Kevin from San Diego.
This thing is long, long, long.
So we might have to take this in bite-size pieces here, Alan.
So Kevin from San Diego he writes and he's like, "Hey, I'm trying to figure out what
to do with Universal Life policies that have large cash values.
As cash value grows, the amount of actual insurance coverage declines (since I could
get the cash value without dying).
I think I'd like to get access to this cash value, or at least understand other ways to
get access than cashing out or dying.
Some background.
I'm 58, bride is 55.
I have a military pension and some disability income.
I'm also still working for another couple years.
The disability payment stops at my death, the military retirement is reduced to 55%.
So I wanted the insurance to cover those potential drops in income.
I could also use it for long term care if a doc says I am going to die soon when I enter
a nursing home (an accelerated death benefit or something like that).
I won't need the insurance for inheritance/estate taxes - I don't expect to die with that much
money."
OK, thanks for that little backdrop, Kev.
Thanks for your service, first of all.
Little military retirement.
So then he bought some life insurance because he's got a pension.
And so if he were to die, his bride-to-be would only receive 55% of the pension.
His V.A. benefit I'm guessing, is that's what he has, the disability benefit would go to
zero, because I've never ever in my history of financial planning Al, have met someone
that has a military pension that does not have a tax-free V.A. pension.
(laughs) It is pretty common, isn't it?
Everyone gets disabled somehow.
Somehow.
A scratched something.
Yeah.
We would have been disabled years ago.
That's why they put us on radio.
(laughs)
But Kevin thank you for your service.
So he's got these universal policies, Al, he's trying to figure out what the hell to
do with them.
So he continues to write: "I have a universal life policy with $245k coverage and cash value
of $91,000."
So he's really covering about $160,000, the insurance is $160,000 because $90,000 is his,
$245,000 is what the insurance is, you take the difference.
That's really what he's paying.
Yeah, and I think a lot of people don't really understand that.
So you've got a policy, if you pass away, your beneficiary, presumably your bride gets
$245,000.
So that's great.
But you have a cash surrender value today, which is your own money, of $90,000.
So as you said, the actual insurance value is the difference between the two, because
you could take the $90,000 right now.
"Which is paid up in 2021."
What paid up means for those of you keeping score here, is that he would not have to pay
any more premiums into the policy.
So now that cash value of $91,000 will continue to pay that coverage, the $91,000, of course,
goes down in value because the cash value is now paying the premiums instead of our
friend Kevin that's paying the premiums out of cash flow.
He's got another, he's got another "fully paid up one with $57k coverage and a cash
value of $25k."
So he's got 25, again, you do the math, split in half, whatever, he's got about 25, $27,000.
"I also have 2 term policies - a $300k policy expiring 2024, and a $350k policy expiring
2021.
My bride has $203k in universal life with cash value of $61k.
And a $30k term rider that ends in 2024.
She is a retired part-timer with a $400 monthly pension from PERS.
Killing it."
Boom.
"I don't need to replace her income.
The life insurance value of the permanent policies grows a little bit each year, but
not as much as the cash value.
Cash value generally is growing about 5% each year - about half of it would be tax-free
if I cash it out (basis is 50% or so).
I could borrow 70% of cash value, too.
The kids have moved out, still a mortgage but just some wedding and grad school tuition
assistance.
My health is not good enough to get a preferred rate if I buy new policies.
Overall, we are in pretty good shape, with $1.6 mil in investable assets split between
TSP/401(k)/457/Roth IRAs and a brokerage account.
Once we sell the house and leave California, we should be set, so the insurance is really
lagniappe."
Lagniappe.
Yeah.
You don't know what lagniappe means?
Yeah, it's a bonus.
Yeah it's just like an extra gift.
Lagniappe, I say that all the time.
Don't really need it, yeah.
'Course, Andi had to look that up for us.
Yeah, because I would have said langen-gappy.
I would have said lagneeapee.
(laughs)
Lagniapeepee.
(laughs)
I guess the G is silent.
(laughs)
Nice job on pulling that off, guys. (laughs)
The insurance is really a lagnia-pee. (laughs)
It was a lag-nye-a-pe-pe. (laughs)
You think he did that on purpose because he knows we can't pronounce things?
Probably.
Lag-nee-a-pe-pe.
Yeah.
So.
let's... (laughs) Oh Kevin, if I were to charge by the words here.
Holy buckets.
What should he do with these policies Al?
You know what?
One thing he didn't really tell us is how much is his pension?
You know what I mean?
So the life insurance policy, if he dies, is that enough to cover his bride, to cover
that pension?
Yeah.
