We’re Cashing Out a Whole Life Insurance Policy

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

Posted by Tricia on November 13, 2007 at 8:38 AM in Insurance | 46 Comments »
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Chris responded:
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.
Chitown responded:
Posted: November 13th, 2007 at 10:13 am
Work it girlie. Great idea!
Michelle responded:
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!
Jeremy responded:
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.
arduous responded:
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?
Tricia responded:
Posted: November 13th, 2007 at 12:18 pm
Hehe…Yup! You should see me checking my mailbox for that check!
Curtis responded:
Posted: November 13th, 2007 at 12:58 pm
Good job… look forward to seeing that net worth get a little extra kick before long!
Matt responded:
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?
Tricia responded:
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.
Rob in Madrid responded:
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
Maria responded:
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.
Tricia responded:
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.
Tricia responded:
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?
AS responded:
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?
Rob in Madrid responded:
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.
Tricia responded:
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.
Carin responded:
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.
Our Emergency Fund is Fully Funded » Blogging Away Debt responded:
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 [...]
Aaron Cook responded:
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.
Life Insurance Canada responded:
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.
PM responded:
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.
Life Insurance Part 2: Should I Buy Whole Life Insurance? | Moolanomy responded:
Posted: February 27th, 2008 at 9:02 am
[...] We’re Cashing Out a Whole Life Insurance Policy at Blogging Away Debt [...]
Is Baby Insurance a Good Buy? | Moolanomy responded:
Posted: March 18th, 2008 at 9:42 pm
[...] Weâ€™re Cashing Out a Whole Life Insurance Policy @ Blogging Away Debt [...]
PackerFan responded:
Posted: February 23rd, 2009 at 8:39 pm
What is all this crazy talk?????

The problem with advice to the masses is that it does not take into account the individual situation.

Whole life, if used properly, can be a great product. There are many companies out there that have bad returns and a few that have returns that rival the S&P. So pick your company well.

But the bottom line is this – Life Insurance should be purchased for one reason only – - THE DEATH BENEFIT!!!!! Make sure you get the proper amount of coverage.

Then, if at that point you have maxed out your 401k or IRA or other qualified plans, a life insurance policy MIGHT be a great place to get tax deferred growth. It could be another place to save money for retirement, college education, a boat, TV, or whatever you want to use it for.

BUT MAKE SURE IT WORKS WITH YOUR BUDGET AND YOU ARE BUYING FROM A TOP NOTCH COMPANY WITH A STRONG HISTORY OF PAYING HIGH DIVIDENDS (New York Life, Northwestern Mutual, Mass Mutual – to name a few).

Term is great and I own mostly Term. Because my situation requires me to carry 3 million of death benefit, of which I cannot afford that much in Whole Life. I also dont have a need for 3 million when I am 75 years old, so term is a great fit now. But 500k of that 3mil is permanent WHole Life (for estate planning purposes).

