• Page :
  • 1
  • Text Only
Voting History
rated:

KC Policy
Disclaimer
First off let me apologize in advance for starting another thread on whole life. I'm aware the concensus is it's a bad idea. However I'm told over and over by family and friends that the Knights of Columbus have probably the best whole life available and they look at me like I'm crazy when I tell them I'm thinking about dropping it. I was talked into it when I was 24 years old and until a couple years ago thought it was a wise investment. I'm still unsure. I pay $1,143.70 a year in premiums and it has a $140,000 death benefit to begin. I talked to the agent last year about cancelling it and he suggested I pay the premium for another year or 2 and at that point the dividend would at least cover the premium each year so I wouldn't lose value going forward. I do expect to have a somewhat large real estate portfolio when I die if I continue to grow my rental company, so he suggested this was a good way to transfer some wealth without paying estate tax.

I ran some basic retirement calculators and if I'd simply invested that same premium from age 24 until I'm 65 and earned an average of 6.5% I would only have $200,000 at age 65, all of it taxable. I max out our Roth IRA's and almost max out our 401k's until this year. We cut back on our 401k this year. In that same time frame the policy would guarantee $68,721 in value plus the death benefit.
His illustration of expected returns, which I'll attach, shows a likely cash value of $234,419 with a death benefit of $430,878. So if they perform as they have in years past it doesn't seem like a bad investment at all. I know that can change, but from what research I have been able to find they seem to have one of the best ratings out there. However information seems to be limited.

I'm hoping someone may have more experience with them can review the numbers and give me some advice. It seems better than other whole life policies I've seen talked about, but I also know in general whole life is a bad investment. I bought into it at 24 and am 36 now, so I've put in $13,716 and currently would get $11,254 if I cancelled it. Thanks for any advice!
 

Member Summary
Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

estate tax exemption is 5mm

I generally agree with FW consensus, but I see whole life a little differently. I'm not opposed to it the way others are. I think it's okay to have some, just don't go overboard.

The reasons I think some is okay are: if you'd like to have death benefit past when your term would expire, something like whole life helps provide that without breaking the bank when you're older. I got my first term policy when I was 25, and it'll expire when I'm 55. If I dropped dead at 56 and that was my only policy, I'd feel bad for my wife, even though in theory we should be financially set. But part of the problem is that you can't guarantee you'll be financially set right after all your term expires. Something like WL is a not-very-expensive hedge against your retirement portfolio not doing as well as you'd like (in terms of the worst possible timing---major recession hits, you lose your assets and then have a terrible accident right and die right after your term policy goes away). Finally, I see my WL as an alternative to fixed-income holdings, because that's what it compares to in terms of "investment." You might not get 6.5% from here on out, but you'll beat most bonds that aren't junk status. And as you get older, you're supposed to transition to more of a fixed income weighting. WL can fill that niche while providing the death benefit.

I probably sound like an insurance salesman. I promise I'm not. I'm an equity quant, and I've tried to think deeper than just "buy term, invest the rest." And if someone was asking me whether they should open a policy, I'd encourage them to be maxing out 401k and IRAs first.

But you already have a policy. It's up to you what you want to do with it. However, in my opinion, it doesn't seem like a bad policy to keep.


 

I am sick and tired of whole life sales pitches that are poorly disguised as discussions.

If you had bought a $150k term policy and invested the rest in a simple index over the last 12 years you'd have ~$19k.
A safer investment like high rated bonds should have netted you probably $14k.

I'm afraid you will find WL pitches never end ssgcinty. It is a product sold and not purchased.

Let me correct a few things. WL will NOT NECESSARILY beat bonds on performance. Lets just go back about 30 years since I can then compare to a very secure long term investment like a US treasurey.....a 30 year treasury could get double digit returns. Did WL give double digit returns over those 30....Nope. If you take a policy today and just look at the guarantee column then commonly the death benefit (which is always higher than the cash value) and calculate the return at expected non premature death for your health rating then it returns below inflation results. That assumes they even make the guarantee and one just needs to see what companies are doing in the UL market with in force polices to get a little nervous as well as review the Japan experience with long low interest rate environments and insurance companies. Now I believe WL will perform better than guaranteed but how much depends on a lot of factors and it isn't necessarily going to beat other fixed. Right now a "good performing" policy purchased today will have a death benefit return around 5.5% at expected death. Again I'm talking death benefit and not Cash value. Dividends hopefully will stop dropping soon but you never know.


