Whole Life Insurance?
poolshark182 asked:
ok, so heres my situation. My mom got whole life insurance for me when i was younger, and has been paying it. I am now 18 and the policy is turned over to me now under my name. It’s supposed to be my college money, but what should i do with it? should i liquidate it(is that taxable?) and pay for college, then reinvest into some kind of mutual fund? What are the terms for liquidating whole life insurance? Are there any penalties? Are there any cons to keeping the money in the policy(i pay to keep it in force) ? thanks a bunch
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ok, so heres my situation. My mom got whole life insurance for me when i was younger, and has been paying it. I am now 18 and the policy is turned over to me now under my name. It’s supposed to be my college money, but what should i do with it? should i liquidate it(is that taxable?) and pay for college, then reinvest into some kind of mutual fund? What are the terms for liquidating whole life insurance? Are there any penalties? Are there any cons to keeping the money in the policy(i pay to keep it in force) ? thanks a bunch
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Everything depends on how much money the policy has accrued and the cost of the premiums.
Without that info I don’t think you will get an accurate answer from Yahoo nuts.
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Depending on when your mom took the policy out and how much she’s been paying in will dictate the amount you have in the cash value of the policy. The money is not taxable unless the policy premium has been invested in mutual funds. Typically a whole life policy is invested in the general fund of the insurance company, and is paid for by after tax contributions making it non-taxable. Some policies have penalties for early withdrawl of the policy usually 10-15 years. In that case you may simply want to take a loan against the cash value of the policy. You may be better off leaving it in the life insurance policy because the government does not count that towards your available funds for college. This would increase the liklihood of being able to get low-interest student loans which you could then pay off with the policy after you graduate. Hope that helps.
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What should you do? I would definetly surrender the policy to get the money. If you leave the money in the policy, the money will grow very slowly (maybe 3% year). If you ever want to use the savings, you have to borrow it and pay it back with 8-9% interest.
Anyway, I would put the savings in a money market account so that it can accrue interest while your in college. Whatever left over after you graduate from college, put into a Roth IRA. If you are currently working, you can start a Roth IRA right now and invest as little as $25-$50/month or put in one lump sum of $500 and let it sit there. I would invest in aggressive growth fund for now.
Is there penalty involve if you surrender the policy? Depending on how long you had it, there maybe no surrender charges. Read the policy to find out.
If you still want life insurance, I would consider getting a 30 year term. For $250,000 coverage at your age, it would probably be like $20/month and it stays that way until you reach 48. By that time, your Roth IRA should have lots of money (that is if you been putting money into it every month) and you probably won’t need as much coverage.
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Best answer I can give is a question. Do you have any other life insurance? Life insurance really isn’t a very good investment vehicle. My best recommendation would be to use the value to purchase term insurance. If you cash it in you’ll only receive the cash value minus any penalties stated in the insurance contract. Feel free to ask me for more info. I’m a licensed insurance producer in Illinois.
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If you need the insurance or may need it in the future, you may be better off handling onto the policy. That way you will not have to go through underwriting. Some sort of commission is also taken into account in the pricing–term will still be cheaper but your whole life policy will have already recouped this cost.
You can also likely take out a policy loan on the policy. It will allow you to keep the insurance policy in force while pulling out some of the cash value embedded in it. A partial surrender is also an option (this will liquidate only part of the insurance)
You can liquidate the policy. You will receive the cash value of the policy, and can do this by calling the company who issued the policy. Here’s how the taxes work: the cash value you receive less any premiums that were paid into the policy by your mom will be considered a gain and will be taxable. So if the cash value (CV) = $10,000 and premium paid=$6,000, you can lapse the policy, receive the cash value, and get taxed on the gain of $4,000.
If you were to only take out part of the cash, let’s say $7,000, the first $6,000 would be tax free (it is offset by the premiums paid) and the last $1,000 is taxable. If the policy is a MEC, this is not true and the non-taxable part would be the last $6,000 of cash value to come out. (MEC is modified endowment contract. The policy is not a MEC unless it was highly funded–ask the company if it is–and to communicate that I actually understand how this works, it’s in section 7702A of the IRC (Internal Revenue Code))
If you keep the money in the policy, understand that it grows tax-deferred (no taxes paid until you take it out). You will also have mortality and expense piece which deduct from the cash value, but you’re young so these will likely be small.