Monday, December 13, 2010

Convert to Paid-Up Life?

Can't make the premiums on your Whole Life policy?  Perhaps you can convert it to paid-up status!

In my earlier posting about Northwestern Mutual, I pointed out that service from their Agents was very poor.  In particular, once you stop buying new products, the Agents basically forget about you.  There is no profit to be made from you, so they drop you like a hot potato. 

And one reason I invested with the Northwestern Mutual Financial Network was to get some financial advice - at least with regard to their own products, if nothing else.  But the products I was sold, I never felt I really understood, and no one, not the Agent nor the company, seem to want to explain to me what exactly it is I am buying or bought - or what I could do with these products over time, as I got older, retired, or whatever.

Perhaps this is because of our litigious society.  In the case of both Northwestern and State Farm Life, I have been an unwilling participant in class-action suits brought against the companies by opportunistic lawyers who have clients who allege that the products were misrepresented.

That may well be true, but it seems that the net result of these lovely class-action suits is that the insurance companies are now reluctant to make any representation whatsoever about their products.

I recently converted two of my policies to a paid-up whole life policies.  This was suggested as an option by a customer service rep at their central office.  I no longer deal with Agents anymore, and it is easier to call the main office and at least get some answers.  The policies were just rounding that difficult corner where the dividends paid in were starting to increase the cash value by an amount equal to or greater than the dividend amount.  In other words, I was no longer "upside down" on the policy.

But at the time, I could not afford to make the payments on three policies (plus a disability policy, which I have since had to drop).  So I converted two policies to paid-up whole life policies.  Was this a good decision?  Well, yes and no.

Yes, it was a good decision as I really didn't have any other choice at the time.  These policies were killing my cash flow, taking well over $600 a month of my after-tax income.  And at the time, I asked my Agent whether these were good investments or not and the only thing I got out of him was "Have you considered a long-term care policy?"  In other words, he wanted me to buy MORE insurance, to the tune of $500 a month for a long-term care policy.  Um, no thanks.  I'll just drift out to sea on an ice floe if necessary.

My portfolio was becoming too biased toward insurance, in my opinion.  Whole Life insurance and its derivative products can be a good adjunct to your investment strategy.  But it should not represent a big chunk of your investment strategy, in my opinion, as it often is not a very good deal, in terms of return on investment.  And as I noted, you oftentimes end up "upside down" for many years before these policies pay back, and if you have to "pull the plug" before then, well, you may end up losing it all or getting very little back.  I have managed to break even on these two policies, and moving forward, they will contine to increase in value.  But for others, who pull the plug early, they may realize very little.

Another option, besides walking away from the policy is to covert it to a paid-up whole life policy.  Now bear in mind, that when you stop making payments on your life insurance policy, a number of things can happen.  Contact the company for specific details for your policy.

For example, for one State Farm policy I had, if you stop making the premium payments, they dip into the cash value to keep the life policy in force, for as long as the cash value will pay the premiums.  Thus, for example, if you have a whole life policy with a cash value of $10,000 and you stop paying the premiums, they will deduct the premium from the cash value.  In this manner, the policy may still be in force for many years after you stop paying.  So if Uncle Fred dies, and he stopped paying premiums on his policy, be sure to check if it was still in force (premiums paid by the cash value) and you might have a nice little windfall.

In other cases, if you don't make the premiums, they cash out the policy, send you a check for the cash value, and say "have a nice day" and you part company and the life policy is voided.  In the case of two smaller State Farm policies we had, I recently decided to cash these out, rather than throw more money at them, as they clearly would be "upside down" for many years to come.  This required that I fax them a signed authorization to do this.

But in addition to letting the cash value pay premiums, or cashing out the policy, you may be able to convert a policy to "paid up" status.  How does this work?

Well, in my case, I had an Adjustable Whole Life policy with a cash value of $14,091.69 and a death benefit of $150,000.  Since I have no heirs, and we have over $1M in assets, decreasing the death benefit didn't seem like much of a big deal.  By converting the policy to "Paid up" status, it now is a standard whole life paid-up policy, with no annual premiums - no more monthly payments!

And in fact, the policy now pays me.  This policy pays out a dividend of about $418.41 annually (the amount varies with return, of course) with no additional cash outlay on my part.  And moreover, the cash value of the policy continues to climb, increasing by $430.36 last year to $14,649.79.  At this point, it is a nice little money-making machine for me, with no further intervention on my part (in terms of investment of more money).

Since I converted this policy from a $150,000 term life policy, I have spent about $15,013.20 in premiums (by my calculations) to yield a cash value of $14,649.79.  Add in the cash dividend of $418.41, and it would appear that I have about broken even in the seven years I have had this policy - not bad for any Life Insurance instrument.

And best of all, this policy should continue to churn out those nice little checks, every year, until I die, at which point it will pay out a $36,226.00 benefit, which should at least cover my funeral expenses, if not allow my spouse to buy a nice motorcycle, boat, or new boyfriend.

The downside?  Well, by converting the policy, I am missing out on further investment opportunities.  I could have pumped about $2000 to $3000 a year into this policy into the future, increasing the cash value by at least that amount, if not much more - and earning more dividends.  So, if I wanted to increase my Estate more, it would have been a good investment vehicle to keep.