OP you seem to think (at least by the words in your post) that you get both the cash value and the death benefit. You don't. When you die, your heirs get the death benefit but the company keeps the cash value. The word "and" shouldn't really be used unless additional qualifiers are made such that one realizes this. So while the death benefit AND the CSV go up, you get one OR the other in the end.

WL is a poor bond equivalent bc you cant do what you can with bonds. I don't buy bonds bc they are going to have lower returns. If you try to get money out of a WL policy in retirement than that typically is via loans and loans cost money and can cause a policy to collapse. So that isn't deeper thought. Its more superficial actually. Just go over to bogleheads and read the posts about people who access loans early in life like for college or early in retirement and how that hasn't worked out for them in this decreasing dividend environment. Not only do they have collapsing polices, they also are being faced with a tax bill on phantom gains used to pay interest on the loans and WL gains even if phantom are INCOME rates and not long term capital gains rates.

Now what you should do OP is determine if you need or want a permanent death benefit. If you do then you have already paid the majority of price for one. It was a mistake to not max out your other tax adv accounts. If you value the death benefit then id keep it at this point. I certainly wouldn't purchase another policy. My understanding is that your company has done fine in the past but I'm not in the insurance industry or any finance field at all.

Notice the OP has been paying for 12 years and has still lost money on WL. Its even worse now for a policy purchased today.

rufflesinc said:   estate tax exemption is 5mm
  I expect to be above that unless something happens. We're talking 50+ years away

jerosen said:   If you had bought a $150k term policy and invested the rest in a simple index over the last 12 years you'd have ~$19k.
A safer investment like high rated bonds should have netted you probably $14k.

  I completely understand I'd have made a little more in the market. But I would come out behind at age 65 had I bought term and invested the difference. At least according to their historical projections, right?

dpa789kd said:   rufflesinc said:   estate tax exemption is 5mm
  I expect to be above that unless something happens. We're talking 50+ years away


You do realize that WL is NOT exempt from estate taxes? It is only income tax free and stocks also get a step up in basis at death.

dpa789kd said:   jerosen said:   If you had bought a $150k term policy and invested the rest in a simple index over the last 12 years you'd have ~$19k.
A safer investment like high rated bonds should have netted you probably $14k.

  I completely understand I'd have made a little more in the market. But I would come out behind at age 65 had I bought term and invested the difference. At least according to their historical projections, right?


You mean if you died at age 65 (after term expired)? There is a small window where if you die after an appropriate length of term would have expired that you would likely be better with WL but it's a small window and of course not likely to happen. If you mean cash value then not likely.

dhodson said:   I'm afraid you will find WL pitches never end ssgcinty. It is a product sold and not purchased.

Let me correct a few things. WL will NOT NECESSARILY beat bonds on performance. Lets just go back about 30 years since I can then compare to a very secure long term investment like a US treasurey.....a 30 year treasury could get double digit returns. Did WL give double digit returns over those 30....Nope. If you take a policy today and just look at the guarantee column then commonly the death benefit (which is always higher than the cash value) and calculate the return at expected non premature death for your health rating then it returns below inflation results. That assumes they even make the guarantee and one just needs to see what companies are doing in the UL market with in force polices to get a little nervous as well as review the Japan experience with long low interest rate environments and insurance companies. Now I believe WL will perform better than guaranteed but how much depends on a lot of factors and it isn't necessarily going to beat other fixed. Right now a "good performing" policy purchased today will have a death benefit return around 5.5% at expected death. Again I'm talking death benefit and not Cash value. Dividends hopefully will stop dropping soon but you never know.


OP you seem to think (at least by the words in your post) that you get both the cash value and the death benefit. You don't. When you die, your heirs get the death benefit but the company keeps the cash value. The word "and" shouldn't really be used unless additional qualifiers are made such that one realizes this. So while the death benefit AND the CSV go up, you get one OR the other in the end.

WL is a poor bond equivalent bc you cant do what you can with bonds. I don't buy bonds bc they are going to have lower returns. If you try to get money out of a WL policy in retirement than that typically is via loans and loans cost money and can cause a policy to collapse. So that isn't deeper thought. Its more superficial actually. Just go over to bogleheads and read the posts about people who access loans early in life like for college or early in retirement and how that hasn't worked out for them in this decreasing dividend environment. Not only do they have collapsing polices, they also are being faced with a tax bill on phantom gains used to pay interest on the loans and WL gains even if phantom are INCOME rates and not long term capital gains rates.

