Should I keep paying the interest on this life-insurance policy loan?
July 7, 2017 8:53 AM Subscribe
This is partly a life-insurance question and partly a math question. My parent took out a 100K whole life insurance policy when I was a child. Parent has taken loans against the policy when things were tight over the last 30 or so years. I'm 43 now and have kids. Parent recently told me that I could take over the policy if I wished and make the beneficiary my kids and assume paying the premium and the loan, otherwise she would let it lapse rather than pay back the loan or keep paying the interest and premium. I did for 2016 but I'm now wondering if that was a good idea. Advice?
I have my own term life insurance for my kids that goes until they're 20 and 17, respectively, that would be adequate for my partner if I cork off.
The loan is about $14,000. The interest is about $800, and the premium is $580. Last year I just payed the interest and premium and postponed the decision. But now I have to pay the bill again and I don't know how to calculate if this is a good idea.
I could pay off the $14,000, but there are better uses for that money right now. And assuming I live another 40 years, is it worth it to pay $14k now plus $580 for every year (although there are dividends; this year is $329, but it says it is applied to "paid up additional life insurance"--I don't know what that means).
Or should I just pay the $580+$800 forever? That seems dumb, in 16 or so years that equals the amount of the the loan.
How should I think about this to arrive at the correct decision?
I have my own term life insurance for my kids that goes until they're 20 and 17, respectively, that would be adequate for my partner if I cork off.
The loan is about $14,000. The interest is about $800, and the premium is $580. Last year I just payed the interest and premium and postponed the decision. But now I have to pay the bill again and I don't know how to calculate if this is a good idea.
I could pay off the $14,000, but there are better uses for that money right now. And assuming I live another 40 years, is it worth it to pay $14k now plus $580 for every year (although there are dividends; this year is $329, but it says it is applied to "paid up additional life insurance"--I don't know what that means).
Or should I just pay the $580+$800 forever? That seems dumb, in 16 or so years that equals the amount of the the loan.
How should I think about this to arrive at the correct decision?
I think the key thing is whether you have life insurance that will help your partner + kids be okay on one income if you were to pass away, plus life insurance for you + your partner that's adequate for your kids to be taken care of if you were both to pass away. It sounds like you feel good about that now, but you might double check with a financial planner too -- I'm not sure what the recommended amount is (I don't have kids myself), but just thinking about it, I think you'd want multiples of your annual salary if possible in the case that your income suddenly disappeared -- your partner would still be paying the same mortgage, same costs for your kids, etc.
If you feel good about your insurance situation now, it seems like it makes sense to let this lapse. If you don't, I would compare the cost of this plan vs. other plans you might be eligible for (i.e. increasing whatever insurance you have through your employer, purchasing a new plan, etc.). If you have any serious health issues, it might be hard to obtain new supplemental coverage, meaning holding onto this plan is a better deal than if you're 100% healthy and able to obtain your own coverage.
posted by rainbowbrite at 9:13 AM on July 7, 2017
If you feel good about your insurance situation now, it seems like it makes sense to let this lapse. If you don't, I would compare the cost of this plan vs. other plans you might be eligible for (i.e. increasing whatever insurance you have through your employer, purchasing a new plan, etc.). If you have any serious health issues, it might be hard to obtain new supplemental coverage, meaning holding onto this plan is a better deal than if you're 100% healthy and able to obtain your own coverage.
posted by rainbowbrite at 9:13 AM on July 7, 2017
A lot may depend on the exact terms of the policy. Find an agent that can explain them if need be. It could well be that, having survived the first years of coverage, maintaining coverage is cheap insurance. Or, it may be paid up at age 60, or whatever. I would expect a whole life policy to have a surrender value (that is currently the collateral for the loan), so if you don't want insurance, you might end up a small sum to the good if you surrender the policy.
Insurance companies answer this kind of question every day, but in my experience, they may not explain in words of one syllable. I'd look around for someone with insurance smarts and no great vested interest.
