Cashing Out My Life Insurance Policy

For the past year I’ve been going back and forth on whether or not I should I cash out my life insurance policy. Long story short, my mom took out a $50,000 policy on me when I was born. She paid into it as I grew up and has since given me the policy.

Like any sensible accountant, I ran the numbers on keeping my life insurance policy vs. cashing it out and the sensible move (in my case) is to cash it out.

I wanted to share the reasoning behind my rationale in this week’s post. To do that, I broke out the risks and the benefits for comparison.

Benefits of Cashing Out My Life Insurance Policy:

Based on the calculations from the post’s cover photo, I end up with an asset 75% larger than the policy by age 65.

My alternative approach is to cash out the policy and invest the premiums on my own. I’m assuming a relatively low rate of return at 5% plus an annual 2% dividend. I did not make adjustments to factor in inflation in an effort to compare apples to apples with the policy.

The tax consequences of cashing in a life insurance can be summed up as this: If we make any additional money on our premiums, then that amount will be taxed. In my case, the premiums that have been paid into the plan exceed that of the cash value. The end result is that there is no, “profit,” and I will receive the entire amount tax free.

The fact that the full value at 65 does not amount to $50,000 is troublesome. This value can easily be reduced further to created an alternative asset as large as 2x or 3x in value. For the sake of being conservative, I left this at 50k. If anyone knows a better way to approach valuing a 50k policy at 65 and throughout retirement, let me know.

One things to keep in mind is that, for now, I do not have any children. Not having kids is definitely not a “benefit,” per se, just a different life circumstance, but for these purposes it falls into my pros column when deciding on whether to cashing out or not. If kids come into the scene at a later date, and there is a need for income for many years ahead to cover expenses, then the discussion for life insurance can be reopened.

Risks of Cashing Out My Life Insurance Policy:

To offset the lack of a 50k policy, I have an 80k term life insurance policy with my current employer. Even if I switch jobs, I would expect at least a baseline life insurance policy to be included in my benefits. If it isn’t down the road, I can always pay into a term life insurance policy if needed.

At this point, I felt comfortable making the decision, but I wanted to take things a step further.

So, I went ahead and walked through my analysis with two different life insurance agents on two different calls with the company.

The general response from the agents was that I was under covered on my current policy. They brought this up despite my first comment suggesting I would close the account.

They suggested I should be be paying at least 3x MORE to expand my coverage.

Again, I felt this was a bit odd that each agent had this as their first response despite my telling them I wanted to close the policy.

The younger agent mentioned I wouldn’t see any significant return until 20 years into the policy. I told them that the current policy I was talking about is 27 years old and does not have any significant returns. They said I should be at that turning point “soon”. I wasn’t even sure what “significant return” they are talking about here since the death benefit & cash value is guaranteed, and the dividends are relatively unchanged year to year.

I noticed each agent kept stressing the tax free component. When I started asking about the actual return, they said it was “very high” but later said it was also, “very conservatively invested, because [the insurance company] does not want to lose you money.” They only mentioned a 4% “guaranteed” rate, but no numbers outside of that.

When I suggested investing the money instead, the older agent said two things:

  1. I should take a loan against the policy at 7% to invest instead of closing out the account. She did not say can, she said should.
  2. Life Insurance will cost me much more in the future if I terminate the policy because I’ll never have this low rate again. We can lose a great deal by chasing good rates.

A funny comment here: the older woman said, “If you had 2k that you could invest aggressively, then absolutely do that, but for a monthly payment of just a few cups of Starbucks, it definitely makes sense to stick to this policy.”

This is exactly what I was trying to do, but there was a disconnect since my approach included closing out the policy and no longer paying her organization the annual premium.

I went into the opportunity cost and discussed using the annual premium along with the cash value ($3,400 + premiums) to invest instead of paying for additional insurance.

They kept insisting I could and should do both. I tried to explain my goal was to maximize my net worth at the end of the day and that paying for insurance didn’t make sense given the factors I mentioned above.

I explained that I wanted a higher return on an asset that would build into the future. She responded with another statement about the, “guaranteed rate,” being very high and the full rate of return often being in the double digits.

If you’re unfamiliar with how these returns work, then the short answer is you pay $100 to have insurance coverage for the year. The cost of that insurance coverage (as in this case) is often in the 20% range, so the $100 is now $80. Add in that 10% return and you’re back up to $88.

I consider the “guaranteed return,” portion to be a recoupment of costs. As it should be too, since you are buying a great amount of coverage that might be essential given the circumstances.

At this point each agent started bringing up general phrases such as, “at your age, most people have this type of coverage,” and, “I think this is the right thing to do.”

That was the end of the call.

I hung up and remembered a line from Warren Buffett, “Don’t ask the barber if you need a haircut.”

