Should I keep investing in this policy?
January 16, 2008 8:40 AM Subscribe
I've had a North Western Mutual Variable Life policy for a few years. How bad of an investment is it? Does it make sense to keep it, or should I get out now? What penalty would I have for getting out now?
A friend of a friend is a financial advisor and I was talked into seeing her about five years ago. I was not and am not financially savvy, but she said that by continuing to contribute the maximum to my 401k, I'd have "tax problems down the road". I make too much to contribute to a Roth IRA, and she made it sound like a variable comprehensive life policy would be very beneficial. I admit that I don't know much about the policy, but I signed up anyway. I've contributed about $375 a month since then and now have about $25,000 in invested assets. My death benefit is several hundred thousand, but I don't have any dependents and don't really need the insurance part of it.
I now question whether it was a smart move getting involved in this. If not, can I do anything about it now? Are there big drawbacks or penalties for getting out now, or am I better off just sticking with it? Retirement is at least 30 years away for me and I don't really need the $25,000, so I'd just invest it.
Because the advisor is a friend of a friend, I am worried about burning bridges if there's no reason to. I appreciate any advice you can give.
A friend of a friend is a financial advisor and I was talked into seeing her about five years ago. I was not and am not financially savvy, but she said that by continuing to contribute the maximum to my 401k, I'd have "tax problems down the road". I make too much to contribute to a Roth IRA, and she made it sound like a variable comprehensive life policy would be very beneficial. I admit that I don't know much about the policy, but I signed up anyway. I've contributed about $375 a month since then and now have about $25,000 in invested assets. My death benefit is several hundred thousand, but I don't have any dependents and don't really need the insurance part of it.
I now question whether it was a smart move getting involved in this. If not, can I do anything about it now? Are there big drawbacks or penalties for getting out now, or am I better off just sticking with it? Retirement is at least 30 years away for me and I don't really need the $25,000, so I'd just invest it.
Because the advisor is a friend of a friend, I am worried about burning bridges if there's no reason to. I appreciate any advice you can give.
IANYFA.
These types of polices are not designed to be discontinued. Usually, there is an initial period during which you are obligated to pay that amount of money in. After that initial period, the account will have sufficient assets to maintain the "insurance wrapper" without addition paid-in amounts, but you can still pay in additional amounts, most of which will be invested in a standard fund maintained by Northwestern Mutual (or whatever provider you are using) for that purpose. If you don't actually "withdraw" money from the policy (you may not be able to), there are no taxes on the assets that have grown until you die, at which time they will be within the estate tax exemptions for most investors. During your life, you can borrow against the policy and take amounts out, subject to certain requirements to retain the nature of the "wrapper," but you have to pay them back before you die, or your estate has to pay it back into the account.
The invested assets in these plans often grow through some income account at about 7-9% a year. Northwestern Mutual has a table that shows what the fund has paid for the last 100 years or so, and it's usually in that range. This has the effect of providing you with untaxed growth of a pretty decent rate, but you can't ever totally liquidate the account, you can just take money out of it up to an amount determined to "maintain the wrapper."
If you (a) have exhausted other tax-advantaged investment options, (b) are not likely to need to liquidate the account prematurely instead of just taking the permissible amounts out temporarily and (c) are willing to go through the hassle of getting and maintaining life insurance (since that's what this ultimately is), it's not necessarily a terrible idea, but you should definitely speak to a disinterested advisor before getting a policy like this. I decided against it because one of the main benefits of it is as life insurance *in addition* to investment, and I already have enough life insurance right now.
Since you already have it, you might want to check how much of your premiums actually go to the insurance and how much gets invested, and what those investments are in and how that fund has been doing. Given what I understand about these policies, it's probably not a good idea to try to get out completely, but you should be able to minimize any additional payments.
posted by iknowizbirfmark at 9:33 AM on January 16, 2008
These types of polices are not designed to be discontinued. Usually, there is an initial period during which you are obligated to pay that amount of money in. After that initial period, the account will have sufficient assets to maintain the "insurance wrapper" without addition paid-in amounts, but you can still pay in additional amounts, most of which will be invested in a standard fund maintained by Northwestern Mutual (or whatever provider you are using) for that purpose. If you don't actually "withdraw" money from the policy (you may not be able to), there are no taxes on the assets that have grown until you die, at which time they will be within the estate tax exemptions for most investors. During your life, you can borrow against the policy and take amounts out, subject to certain requirements to retain the nature of the "wrapper," but you have to pay them back before you die, or your estate has to pay it back into the account.
The invested assets in these plans often grow through some income account at about 7-9% a year. Northwestern Mutual has a table that shows what the fund has paid for the last 100 years or so, and it's usually in that range. This has the effect of providing you with untaxed growth of a pretty decent rate, but you can't ever totally liquidate the account, you can just take money out of it up to an amount determined to "maintain the wrapper."
If you (a) have exhausted other tax-advantaged investment options, (b) are not likely to need to liquidate the account prematurely instead of just taking the permissible amounts out temporarily and (c) are willing to go through the hassle of getting and maintaining life insurance (since that's what this ultimately is), it's not necessarily a terrible idea, but you should definitely speak to a disinterested advisor before getting a policy like this. I decided against it because one of the main benefits of it is as life insurance *in addition* to investment, and I already have enough life insurance right now.
Since you already have it, you might want to check how much of your premiums actually go to the insurance and how much gets invested, and what those investments are in and how that fund has been doing. Given what I understand about these policies, it's probably not a good idea to try to get out completely, but you should be able to minimize any additional payments.
posted by iknowizbirfmark at 9:33 AM on January 16, 2008
Also, the Wikipedia article is pretty good, and has a few good links.
posted by iknowizbirfmark at 9:35 AM on January 16, 2008
posted by iknowizbirfmark at 9:35 AM on January 16, 2008
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Because the advisor is a friend of a friend, I am worried about burning bridges if there's no reason to
I don't have any advice about this investment specifically, but both of these statements worry me. You shouldn't invest in something you don't understand, and having a financial advisor that you can't say "no" to without worrying about social consequences is a Very Bad Idea. Especially if the advisor is working on commission.
You should never be afraid of saying "no" or "let me think about it" to a sketchy or confusing investment. If this person gives you a hard time because you are looking for better ways to invest your money than their recommendation, you should be wary of taking their advice in the future.
I think you need to find a fee-based financial advisor that you don't have social ties with. Better yet, get some books (or find some financial blogs) and read up on financial issues for yourself. Learn what you're paying into. Read your policy and the penalties for yourself.
posted by almostmanda at 9:09 AM on January 16, 2008