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Back when my husband was 18, his parents took out a $25,000 whole life insurance policy on him. His parents paid the premiums for some time and not too long after my husband and I got married we took over the payments. A little while after that, the policy was transferred fully over to my husband’s name.
We paid premium after premium for that policy. Back then, I didn’t question it too much. But now that I’ve been reading about personal finance, I think there is a better policy for us.
I started reading some articles about term versus whole life policies like this one from SmartMoney.com. The difference between the two boils down to this:
A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component.
[Via SmartMoney.com]
With all of our debt, $25,000 wasn’t going to go very far. At this point in our life, we need a policy where you get more bang for your buck if the unspeakable happens. After looking around, I found a 10-year term life policy that only costs a few dollars more per month yet will provide $100,000 in coverage. Now that will at least wipe the debt slate clean. While it would be great to have more insurance than that, for now that is what we can afford.
In some cases, whole life may be the way to go. But after careful consideration, I set in motion the application to get term life insurance for my husband. For simplicity sake, I went through the same company that I got my life insurance from (Gerber). I sent out the payment and got the official papers so then it came time for my husband to call his whole life insurance policy.
He made the call and a few days later we received the paperwork that needed to be signed and returned. In that letter, we found out approximately how much money we will be getting by cashing out the policy…a little over $1,200. They also refund some of the premium that you paid so the total amount will be closer to $1,300. Now we are just waiting for the check.
It’s exciting that we will be getting a minor windfall. Oh, how we would have blown that on frivolous junk back then! Not anymore, though. Only just now I realized I could satisfy my LCD TV obsession with that money but I don’t even want to do that. Nope. It goes straight towards our debt and maybe a little towards our savings.
So now both my husband and I have $100,000 term life insurance policies and we are still making progress towards getting some financial security. We’re on the right track 
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Posted: November 13th, 2007 at 9:15 am
Good idea. My wife had one of these whole life policies and we cashed it out in favor of 20 year term for both of us.
Her “cash out” value was about 1% more than the total premium she had put in. I think its important to have a nice term policy in your early years, when you have few assets, and then long term disability/nursing care insurance later on.
Posted: November 13th, 2007 at 10:13 am
Work it girlie. Great idea!
Posted: November 13th, 2007 at 10:38 am
Term life is good for the young who have more debt than assets (as Chris said) or for the old who do not have the time to really benefit from a whole life policy. As you increase your assets and reduce your debt, a whole life policy is a great way to protect yourself in the future and to pass along wealth to future generations. If you get in the position to get another in the next few years, it might not be a bad idea to pick up a whole policy that will cover your debts and then some. Term runs out and in 10 years yours and your husband’s health may not be the same!
I enjoy your site and seeing it show a new post on my reader. It reminds me to keep myself in check, too. Keep on keepin’ on!
Posted: November 13th, 2007 at 10:47 am
Good call, Tricia! Whole life almost never makes sense for younger people, so you’re doing the right thing.
Posted: November 13th, 2007 at 12:12 pm
yay! does that mean that we get to see your credit card debt tick down to the half-way point?
Posted: November 13th, 2007 at 12:18 pm
Hehe…Yup! You should see me checking my mailbox for that check!
Posted: November 13th, 2007 at 12:58 pm
Good job… look forward to seeing that net worth get a little extra kick before long!
Posted: November 13th, 2007 at 1:21 pm
I actually have set the wheels in motion in cashing out my wife’s Whole Life Policy as well, but was curious about tax implications. Does anyone have any insight as to what the tax rates are on a surrendered Whole Life policy?
Posted: November 13th, 2007 at 1:36 pm
Matt - In some cases, you will not have any tax implications as long as the cash surrender value is LESS than the money you have paid in premiums. But there are exceptions for some policies.
Definitely consult with your policy holder and accountant to make sure for your situation.
Posted: November 13th, 2007 at 4:40 pm
Generally speaking for most people Term makes the most sense. There are very few situations where whole life is a good choice. The problem with whole life is you get very little insurance coverage in return for a large premuim. As you have shown most people cash it in after a few years
Posted: November 13th, 2007 at 6:02 pm
Why cash out the life insurance instead of doing a 1031 exchange and avoiding the tax liability? Granted $1300 is a good deal, and should further put a nice dent in the ol’ debt bucket, you failed to mentioned the pros/cons of cashing out versus a 1031 exchange. From reading your blogs, I’m sure you took this into consideration…just wondering how it factored into your decision.
