I regret that I have but one variable life to give
August 24, 2009 6:24 PM   Subscribe

Once upon a time my new financial adviser sold me a variable life insurance policy. Although I didn't really need any more insurance, she said it would be a great investment for retirement because of its tax advantages. I doubt this now and wonder if (and how) I should get out of it.

It's a Variable CompLife policy from Northwestern Mutual. I did a lot of research on the company, which is by all accounts solid and reputable. Unfortunately, I didn't do much research on the policy before signing up mostly because I wasn't able to find much about it I could understand and gave the adviser the benefit of the doubt.

I've learned since then and now wish I hadn't signed up, but you can't change the past. Now that I've been in the policy for 10 years I am wondering if getting out now is better or worse than staying in. I want whatever's best in the long run because retirement is at least 20 years away and I don't urgently need this money now. If I dropped the policy, I'd probably buy term insurance and invest the difference in my IRA like I probably should have in the beginning.

I'm having trouble finding anything that explains the consequences and procedure for dropping the policy or a calculation that will help me figure out if I should do so. To make matters worse, I don't feel I'd get unbiased advice from my financial adviser, so I hope MeFi can help.
posted by anonymous to Work & Money (3 answers total) 1 user marked this as a favorite
The details matter, such as the cost, the value, the probable returns on your investments, and your expected years of life (although it sounds like you're 45-50, if you're a smoker and have high blood pressure things are different). You have to read the policy to find terms like cancellation. If you called and asked them about getting out, my guess is that they'll tell you. Their web site discussing a similar policy makes it look like you can freeze the policy and use its value to buy term insurance, or get the cash value if you have >$25k in it.

If you can't find a real adviser who doesn't have a conflict of interest, then you'll have to get ok at doing the calculations for your alternative ideas. I don't think that any are too complicated to do in excel, or even with a pen and paper if you have spare time.
posted by a robot made out of meat at 7:11 PM on August 24, 2009

Keep in mind that if you've had the policy 10 years, it's rates were based on your age and health status 10 years ago. Accordingly (bear with me for a minute), to get out and replace it with a similar policy (i.e. variable whole life) would be MUCH more expensive per each $1 of coverage - because you are older and (no offense) probably have had at least some health issues. While it might be cheaper to exchange for a term life policy, you would be giving up a great deal, i.e. the flexibility in use of accrued cash value and the inherent advantage of whole life coverage. Term is cheap, but depending on the reasons you need insurance in the first place, it might not be a good deal if it doesn't provide what you need.

I am a licensed life insurance broker in NY. I haven't even looked at what state you are in because I don't want to know, since without the details requested upthread, I could never make a specific recommendation. Also, even if you are in NY, you have not hired me and I don't work for free, so I am not giving advice.

That said, my state has VERY specific rules for replacing one policy with another under the logic of the Insurance Commissioner of New York that doing so is RARELY BENEFICIAL - and often disadvantageous - to the consumer. As an option to cashing out and buying new, you may want to look into your conversion options under the policy. Under conversion, sometimes you can exchange for a different type of policy based on your attained age but without doing another physical or submitting new medical questionnaires. For example, you may be able to use your accrued cash value to convert to fully paid-up term life or any other type, obtaining a higher dollar-value of coverage from a fully-paid policy. Hypothetically, if you have $23,000 of cash value in a $50k variable life policy, you may convert to a fully-paid (i.e. no need to pay future premiums) $150k 15 year level term. Total hypothetical, made up numbers.

To the extent you take accrued cash values as a lump sum (rather than doing certain kinds of conversions) planning to use that to buy a new policy from a different company, you are likely to have a tax bill associated with it (unless you treat it as a policy loan which must be repaid at interest). So consider the tax consequences as well.

To summarize in a way that I hope is more useful:

1. You may want to ask about "conversion options" rather than cashing out the policy and buying a new one. Your conversion options should be listed in your policy. Once you see them, you can do some basic Googling to get a general idea of what they are, but you want professional advice.

2. No matter what you do, consider the effect that your new age and any medical conditions may have on the price you would pay for a new policy. If you have a conversion option that permits using attained age with no evidence of insurability, that is generally a more favorable compared to a brand new policy.

3. Consider that there will be a tax bill if you cash out the existing policy, which will reduce the effective amount of your cash value.

For the above reasons, replacement is generally thought to be only rarely a GOOD move by my (but not necessarily your) state's insurance department. Life insurance agents work on commission - feel free to go to one, bringing a copy of your policy, and ask them for their suggestions. Be prepared with an understanding of your goals - whether you want coverage to protect spouse/kids on your death, to ensure a mortgage debt is satisfied, whatever. This individual may aggressively market a new policy to you, since they would earn a commission if you buy a new one and nothing if you don't. It may be worthwhile to speak BOTH to your existing financial planner and to an independent insurance agent. Your state MAY have someone in the State Insurance Department you can call to get advice on replacement, or you might look at the website for the National Association of Insurance Commissioners, which sometimes has some helpful consumer guides. If you Google "life insurance replacement" you will see a number of "beware" warnings, such as this one - the first that popped up.

PS. I just checked AM Best (third party insurance company ratings agency), which rates Northwestern Mutual at "A++ Class XV". That is their highest rating. The "A++" part means they have a good ability to pay claims on their outstanding policies. The Class XV indicates financial size, and they are the highest. Lots of assets - $2 billion or more. As of June 4, 2009 their outlook was stable.

PPS. Sorry so long and rambling. I have a sick and loving fascination with insurance. I've been this way for 10 years. I don't know what is wrong with me.
posted by bunnycup at 7:53 PM on August 24, 2009

PS, let me add that again, in MY state (New York) if you go to a new insurance broker to discuss a replacement, they are bound by law to be very specific about the advantages AND THE DISADVANTAGES of doing so. In my state, they must disclose disadvantages, have you sign an acknowledgment of them, provide that to the life insurer and, I believe, to the insurance commissioner.

Why all the rigamarole? Because replacement is so rarely a good deal for the consumer.
posted by bunnycup at 8:00 PM on August 24, 2009

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