploaded MassMutual's guide to assets and how they are included in FAFSA calculations.

 

[Golfnut2112]

I have uploaded MassMutual's guide to assets and how they are included in FAFSA calculations.

I understand what assets are includable in the FAFSA calculation. How do you get around the $240,000 of yearly income?

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With a disability rider at death or disability it will be self funding. if kids become ungrateful derelicts the money can be used for any purpose you chose not education.

If you don't trust your kids then just put the money in another investment in your name. To save money for a specific purpose then have to loan it out for that purpose makes no sense to me.

 

[DHK]

I understand what assets are includable in the FAFSA calculation. How do you get around the $240,000 of yearly income?

You don't. Income is the biggest factor in the FAFSA, but we've been talking about the asset, not their income. A 529 plan is treated WORSE than life insurance in the overall calculation. In my opinion, every little bit helps.

Oh, and restructuring assets ONLY for FAFSA purposes... is not a good enough reason to do it. It must be a coordinated and integrated strategy that takes someone through their retirement years and "hiding assets from FAFSA" is a side-benefit, not a sole reason to do it.

Financial Aid Strategies With a Catch

One caveat in favor OF 529 plans - if your state plan offers a tax-deductible contribution, that can skew the recommendation in favor of those plans. California has no such deduction for their state plan.

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If you don't trust your kids then just put the money in another investment in your name. To save money for a specific purpose then have to loan it out for that purpose makes no sense to me.

I might trust my kids at age 8 when I start (it is a good idea to start early, right?), but if they start up the habits of theft and drugs at age 16 and keeps it going until they land in jail at age 22... I just might change my mind. What happens to the asset then? *I* would be penalized for withdrawing the money for non-qualified tuition expenses. (Yes, I could 'gift' it to another child or family member... but that was MY money and to do that just to avoid a penalty... would cost me 100% of the funds, over just paying a 10% penalty.)

Life and circumstances can change. I've found that life insurance can be the most adaptable product out there for multiple various reasons.

 

[LGilmore]

Goldnut?

For me before I start laying out the opinion, I like to know more about the purchase and the company. If not having more information isn't necessary for you to put your opinion out there, well good for you.

Since the OP isn't an agent, they could have all sorts of products from all sorts of companies that call their product whole life or permanent insurance. I just find before I speak in absolutes that I know what I am supposed to be giving an absolute opinion on.

Cheers.