I didn’t find it surprising that the life insurance agents would not agree with my idea to cancel a policy. I found it interesting they were telling me I should invest into the market with a 7% loan. This was my first experience receiving investment advice from an insurance agent and I feel like it won’t be my last.

Again, the benefit I have is not having children that would need a supply of income. In the case of my demise, my assets would be more than enough to cover my liabilities and expenses. Given my risk tolerance and time horizon, the logical next step is to close the account and invest.

In summary, I’m prioritizing my net worth instead of opting for additional insurance coverage. Key word, of course, is “additional”.

Would you do the same thing in my position? Any additional thoughts I should consider? Is there anything here I left out?

Barring any major oversights on my end, I’m planning on cashing out the policy in the next few weeks.

Master Distiller

24 comments… add one
  • Vicki@MSDLifeCoaching Jun 13, 2016, 6:27 am

    Hi Matt,
    We did something similar a few years ago and it was actually quite difficult to actually close the account. They had “statements” they had to read to us (that sounded “scary” – as if we were not going to provide for our family) and then they still told us they thought we were making a mistake. I’ll be interested to see what others say.

    • Distilled Dollar Jun 13, 2016, 9:51 pm

      So far the process to close looks like I need to submit a form and that’s it. I’m guessing they’ll give me a few calls to “make sure” I want to go through with my decision. I’m curious to see what they’ll say at that point.

  • The Green Swan Jun 13, 2016, 6:42 am

    Got to love the hard sell they put on you! I had exactly the same experience when I closed out a policy my parents bought me when I was born. They gave it to me when I was 25. I looked into and made the same considerations you did. My parents had use for the policy, it would be for my funeral if I died prematurely. But once they gave it to me, I had no use for the policy. No kids at the time, no liabilities, and enough assets to cover funeral costs plus plenty left over. So I cashed it out and invested it. And when I cashed it out, the poor salesman was playing it up so much it sounded like I was taking food directly off his table.

    • Distilled Dollar Jun 13, 2016, 9:52 pm

      Yep, exactly. I think my parents played the smart move to take it out when they did and to keep it, especially when I started to take on student loan debt.

  • Apathy Ends Jun 13, 2016, 6:58 am

    Nothing like some investment advice from the insurance agent, that sad part is they wouldn’t use those lines if they didn’t work at least once before

    • Distilled Dollar Jun 13, 2016, 9:53 pm

      That is a scary thought! I had a similar thought when I was talking with each agent. Their responses to my rebuttals were nearly identical, to that point that it felt like they were reading from the standard script. As if it read as, “if the person is unsure and says this, then remind them of this.” I can see how so many people end up getting more insurance than they really need.

      • FinanceSuperhero Jun 13, 2016, 10:08 pm

        As I was reading, I was thinking that the agents’ responses sounded very scripted. When you mentioned the phrase “everyone else your age is doing this” I knew that was the case.

        I absolutely think you’re making the right choice by cashing out the policy. While I understand that your goal is to maximize your net worth (and term life insurance isn’t necessarily a great way to do so), you might consider locking in a 25 year term policy while you are still young and most likely in the preferred plus tier with most companies. Though you don’t have kids yet, it still isn’t a bad time to get a policy in place; God forbid you wake up one day and discover a melanoma and become nearly uninsurable.

        At the same time, I understand your goals and where you are coming from.

        • Distilled Dollar Jun 13, 2016, 10:13 pm

          It felt scripted and a little emotionless at times. I’m sure they have told potential clients a thousand times at this stage about the worse case scenarios, so it felt like they were reading off a script about some of those cold hard facts we can come across in life.

          Term life insurance does seem more practical than whole life insurance, so if we decide to have kids or if my current term life insurance ends (by moving jobs or for whatever reason), then I think the conversation will open back up. I’m not sure I’ll opt in, but again, it will need to be another review at that point.

  • Jon Jun 13, 2016, 8:18 am

    Matt, I think you’re making the right decisions to close it out. Insurance salespeople are heavily compensated on “volume” so they have a strong incentive for you to not only keep but increase your policy. In your situation, you don’t need ANY insurance, let along a whole life policy like this one.

    My only question to you is, what are you going to do with the money? If you are going to use it on something that will increase your net worth, e.g. down payment on a house or investing in the stock market, then I’d say close it out. If you’re going to spend it on a new car and lavish vacation (which I know you’re not), then I’d say keep it safe in the policy where you can’t touch it! There’s definitely a benefit for people with low self-control to keep money locked-up in places where it’s difficult to spend.

    Good luck on your decision!

    • Distilled Dollar Jun 13, 2016, 9:56 pm

      My plan with the excess cash is to immediately put that towards my investments or pay off credit card debt. If I pay down debt today, then that’ll free up excess cash flows next month for investments, so either way, the money will be put to work!

