What are the consequences of cashing out a whole life insurance policy?
My wife has bought a whole life insurance policy as an investment before we met. She is currently in her early forties and she has been paying into it for roughly seven years.
I do not believe that life insurance makes a good investment, especially for us, as we have no need for actual life insurance. As such, I'd like to get rid of this policy, and I will schedule an appointment shortly with the "investment advisor" that sold her this insurance. Unfortunately the documents I have are very opaque: there's very little detail on fees/penalties, how the premium is allocated, or how the cash value grows over time. (I suspect this opaqueness isn't that unusual for life insurance products.) I'd like to arm myself with as much information as possible before that meeting so that I am not at a disadvantage.
Is best to just cash out the policy? Or is there a "break even" point somewhere because of the actuarial tables? (I am skeptical that this would be the case, but want to be forearmed against such an argument.)
Are there tax consequences to cashing out the policy? If so, would it be better to just stop making premium payments instead of cashing it out? (My understanding is that with her current product if you stop making premium payments it reverts to the amount of coverage that could be sustained with just the dividends from the current cash value.)
In short, if you are already several years into a whole life policy, what is the best way to get out?
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The big question when canceling is if you have the insurance that you need in term insurance.
Once the answer to that question is yes, you can just cancel it. Don't think that the financial advisor will agree with the decision. He is getting paid as long as he persuades you to keep it. Just insist on canceling it.
If you want to hammer home an argument, it would be that when you die, they only pay the face value of the policy. You lose your investment.
In terms of taxes, every penny you paid in forms the basis of the investment. It is rare for a whole life policy to even break even with the premiums you paid, let alone be a big tax event. Either way, you will have the money to cover the tax bill from the cash value.
Yes, the income tax consequences will depend on the cost basis. Yishai is correct. Since this is a whole life policy in the early years, you won't earn more than what the policy costed you.
The other consequence is if you have more liabilities than assets, it will puts you or your spouse in the risky financial position. If an unexpected death occurs and the liabilities depends on that income earner to cover, then it will have an impact on your finances.
The other option is to exchange your policy for one that is more in tune with your financial goals.
Insurance and investment goes hand in hand for a solid financial plan.
IF you have a guaranteed whole life policy, the worst financail decision you can make would be to surender the policy,... I teach my clients why everyone requires life insurance in every stage of life. I build pension plans with insurance and annuities.
Guaranteed income for life...
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