But the problem with life insurance is that it is a forced investment - you have to make those premium payments, regardless of your income.  And in the last two years, things have been hard, to say the least.  And, as I noted above, I didn't feel I wanted to pump more money into Life Insurance as an investment vehicle.

I also converted a second policy, a Variable Whole Life Policy that I had since 1998.  This now pays out a dividend every year of about $751.12 (depending on yield) with no further investment by myself.  It has a cash value of $29,165.91 and a death benefit of $75,487.00 and last year the cash value increased by over $900.  So this is chugging along, paying me in cash and increasing in value, with no further investment on my part.

Again, this is based on a total invested premiums of $28,151.72, which means that the cash value is more than the original investment,  not to mention the approximately $1600 I have received in cash dividends in the last two years.

Again, should I have "Stayed the course" and paid $3000 a year into this policy?  Perhaps.  If I had done that, I no doubt would have a far better return on the policy down the road as it grew in cash value and the dividends climbed.

But as events turned out, I needed that $3000 a year for other things.  Again, I could have cashed in the policy, but instead, decided to let it "lapse" to a paid-up policy (in this instance, unlike my State Farm policy, failure to pay the premium automatically converted it to paid up status.  CHECK WITH YOUR COMPANY to see what your options are and how they are triggered for your particular policy).

So, if you have a whole life policy, and decide you don't want to make the premium payments anymore, there are basically three choices you can make:

1.  Use the cash value to pay dividends and keep the life policy in force until the cash value peters out.  This will provide you with life insurance for a few more years, depending on the cash value and the premium amount.

2.  Cancel the policy, "cash out" the cash value (sent to you by check or as EFT) and call it a day and walk away from the whole deal.

3.  Convert the Policy to "Paid Up" status, and either use the dividends to increase coverage, or have them paid to you by check every year.

And THIS was the advice that I wanted to get from my Northwestern Agent, and the advice that he never gave me.

If I had the cash, I may have continued to fund the policies.  But failing that, I think converting to "Paid Up" status has its benefits.  Between these two policies, I still have $100,000 in death benefits (probably enough to buy an economy car in the year 2025) about $45,000 in cash value (as an investment vehicle that increases in value about $1300 a year) and about $1000 in annual cash dividends paid to me.

It's like getting an extra Social Security check every year!

Things, as they say, could be a whole lot worse.

If you are having trouble making those premium payments on your life insurance policy, call the home office and ask about your options.  Don't just walk away from a policy, thinking that you've blown it.  You may still be able to convert to "paid up"status and have a nice investment vehicle - and a cash generating machine - for your immediate needs, as well as your eventual retirement.

I still have one plain "Whole Life" Policy still in effect with Northwestern.  This is my oldest policy and it has a cash value of $27,559.10.  Last year, the cash value increased by $2170.79 after paying a premium of $1284.  So for every dollar I put into this policy, it nearly doubles in cash value.  Hmmm..... a 100% rate of return on your investment?  Might as well keep that one.  It also pays a dividend of about $592.80, which I use to reduce the premium.  So the net cost to me, annually, is about $650 to keep this policy in force.  $50 a month - I can swing that, even if I lose my job!

So at this point, I have over $200,000 in death benefit, about $83,000 in cash value, and a net negative in premiums (dividends exceeding premiums by about $500 a year or more).  This is the fun part, after you've reached the top of the roller coaster!  Wheeee! All the way down.

So why not keep all the policies in force?  I would love to, if I won the lottery.  But as I noted, the combined premiums, particularly when the dividends are not reducing premiums, was $600 a month or more (plus disability!), and this was a huge dent in my cash flow.  Also, since life insurance is not guaranteed or FDIC-insured (but may be insured by the State, to some extent) it doesn't pay to put too much into one basket.

And should you use dividends to reduce premiums or buy additional insurance?  Consumer Reports generally suggests the former, and notes that agents will pressure you to do the latter.  And that pretty much reflects my experience.  Agents will tell you that using dividends to buy additional "paid up" life units is the best way to go.  While this may increase your death benefit over time and also increase your cash value, it also means your cash flow is higher.  And the marginal rate for those increased death benefits is much higher than for the initial policy.

The whole point of a whole life policy was that it would build up in cash value and pay enough in dividends, over time, to reach "paid up" status - such that it would never require additional premiums.  So applying dividends to reduce premiums may result in lower cash value, but means you have to pay less into the game.

And if you can convert to "paid up" status, down the road, you can call it an early "game over" and still walk away with a "paid up" policy.

I'm glad I converted my two newer policies to "paid up" status, and maybe down the road, I will do the same with my remaining policy, when I retire.  I only wish that my Northwestern Agent took the time to explain these options to me.  But I never got a lot out of him, other than vagueness.

Agents suck, period.

2 comments:

  1. See also this posting:

    http://livingstingy.blogspot.com/2013/11/whole-life-insurance-after-20-years.html

    Which illustrates how insurance policies play out after a couple of decades.....

    ReplyDelete
  2. This posting:

    http://www.badfaithinsurance.org/reference/Life/L0455a.htm

    is from an Agent who describes how some Agents misrepresent policies and basically commit fraud. They try to sell new policies to existing policyholders, in order to get a commission on the deal.

    Agents suck, period.

    ReplyDelete

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