      You bring up a great point. If my behavior was any different with spending the money, then I would be more inclined to keep the money where it is.

  • Ms Susty Themes Jun 13, 2016, 1:29 pm

    Hi Matt,
    I’ve been debating something similar – these decisions are very individual, and situations vary but I’ll share my thinking. I’m 55 and have a Universal Life policy I opened 25 years ago. If I had it to do over again, I would never buy permanent life insurance, and might buy term as needed to have something portable to supplement my employee insurance benefits. I have a relative who is an insurance agent and his general advice is for people to buy term life if/when they need it, and to never consider insurance to be an investment.

    But – since I already have it, I’m considering what to do now. My trusted relative with expertise looked at the current numbers with me and said there’s no absolutely right or wrong decision really…and advised that there’s no need to rush a decision.

    I’m considering things like:
    – whether I feel I need life insurance – I’m essentially retired, and ended up having no dependents.
    – my husband is very unlikely to need this money due to our other assets.
    – but, you never know what’s going to happen in life (or to your assets in the market), and when…
    – if I were to die soon, the ROI on this would be good for my heirs since I’ve invested much less than the benefit value of the policy, and am no longer paying premiums. But there’s still an opportunity cost of not investing this money elsewhere.
    – right now there would be tax implications of canceling (I have some gain). Eventually, that gain will be eaten away by the increasing cost of insurance.
    – I learned that some people with large estates use life insurance payouts as a way for their families to pay estate taxes. I’m assessing whether this is relevant for me.
    – I know the insurance agent will try to convince me to keep it, which makes me want to cancel it even more! But, I’m not going to sell just to spite my insurance guy 😉 I’ve got to assess my own goals….

    Since this policy will stay in force for at least another 12 years based on guaranteed rates even if I don’t pay any more premiums (which I stopped paying years ago), I’m leaning toward letting it ride until it doesn’t pay for itself anymore. The opportunity cost is that I could invest the surrender value and earn higher returns (or lose it in the market), but the numbers aren’t looking very compelling and I wouldn’t mind providing a payout to my heirs since I’ve already paid for it.

    Lots to think about…and I might still change my mind. I’ll let it simmer in the back of my brain for a while before doing anything ~ any obvious points I’m missing?
    Thanks for sharing your thinking ~ it always helps to hear the insights of others.

    • Distilled Dollar Jun 13, 2016, 10:05 pm

      Thanks for walking me through your analysis. From my perspective, it looks like you’ve covered everything. You’ve even expanded your benefits to include others who may or may not receive some of the funds.

      Given the question of estate tax and inheritance, then I think there are multiple unknowns here. One consideration is seeing what those inheritors would want you to do. If they’re comfortable in their own financial situation and have prepared their families for college expenses or whatever large purchases, then they might prefer you to utilize the cash how you want to use it. I’m sure you’ve already thought about this, so it sounds like you’re between two comfortable choices. Not a bad position to be in.

  • Stefan @Mllnnlbudget Jun 13, 2016, 7:05 pm

    I think you are making the right choice by cashing out. I have not had experience with life insurance yet but I think not having kids would be a major factor in cancelling the plan as nobody truly depends on you right now. Also, why would you take a 7% loan out to invest in the market? Like I said I have no experience with this but that sounds ridiculously foolish to me.

    • Distilled Dollar Jun 13, 2016, 10:07 pm

      Ya, how crazy is that! I had the agent repeat themselves on two more occasions on that call to just hear them say it again. I was equally shocked on all three occasions, hoping there was some error she was overseeing.

      • Corey Aug 7, 2016, 9:25 pm

        Ultimately, I agree that you made the right decision based on your personal circumstances, your goals, and your personal analysis. That being said – even though the conclusion would most likely be the same regardless, your analysis is not complete.

        Also, don’t take this as a defence for those slimy agents – but what they were referring to as a loan @ 7%, was a “loan” from yourself. There are 2 benefits of a loan provision in these types of policies, one is that it’s a way to access the same cash while leaving the death benefit in place and second, you don’t have to repay the loan. Are there consequences to that? Sure.

        Some people allude to this and I think you refer to as well, but insurance is not an investment yet that’s the exact benchmark used to compare what you can do with the extra cash.

        Finally, you repeatedly talk about if you have kids, that covering their needs will be addressed later yet you also mention a girlfriend/future spouse. That timeline is more “known” and much sooner than kids.

        So yea…these things may have been considered internally for you but either way, I like your take, I would have come too the same result, and I’m looking forward to reading more.

        • Distilled Dollar Aug 10, 2016, 6:34 am

          Thanks for adding that in Corey!

          I’m glad to see you say insurance is not an investment, despite what I’ve been told by various advisors. I think the definition of “investment” is broad, so they are taking a few liberties when they say that line.

