Whole Life Rate of Return

[kiwihoshi]

I'm trying to understand my life insurance more to determine whether I should keep my whole life policy, trade to a different company, or surrender it and buy a term life policy.

I'm trying to look at different investment options and decide if my cash value is better placed in a high interest earning account (which would make it taxable income), remain in my whole life (where it won't be taxed? I think...), or moved to a different whole life policy with a better rate of return.

What I want to know is: Are there policies out there with better rates of return than what I have? My rate is 4.5%. I think it's compounded daily, although I need to get this confirmed.

I read online that you can have a rate of return on your cash value and a rate of return on your death benefit. I don't know if my rate is 4.5% applied to my cash value and 4.5% applied to my death benefit or just to my cash value. (I'll try to find out how it works.)

Can those of you with whole life policies tell me what your rate of return is so I can get an idea of the current average rate? (If you could include your age and policy amount, that would be helpful to.)

By the way, I have no investment experience. I'm just trying to learn and plan for the future. If you start using fancy investment terms, I'm likely to get confused.

 

[DHK]

Let's reaffirm in real terms what you have.

First, if you are truly earning 4.5% on a TAX-DEFERRED BASIS, that's the equivalent of a 5.625% pre-tax return (assuming 25% tax bracket) that you'd have to earn elsewhere. In today's interest rate environment, you're effectively earning 4-5x what you could earn at a bank, while maintaining liquidity through withdrawal or policy loans.

Second, it's not really fair to compare whole life insurance (a stable asset) to another asset class that has market volatility. Whole life insurance is a savings vehicle, not necessarily an investment. It can be used for many things, but it isn't a security.

"Savings and investments are similar words, but as Mark Twain said 'The similar word and the right word can mean the difference between lightning and the lightning bug.'"

Third, not all whole life policies are structured identically. Some will be structured with Paid Up Additions that allow for more cash to be put into the contract. So when comparing policy performance, one must look at the following factors:
- age,
- death benefit (discounts for policy banding),
- premium,
- years in force,
- underwriting class,
- riders (which add costs and drag performance, but could be very important)
- Is it a limited pay policy?

Many things are considered when evaluating a permanent policy for an "apples to apples" comparison.

 

[kiwihoshi]

Thanks for your reply!

Maybe, I should ask you this question so I can better understand (in general) how whole life works.

Example: Let's say I have a whole life policy for $100,000. I pay monthly premiums. The current cash value is $5,000. I take a loan out ($5,000) on the total cash value, with 0% interest for the first year and no borrowing fees. I continue to pay my monthly premiums and plan to pay back the loan before the end of the first year. But I suddenly die. Is my death benefit still $100,000 or would it be roughly $95,000 since I didn't get to pay back the loan?

 

[DHK]

The net death benefit = Cash Values + net amount at risk (insurance) - any outstanding loans.

In your example, you have a $100,000 policy (which includes your $5,000 cash value) minus your outstanding loan of $5,000 = $95,000 net death benefit proceeds.

Life insurance loans (which are not reported to credit bureaus) are secured by your cash values while you live, and secured by the death benefit upon death.

 

[kiwihoshi]

So then, everything kind of comes back to this question I've been pondering:
Why pay higher premiums for a whole life policy?

Wouldn't I be better off buying a term life policy for the same amount that offers lower premiums and then, taking the money I'd save from the premium difference and invest it/save it/use it in some other way?

Life insurance is frustrating.

 

[LGilmore]

Maybe you could tell us what policy you have so we can help you better. Some people assume all permanent life policies are whole life. Who is it with? How long have you had it? What is your face amount?

Thanks.

 

[labdeglio]

I have the same problem too

 

[pfg1]

Whole life is a fantastic product in so many ways. Keep in mind - as DHK mentioned, it is not an investment. Although the IRR can be very competitive with and sometimes better than other guaranteed investment products. The addl features available from owning a permanent life contract - especially a WL are a plus. A WL contract should never be looked at solely for rate of return, its a life insurance product that just happens to grow tax deferred rather nicely. Especially if its with a dividend paying company.

What company/product do you have and what are your actual numbers? Death benefit, premium, cash value, etc? You can get much more accurate answers if we know that.

 

[deancp]

I am little confused here..Need some good info from experts.

 

[DHK]

I know the feeling. Need some good questions from those seeking info from the experts.