Posted: November 13th, 2007 at 6:28 pm
Maria - I’ve never even heard of a 1031 exchange so no, that wasn’t considered.
We’ve paid in over $1,500 ourselves for this policy (that does not include the amount my husband’s parents paid in premiums before my husband and I got married). By surrendering it we are getting less than what we’ve paid in. It’s not a policy that is connected to a retirement account (which I’ve read that those can have tax consequences).
I have a good booklet that came with the policy and according to it we would have no tax liability because our premium payments were more than the surrender value. Of course, come tax time that will be verified by our tax preparer.
Posted: November 13th, 2007 at 7:42 pm
I was curious what a 1031 exchange was, so here’s a link to the IRS about it:
IRS 1031 info
From that article, it looks like it is for real-estate only?
Posted: November 13th, 2007 at 11:48 pm
One factor you may want to consider in taking a 10-year term policy is that your premiums are (probably) fixed for the next 10 years, but 10 years from now when you want to renew the policy you will be 10 years older, which means you base rate for premiums will be higher due to age. Plus the possible health changes another poster already mentioned.
You may want to looking into increasing your coverage within a couple of years to a higher amount that provides more depth of coverage, as well as locks in your rate for a longer period - maybe shop around for a 25 or 30-year term policy?
Posted: November 14th, 2007 at 2:32 am
When we got married we took out increasing term, it’s more expensive now than it was when we got married but still reasonable.
I’ve had a few freinds who all have taken out whole life. I tried to talk out of a whole life policy but he was soooo impressed with the fact that after 30 years he’d get a whopping 90,000 dollars back (this was 20 years ago). Needless to say when he got married had kids bought a house (which he paid 112,00 for) he started re thinking the costs. Once the house values jumped he realized how little that money was going to be worth in 30 years and how much it was costing him he canceled the policy. This seems to be a typical thing people buy whole life young and then cancel it when they get older and wiser.
Posted: November 14th, 2007 at 8:42 am
AS - in a few years, we hopefully will be in a better position with having our credit card debt paid off. We’ll still have a mortgage and student loans, but at least the really *bad* debt will be gone. We’ll revisit a lot of our spending and see where we can possibly get more insurance-type things. Like more term insurance and even disability insurance. At lot of that will depend on our income at that time.
We are taking a risk with the 10-year, and not being insurable after it ends. But by that time, I hope that we are in a much better position financially so having a policy in place won’t be as important.
Posted: November 19th, 2007 at 12:51 pm
You can also use a term life insurance policy instead of the mortgage insurance offered by the lending institution. A term life policy in an amount sufficient to cover your mortgage can be purchased, and it’s usually alot cheaper. It also allows you to name your own beneficiary, which gives you more control.
Posted: November 28th, 2007 at 7:33 am
[...] recently received a minor windfall when we surrendered a whole life insurance policy. The timing of that check ($1,300) enabled us to hit the halfway mark with our debt. For the past [...]
Posted: December 1st, 2007 at 4:16 pm
This article is a little dated. It doesn’t mention that premiums for a 50 year old at the end of their 20 year term would be astronomical if they could get coverage at all. It doesn’t mention Equity Indexed Life which has lower premiums than Whole Life, with a much higher return on your money than either Whole Life or Universal without the losses associated with Variable. Whole Life is a really old type of insurance that is a little outdated.
Posted: December 14th, 2007 at 8:27 am
You know, you really have to differentiate here. as a life insurance broker I know that a lot of people are puzzled when they have to choose between Term, Whole and Universal life insurances. That’s one of the reasons I wrote about this theme in the Tips section of my Life Insurance Canada website.
Posted: January 8th, 2008 at 12:47 pm
I thought you could “borrow” money from a whole life policy and pay yourself back over time. You could then used that “borrowed” money to pay off debts that have interest that goes to a bank. In the meantime, the interest you pay on your whole life loan is interest you pay to yourself, and increases its value. Once it’s paid up, you can borrow from yourself again (even more than the first time). Over and over.
Posted: February 27th, 2008 at 9:02 am
[...] We’re Cashing Out a Whole Life Insurance Policy at Blogging Away Debt [...]
Posted: March 18th, 2008 at 9:42 pm
[...] We’re Cashing Out a Whole Life Insurance Policy @ Blogging Away Debt [...]