          As for the girlfriend & future spouse, she has her own career along with basic insurance from her employer, so there is zero concern on my end for her to pay for her own lifestyle at the moment. I hope that answers your question.

  • Martin - Get FIRE'd asap Jun 13, 2016, 8:51 pm

    Matt, I agree with yourself and the other comments on here. Get rid of it.

    My thoughts on life insurance are: Unless you have dependants who are going to be significantly disadvantaged should you die, then life insurance is an unnecessary expense.

    While you and your wife are still young, should something happen to the other one, there will be a period of sadness followed by getting back on with life.

    By you being financially independent, as a couple, the remaining person will no doubt inherit the stash and may not have to work again as the funds that were destined to keep two people financially happy now only have to sustain one person.

    Take your monthly premium and add it to your investment contributions and enjoy spending the ‘real’ returns of these long into the future.

  • Rudy SMT Jun 15, 2016, 6:05 am

    Well done.

    Life insurance is all a bunch of crooks. These policies have been created only with one goal; suck money from customers as much as possible.

    The government should band them but too much lobbyist and interests to kill the industry.

    Here a small story.

    My wife works in the bank and got visited by a friend to see our newborn baby. While chatting, the friend told me if I want to buy insurance for the baby. I just smile and move on with the conversation.

    When she left, I asked my wife about it.

    My wife told me don’t bother because the insurance’s conditions are just horrible and isn’t worth it.

    • Distilled Dollar Jun 19, 2016, 10:19 am

      The tricky part with insurance regulation is that its mostly driven at the state level.

      On the federal level they implemented a new law effective next year where all managers of retirement funds must act as fiduciaries, or they must put their clients interests ahead of their own. To have a similar law take affect in the insurance industry is either impossible, or as close to impossible as it gets. As you mentioned, each state has their own imbedded interests and lobbyists who are motivated to keep business as usual.

      I do see some instances where insurance would definitely help, so I don’t view the industry as all bad. As I quoted up above, we need to know we’re asking the barber if we should get a haircut. The response from an insurance agent can be predictable, so the best we can do is educate ourselves with the knowledge before hand.

  • Brandon @ Nurse on Fire Jun 16, 2016, 4:01 am

    I completely agree with your decision to cash in your policy; it’s a pretty safe guarantee that your money will fare far better in the market. Good choice in my opinion.

    I bought a $250k term life policy when we were in college and just recently increased my coverage to $1M, going through Zander Insurance (recommended by Dave Ramsey.) You enter some basic info and they spit out rates from multiple companies, working as the middleman throughout the process. I never even spoke to an agent; rather, I was interviewed by a nurse over the phone, a nurse can come to your house (unless you live in the middle of nowhere like me…which I don’t believe Chicago counts in that instance…lol) for a simple screening, and that’s it. It was super simple and, for about $50/month, my wife and kiddo would be set if something were to happen to me.

    While that sounded like a horrific sales pitch…lol…it was a really smooth process and I thought I’d share my experience.

    The bottom line is this…insurance, especially life insurance, plays on an emotional level and, in my opinion, for pennies on the dollar of coverage (literally 6 cents per dollar of coverage per year), I have peace of mind that my family will be taken care of in the event of my untimely death, just as my son and I would be taken care if the same were to happen to my wife. Both scenarios are unthinkable and gut wrenching but the fact of the matter is…shit happens.

    Also, while you and the Misses aren’t yet married, you two clearly sound like you’re in it for the long haul. If something were, God forbid, to happen to either one of you, having an appropriate amount (your decision) of life insurance in place would allow the other ample time away from work to grieve, regroup, and figure out the next step in your life…maybe even FIRE?

    Maybe it’s morbid but I can picture, if I were to suddenly die, my wife and child being able to pay off the remainder of our debts, pay cash for a modest house somewhere, and comfortably live off the 4% rule indefinitely. That, my friend, makes me sleep very well at night.

  • TJ Sep 26, 2016, 11:44 am

    Term life insurance is so cheap that I think it’s foolish not to put in place while young and healthy. If I don’t get married or don’t have kids after a certain amount of time, then I will just cancel it. better to be safe than sorry and have to pay more for insurance later.

    Keeping permanent insurance around is a lot more complicated. Did you look at the in force illustrations in your evaluation? My parents bought one on me, when I was young but they haven’t given it to me, so I don’t even really think about it.

    • Distilled Dollar Sep 26, 2016, 12:07 pm

      I lost faith in the in force illustration when the agents explained how dividends in year 20 would cover the annual premium. I highlighted the policy was already in year 25 or so and the dividends were not covering the premium. They mentioned the dividends were “right around the corner” in terms of covering the annual premium. I mention it in the article, but it was difficult to find this valuable based on their projections that were previously off by 75%+.

      As Warren Buffett would say, “Price is what you pay, value is what you get.” In other words, cheap doesn’t guarantee value.

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