Because the survivor benefit is only 55%.
So in other words, 45% of that pension would go away.
And the V.A. disability would go away.
Here's what I would do.
If I was Kevin, I would run two scenarios.
I'm gonna be like - because he's leaving California.
I don't know where he's going.
Why would you want to leave California, Kevin?
Probably because the cost of living here is very high and the taxes are through the roof?
Besides that?
Yeah.
Besides that, it's a great place to be.
Great place to be.
So he's splitting.
So he needs to figure out first how much money is he spending?
How much money are you as a couple spending?
Yeah.
And what's the need if you were to pass away - I think that's what you're concerned about.
Right.
He's got $1.6 million.
He's got a military pension, a V.A. pension.
He'll have Social Security.
He's pretty young, right?
He's 58, so he's got 10 years to bridge, roughly, a little bit less than that for Social Security.
Depends on when he retires.
She's retired, she's killing it.
She's 55 making 400 bucks a month part-time, but then...
So it's like, you're leaving California how much money do you want to spend?
Here's your fixed income.
Is that covering 100% of your living expenses?
If it is, I would get rid of the insurance altogether.
I'd cash that thing out because if you die, you have $1.6 million that's going to your bride.
That would be plenty to cover her needs.
Yeah.
So in other words, even though the fixed income would go down, there's this big pool of money.
There's that pool of money to cover to pay for the other 45% of the pension that's leaving
plus whatever you're V.A. is.
And as you mentioned, the insurance coverage really isn't that high when you consider a
lot of this is already your own money.
The one policy which is smaller, almost half of it is your own money.
Right.
Man, you've got a lot of insurance, Kevin.
Was your neighbor an insurance agent or your brother in law?
(laughs)
Now, on the other hand, Joe, if Kevin were not in good health at all and felt very short,
impaired life expectancy...
Yep, of course, he'd keep it.
Yeah you keep it right?
Sure.
Because then you look at the internal rate of return.
Because you look at $91,000 growing to $245,000.
Let's say Kevin's gonna die in five years, well $91,000 growing to $245,000 in five years,
that's a pretty high internal rate of return.
Probably not going to happen.
All tax-free to the beneficiary?
Of course.
So you can look at it that way too, say, "what's my life expectancy?
I'm a pretty healthy guy.
I got ten years to live 15, 20, 25, 30, 35 years to live.
The death benefit's gonna be $245,000."
You take that $90,000 out, pay a little bit of tax, some of it's going to be return of
basis.
Now you have full access to it.
And then what's your break-even?
How long can that $90,000 go to $245,000?
What's your internal rate return?
If you think the insurance is better, because at least the heirs are going to get it, but
it sounds to me he wants to burn through everything, right?
And says, "Hey, the kids or whatever, they're there out of the house, they're all good."
It sounds like he was a really good saver, he's got $1.6 million.
You probably needed the insurance at the time to protect your income.
I don't know, you met your bride.
I mean the bride, is that like bride-to-be or wife?
That's wife.
He calls her his bride.
Oh that's so sweet.
It is.
I thought it was like hooking up with my bride.
They've probably been married for 30 years.
Yeah exactly.
They're probably high school sweethearts.
That's what it sounds like.
And every day is like wedding day.
It's so good.
It's awesome.
That's what you want.
Yeah I'm still waiting for it.
I want to be like Kev.
I want pensions and $1.6.
Leaving California and my bride.
A little disability income tax-free.
It's gonna be awesome.
(laughs) Yeah, but I wouldn't know.
That's how I would look at it, you got any other comments on this?
Well I'll put it this way for most healthy people, I would not keep the insurance.
And I like how you point to yourself, like (points to himself) myself.
(laughs)
Yeah like "most".
Because I think you can do better with the cash value on your own.
Well do the math.
Let's figure it out.
So for those of you that have cash value in insurance, a few things that you want to look
at.
We're running an example here that Kevin had a $245,000 or $250,000 death benefit in his
life insurance policy.
He has $91,000 of cash value.
He didn't even tell us what the premium was, because he is still paying premiums for another
couple of years.
We assumed that there was no more premiums.
So then the question was, do I keep this or do I get rid of it?
So you can run a calculation.
So Al ran a calculation one way and I ran it another way, so it depends on if you're
left or right-brained to see what makes the most sense for you.
(laughs)
So I'll go through my calculation, which is it's looking at the $91,000 and what could
that earn on its own, like outside of the insurance policy.
Now, of course, there would be taxes, we're keeping this really simple.
So in other words, if you take $91,000 and you do a 6% rate of return, that's pretty
conservative, over a 10 year period you would end up with $163,000.