Now what you should do OP is determine if you need or want a permanent death benefit. If you do then you have already paid the majority of price for one. It was a mistake to not max out your other tax adv accounts. If you value the death benefit then id keep it at this point. I certainly wouldn't purchase another policy. My understanding is that your company has done fine in the past but I'm not in the insurance industry or any finance field at all.

Notice the OP has been paying for 12 years and has still lost money on WL. Its even worse now for a policy purchased today.

  Thank you for your in depth response. I probably wasn't clear in my wording but yes, I understand it's cash value or death benefit, not both. Sorry about that. One of their big selling points was being able to borrow against it and i never understood that. Like you said, it will cost me returns on the policy, and my argument has been that I should have multiple paid off rentals at that point should I ever need to cash out refi for money.

I think I should probably cancel it and at this point leave the lost money in it to have a small policy. I don't see a lot of advantage in pulling the cash value out right now?

I've struggled with this as the agent is a close family friend, and I grew up in a family with little money who think I'm crazy to get out of this and keep investing in the market which is so unsafe. It took until my mid twenties to start to become educated about investing and I'm still learning sometimes.

Thanks again for all the advice

 
dpa789kd said:     I've struggled with this as the agent is a close family friend, and I grew up in a family with little money who think I'm crazy to get out of this and keep investing in the market which is so unsafe. It took until my mid twenties to start to become educated about investing and I'm still learning sometimes.
  Red flag! Either the family friend is ill-informed as an insurance agent or worse. Be careful when dealing with this individual.
Getting educated about investing in mid twenties is quite good/early in general.
 

dhodson said:   WL will NOT NECESSARILY beat bonds on performance. Lets just go back about 30 years 
  Dhodson, thank you for the detailed explanation.  I did not understand everything but then again, I don't need convincing either because I already am a term life guy.

  But I do have a question - Tbond yields over last 30 years have been unique because there has been no reversion to mean.  It seems they dropped approx 2 points every 7 years. If they do start going up, what are the odds that WL will beat bonds?

PS: I don't want to make you type a long reply.  I won't understand all of it anyway.  But I will appreciate your opinion.

fwuser12 said:   
dpa789kd said:     I've struggled with this as the agent is a close family friend, and I grew up in a family with little money who think I'm crazy to get out of this and keep investing in the market which is so unsafe. It took until my mid twenties to start to become educated about investing and I'm still learning sometimes.
  Red flag! Either the family friend is ill-informed as an insurance agent or worse. Be careful when dealing with this individual.
Getting educated about investing in mid twenties is quite good/early in general.

  
Yep- all the time I've seen agents who are 'family friends', 'real good guys', 'super nice'. Our local whole life agent has a nice spray tan, a firm handshake, and will assure you you are making a wise decision- while he is bending you over and... In my book, a 'family friend' who screws you over isn't much of a friend. This family friend is (or has) made a ton of money off of you. What a friend.

ssgcinty said:   dhodson said:   WL will NOT NECESSARILY beat bonds on performance. Lets just go back about 30 years 
  Dhodson, thank you for the detailed explanation.  I did not understand everything but then again, I don't need convincing either because I already am a term life guy.

  But I do have a question - Tbond yields over last 30 years have been unique because there has been no reversion to mean.  It seems they dropped approx 2 points every 7 years. If they do start going up, what are the odds that WL will beat bonds?

PS: I don't want to make you type a long reply.  I won't understand all of it anyway.  But I will appreciate your opinion.


The way it typically works is as follows. These companies invest in very conservative things like treasuries/bonds, take a cut of the return and pass the rest to you. The companies get a little boost bc almost everyone surrenders these things and typically for a loss. As interest rates have fallen, so too has conservative investments including WL. WL typically lags about 6 years in my observations from what's currently happening. Thus while interest rates have been stable low for years, dividends still fall. As interest rates go up, WL will likely eventually go up but again lag by several years. Now interest rates have really hurt these guys and some are investing more aggressively bc if things continue eventually they could have trouble making their guarantees. How that will eventually shake out is unknown but one should not assume WL will beat other conservative investments. It certainly isn't guaranteed to do so.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017