Good luck and make sure you talk to an advisor!
John responded:
Posted: April 11th, 2009 at 8:03 am
i agree with the last guy, after ten years you have to renew it, get a physical and your premiums will go up, it seems to me that the term is wasting money..at least with whole life you can get some money out of it. i am 23, my dad bought my whole life insurance 23 years ago, so it has a really large cash value. Also guess what if your husbaund or wife dies the DAY after your term insurance is no longer in effect your screwed!!
Ralph O. Vondrak responded:
Posted: May 26th, 2009 at 6:04 am
I have a paid up ins. policy. Because I am the orginal purchaser, can the adult which I insured cash in the policy without my permission? Please send me information as to the legal aspect of this matter. I suspect I have been robbed of investment.
TakeThe RedPill responded:
Posted: August 17th, 2009 at 11:21 am
Ralph,
If you are the OWNER of the policy, only you can touch the cash surrender value or dividends inside the policy. The INSURED (unless you are both the owner and the insured) cannot touch it or change it.
Ralph O. Vondrak responded:
Posted: October 6th, 2009 at 8:26 am
I am writing for information on Omaha Mutual life insurance policy which was cashed out without my approval. How is this possible since I was the owner. please ask for my approval next time. thanks much.
Shawn Potts responded:
Posted: January 11th, 2010 at 9:11 am
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Mamie Johns responded:
Posted: January 11th, 2010 at 9:19 am
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NH responded:
Posted: January 14th, 2010 at 11:10 am
too bad you didn’t keep that policy, take policy loans and pay down your debt, then pay the loan back, which goes into your cash value. You’ve not only payed down your debt, but recaptured the interest, AND created investment.
RK responded:
Posted: January 15th, 2010 at 7:06 pm
My dad gave me a small whole life policy when I married many years ago. I changed it to a flex-life policy and doubled the face value. As time passed and I had children I bought them each a paid up policy and continued to fund my own as well. When necessary I increased the face value of my policy and would borrow against the now quite large “cash value” that had accrued over time. Time being the key to this entire idea. It flies! My insurance man who my dad introduced me to when he handed me the policy so long ago, always said, “never let the policy lapse”. Borrow but always repay. I would do just that. Now my oldest son was given his policy at the early age of 22. Big mistake! The cash value had grown to over $6K and he borrowed it all, with no thought of paying it back. My how generations change! He can keep the insurnace in play and pay the interest on the outstanding loan and keep the policy in force for the entire benefit less loan value, or pay some on the loan along with the interest. I find the idea of insurance as a savings tool to be it’s main value to me. It is not a cure all for overspending.
Jay responded:
Posted: February 11th, 2010 at 2:03 pm
Maria – I believe you are referring to a 1035 exchange. That is common transferring cash from one permanent policy to another or even to a non-qualified annuity. However, it cannot be done into a term policy. There is no “in” to transfer it to – term has no cash value. They are different animals. Can’t be done. Hope this helps!
Jay responded:
Posted: February 11th, 2010 at 2:03 pm
Maria – I believe you are referring to a 1035 exchange. That is common transferring cash from one permanent policy to another or even to a non-qualified annuity. However, it cannot be done into a term policy. There is no “in” to transfer it to – term has no cash value. They are different animals. Can’t be done. Hope this helps!
Vincent responded:
Posted: April 1st, 2010 at 9:50 am
I agree with buy as much Whole Life as you can afford, and have the correct amount of death benefit to cover your Human Life Value. This should all be done by talking with a Certified Financial Planner. Whole Life is a asset class. Here are the benefits:Permanent death benefit,After tax earning,It acts as your very own bank, Guaranteed returns(no stock market risk), Creditor protected(check your state law), recapture of term insurance costs. The list goes on and on. Get properly educated on Insurance to make the best decision for you and your family.
Student2010 responded:
Posted: April 7th, 2010 at 9:18 am
What about just getting term and investing the difference (between term and whole) in an IRA or something else that actually acquires cash value at a higher percent? We have partial whole and term with NWM, but the premiums are so high, I think all the time that I could be using that money for something else. We don’t have debt, but Mr. Dave Ramsey suggests what I asked in the first sentence…
Peter Johnson responded:
Posted: May 27th, 2010 at 5:50 pm
You get more “bang for your buck” with term life insurance because you pay a smaller premium for a higher amount of coverage. If your goal is to provide tax-free money, which does not have to go through probate, to protect your family, term life insurance is a very good deal.
Finance Girl responded:
Posted: June 5th, 2010 at 1:50 pm
Term is great if you don’t have a lot of money, but whole is better if you can afford it. The issue with Term is that most people DONT invest the difference because they find other uses. I have seen later on when people got the cheap term that later on their Health has changed and they can no longer qualify for life insurance. If you have a spouse at home and three kids you need more than you think!
Markyboy responded:
Posted: July 23rd, 2010 at 1:36 pm
It’s funny how the trend of this blog (started in 2007 when housing & stock was still booming) has gone from hating whole life policies to liking them. I bought a 500k Whole life policy back in 2002 and have been kicking myself ever since. At least up until recently. I look at my retirement portfolio and it’s at a breakeven point (thanks to last year) from 2002, when the stock bubble burst, and my home equity is the same as 2002 (glad I bought in 82). Anyway, I am looking at finding some cash for a down payment for a second home, and I can take up to $74 k on a loan from my insurance policy, not that I would take that much. That’s a pretty good deal in my mind, since if I had gotten a term policy back then and invested in stock or real estate, I would have lost more money. I know if the economy did not take such a dump, my frame of mind might not be the same.
Vincent responded:
Posted: July 26th, 2010 at 2:08 pm
I think the most important point in all of this term vs whole life is being missed. Education about each is the most important thing a client should be receiving along with full financial and/or insurance planning. Then it can be decided upon which type of insurance fits your specific needs. Term(usually cheap)has only one benefit, a death benefit for a fixed period of time. Whole life has many benefits, permanent death benefit, cash value, growth, flexibility,accessibility, tax benefits,etc. Remember you get what you pay for. Proper financial planning is usually the key element missing from the equation.
Margaret responded:
Posted: February 6th, 2011 at 11:48 am
Hello, I am 62 years old and have just taken out a Whole Life Insurance Policy,,, for ten thousand….
Is this the proper insurance to take out? I have no idea….
Can someone give me some insight? Thanks….
Tom responded:
Posted: February 16th, 2011 at 4:31 pm
Just cashed in my whole life taken out 43 years ago. Total accumulated payout after 43 years? $4,300, which was the CSV plus Dividends. I did the math, and at a conservative 7% return, another investment would be worth $12,000. FOUR TIMES AS MUCH! But what about the great death benefit? The policy would have paid $3,000 at death. Whoopee.
Dave responded:
Posted: June 9th, 2011 at 6:52 pm
Margaret, are you self insurable? Do you have any debt? Does anybody depend on your income? Term insurance at 62 might be a little bit costly. You might be looking at around $100 or more for less than 200K worth of coverage. It all depends if you are even insurable or if you get rated in a table. Please note that any kind of Cash value policy is not intended for retirment!
Lisa responded:
Posted: August 16th, 2011 at 1:42 pm
The whole life insurance has worked out well for my family. We purchased one policy for myself and my husband when we first got married 21 years ago. My husband and I are now in our mid forties and there is no way we could have insurance as cheap as it currently is and we have over $12,000 in the policy as cash value that we can take out in an emergency. We have 2 policies for our kids too that we started when they were 6 months old and they will use the cash value in those when they go to college next year ($40,000) so we will not end up with as many college loans. We may have had more money if we had invested it but we wouldn’t have actually done it so we’d have 0 right now and expensive insurance which is start needed at our age. Once you cash it in, it’s gone forever and insurance is very very expensive as you age. My kids will have a $250,000 (that increases yearly) life insurance policy for $20 a month for the rest of their lives.
Gayle responded:
Posted: January 27th, 2012 at 1:57 pm
A few things:
1) You MUST take your whole situation into account when making financial decisions such as how much life insurance to have and what type of policy to buy. Asking on a blog won’t work.
2) You MUST first consider your goal–what is it that you want to accomplish with the policy?
3) If you do purchase whole life, you MUST buy from a very strong company. News flash: all insurance companies are NOT the same! Northwestern, New York Life, and Mass are the only ones I would purchase.
aliana responded:
Posted: February 8th, 2012 at 2:41 pm
I am so happy and grateful to have military life insurance as well as a policy from new york life. my husband, in the air force, has a $500,000 policy, plus another $250,000 policy. I have $250,000 policy as well as another $25,000 policy.