An agent may take the opportunity to try to sell you some other insurance. Resist.
posted by SemiSalt at 9:46 AM on July 7, 2017 [1 favorite]
Insurance companies answer this kind of question every day, but in my experience, they may not explain in words of one syllable. I'd look around for someone with insurance smarts and no great vested interest.
An agent may take the opportunity to try to sell you some other insurance. Resist.
posted by SemiSalt at 9:46 AM on July 7, 2017 [1 favorite]
I don't think you can fully evaluate this without knowing what the current "cash value" of the policy is, and even then I don't know quite how one would do the analysis. This policy is probably over 30 years old, meaning that it should have accumulated quite a bit of value, however the loans probably significantly impact that. I'd be thinking "how much value will I forfeit if I don't pay back the loan?". If you do decide to keep this policy you should probably pay off the loan instead of paying interest in perpetuity, because I imagine that not all that interest is going into cash value.
If you re-allocate the dividend to "pay premium" instead of "paid up additional life insurance" your annual premium would be $251, which would be a better way to compare the costs of this policy to a term policy. Additionally, over time, (with properly-applied dividends) the cost of this policy will (probably) go to zero, and then maybe start to pay out; term will only get more expensive every time you need to re-up.
posted by achrise at 9:54 AM on July 7, 2017 [4 favorites]
If you re-allocate the dividend to "pay premium" instead of "paid up additional life insurance" your annual premium would be $251, which would be a better way to compare the costs of this policy to a term policy. Additionally, over time, (with properly-applied dividends) the cost of this policy will (probably) go to zero, and then maybe start to pay out; term will only get more expensive every time you need to re-up.
posted by achrise at 9:54 AM on July 7, 2017 [4 favorites]
Achrise is correct. This isn't enough information.
This is whole life, so think of it as a term policy +a fixed income investment. You need to know what the net value of the investment component is today.
posted by JPD at 10:14 AM on July 7, 2017 [2 favorites]
This is whole life, so think of it as a term policy +a fixed income investment. You need to know what the net value of the investment component is today.
posted by JPD at 10:14 AM on July 7, 2017 [2 favorites]
If the policy is surrendered, and the loan has not been paid off, the insurance company will issue the policy's owner a Form 1099-R for the gains received from the loan and tax may be owed to the IRS. I suggest you speak to a financial planner.
posted by Aha moment at 10:25 AM on July 7, 2017 [1 favorite]
posted by Aha moment at 10:25 AM on July 7, 2017 [1 favorite]
A $251 annual premium for $100k of life insurance coverage is not a good deal. One option would be to take it and cash it out, assuming the cash value is greater than $14k. I'd just tell your parents to keep it though. Find out the cash value.
posted by LoveHam at 10:31 AM on July 7, 2017
posted by LoveHam at 10:31 AM on July 7, 2017
Looking at it like any other investment, you could pop the numbers into excel and calculate the internal rate of return (making reasonable assumptions about when the insured will die). Compare that to (1) the replacement cost of insurance; and (2) other investments (bearing in mind that insurance is generally income tax-free, while taxable investments are.....taxable), and that'll give you a decent idea of whether it makes sense.
posted by jpe at 1:55 PM on July 7, 2017
posted by jpe at 1:55 PM on July 7, 2017
This thread is closed to new comments.
I'm assuming the premium is annual, so - $48.33 a month. This seems high for most people for $100K of life insurance around your age.
Assuming you need to maintain life insurance, I'd get a quote from a few TERM life insurance reps. If the cost is lower, I'd secure the new coverage then let this one lapse.
I am assuming that if you let it lapse that the loan is paid off from whatever cash value is in the policy and you have no further obligation to them to pay it back. You might also check and see if there is any remaining cash value that you could get back by cancelling.
posted by randomkeystrike at 9:02 AM on July 7, 2017