So let's compare that to the life insurance policy, which is $250,000.
So if you think you're going to live less than 10 years, you might just want to keep
the policy, right?
You would, yeah.
Because you're not going to do better than that unless you take a lot of risk.
Or unless you need capital to spend.
Sure.
Now a 20 year at 6% would be $291,000, so you'd be better doing that than having the
insurance, and a 30 year would be $523,000, so you'd actually do a lot better than the
insurance.
So Kevin is 58, correct?
Correct.
So the likelihood of Kevin reaching age 88, I would say is probably 60, 70%?
Yeah.
Or at least 50.
I mean that's today.
Just wait for 20 years.
I mean, they're going to be putting little chips in our bread and we'll live for 120.
You got cancer?
No problem.
Here's a pill.
You don't think so?
I think that would be awesome.
I'm signing up tomorrow.
(laughs)
So yeah.
So just today Joe.
So a 65-year-old male, the average is age 84.
And so you're saying now when he gets to that point, there will be a lot more medical advances
and I tend to agree with that.
Sure.
I mean you can see the advancements - each week, each month, each year there's a little
bit more.
So in other words, another way to say this is 30 years is not unrealistic at all.
So for Kevin to get to age 88, that's very possible.
So how I ran this for Kevin is that I looked at if you got $91,000 and that is going to
pay out a $250,000 death benefit.
And let's assume that Kevin reaches age 88.
So 30 years.
What is his rate of return?
It would be 3.31%.
So in other words, inside the insurance policy, what did that $91,000?
3.31% is what you need to get to $250,000.
Right.
So let's say if you had $90,000, you invested for 30 years at 3.5% roughly, you would have
$250,000.
So then how you look at it is to say, over the next 30 years, do you think I could achieve
a higher rate of return than 3.3%, or am I good with that guarantee?
Because that's his guarantee - he's going to die.
We know that that's a guarantee.
We just don't know when.
If he dies prior to, let's say 88, well then that internal rate of return is a lot higher.
If he dies past that 88, then that internal rate of return is lower.
So it's just looking at, A), do you need the insurance given the small facts that we know
about him, I would say probably not because he has a lot of other assets.
He's got a good pension and he's got a lot of other assets for his bride to take over.
Yes.
And too, it doesn't sound like he wants to give a legacy, "hey, let's build this thing
up."
The final thing that I would do is, I betcha that policy is pretty old.
But I don't know, I'm guessing here because it looks like Kevin loves to buy insurance
and he's probably already checked this out.
He says his health is not really necessarily in great shape.
Yeah.
Because he was maybe looking at either redoing it, getting a different policy or maybe an
additional policy.
I would say still check it out, because that $91,000, let's say if he bought that policy
20 years ago.
So the cost of insurance, the tables that they used 20 years ago are completely different
today.
The life insurance industry was completely different 20 years ago than it is today.
Because you more or less had mutual type insurance companies - Mutual of Omaha, Mass Mutual,
Northwestern Mutual.
You know the names.
So what has happened to these big life insurance companies is that they de-mutualized and now
they're stock companies.
And so in a mutual life insurance company, the policy owners are the owners of the company.
So if I own a policy, I own the company.
In a stock company, the stockholders are, right?
That's us if we want to buy Lincoln Financial, we're a stockholder.
We want profits.
We're demanding, right?
We have a board of directors.
Let's fire the CEO.
Let's do this, right?
Capitalism.
And so what has happened is it drove pricing because there's more competition.
It's like, "sell more policies, sell more policies," it's driving pricing a little bit
lower, plus actuarial, we're live in a lot longer.
So the price of insurance today is completely different than what it was maybe 20 years
ago.
So it might make sense for him to look and say maybe that $90,000 of cash value could
buy him, I don't know, maybe $400,000, because they're doing the same math that you and I
did, bud.
Yeah, that's right.
And the other thing too, like let's just say that that worked, and then he could do a 1035
exchange and so he wouldn't have to pay taxes on any built-in gains inside the cash value.
Right.
So it's a tax free-transaction.
You don't need the money.
You look at, the insurance company is saying, "OK, the internal 3.36%.
We could give him a little bit more than that because it's just arbitrage," they're taking
that money, they're investing it in something else and trying to get a higher rate of return.
Just like you could do on your own.
So I mean, you just gotta think outside the box here and figure out what's the best for you.
So, God, I don't know, man that's long-winded question and answer.
It was thorough!
We are very thorough here at Your Money, Your Wealth®.
If you give us a question, we're going to take the time and figure it out.