About 6 months ago, the Wall Street Journal had an article about when
it makes sense to make a premium payment on an older whole life
insurance policy (with accumulated cash value) -- particularly when
you no longer have a 401(k) plan. I can't find the article, and have
been "googling" to see if I could find other perspectives on this
question...so far without success. Can you help?

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Request for Question Clarification by omnivorous-ga on 16 Dec 2004 06:11 PST

Andyiii --

Have you searched the www.wsj.com index?  Dow Jones and the Wall
Street Journal only keep their online content available to subscribers
for 30 days, then archive it.  It's fully searchable but they then
charge $2.95 for each article (though your public library probably
keeps the Journal back to the beginning of this year).  There's an
article on April 8 that looks as if it fits your description.

Best regards,

Omnivorous-GA

Free Advice:

Whole Life insurance poilicies (accumulating cash value) should not be
considered an investment vehical.  Insurance policies are good for
Insurance needs, however as a main inventmest vehical they have
consideralbe downsides.

1) A majority of a Premium payment is "part of commission", a small
percent of your money goes towards the investment avenue.

2) The guareenteed cash value, or accumulation value of your
investment is normally such a low percentage.  Typically 1-3%

You would be much better off using a traditional investment vehical
than an insurance policy as an investment.  I assume the "security" or
"safe factor" is a large concern, for you to consider the Insurance
policy route.  If you are looking for secure and guarentted
investments, consider Government T-bills, Govt Bonds Etc.  The
majority of your money is invested, unlike a "premuim payment"

Whole life insurance policies- High commission taken from premium,
small % of money goes toward investment, returns average 1-3% a year.

Mutal funds - No load, semi load, full load.. Sales charges range from
free to as high as 8.5%.  Returns dpending upon investment vehical etc
5-10-15 % typically.  Subject to 12-b1 fees or management fees.

---
If you on longer have a 401k, you should consider an IRA or Roth-IRA.  

Your indivudal circumstances, length til retirement, finacial goals,
amount of investment all figure into the equation.  However as a rule
of thumb..whole life insurance as an Investment vehical is rarely the
smart move.  Whole life insurance to cover insurance needs is fine.

Eric
former series 6, 7 and life & health agent

Thanks for your comment Eric. I would normally agree with you, but
wonder if the situation is different when you've had the whole life
policy for 20+ years, there is a substantial cash value, and the
increase in cash value from year to year, plus the increase in
dividends (the internal rate of return, based on the underlying
performance of the insurance company: Mass Mutual) means that in
return for paying the premium the guarenteed cash value plus dividend
increases more than two fold the premium amount...which is a heck of a
return on the "investment" of the premium...don't you think? How am I
looking at this incorrectly?

If you had the policy for 20 plus years...

The majority of commission on the premiums are normally taken out in
the first 5-10 years.  All depends upon the policy itself.  Mass
Mutual is a good company.

Would have to look at the actual terms of the policy.  Cash
Accumulation value, Cash Surrender value, Guarenteed payout, face
value, policy loan provisions, rates,  Current Age, expected cash
surrendor Date, etc..

If the ROR, as you state is almost 2 fold for the premium
investment..Fantastic, but look at your policy provisions about lump
sum "investments or pre-pay premiums".  May not have the same "terms".
 Also you have to compare the "opportunity cost" if you went another
route what would the return have been. Is this 2 fold ROR over the
Life of the Policy? Or is this just a current ROR based upon more of
the Premuim $$$ going toward investment rather than commission? What
is the ROR for the life of the Policy based upon amount paid into?

What type of policy is it?  Universal whole Life?  What is the face
value, how much is the premium?  What is date of inception?  Current
age?  etc

One would need to know this inforamtion in order to truely make an
informed "answer".  You seem to know what you are doing.

  I have always looked at a historical track record of say the Dow
Jones over a period of time.  If I invested X amount over X years what
would my actual Cash on Hand be at Y.  If you compare that same amount
using the Whole life policy, in terms of Y, the Whole life is always
significantly lower. ( High commissons, cash surrender value)

I may be mis-reading your question...is this your current situation?
or this this just a hypothical question if you had a policy.

The best thing to do is compare the numbers.. Amount out of pocket for
X years = Y at cash surrender value.   Or Amount out of pocket for X
years in a say T-bills and the value at point Y.  I would wager that
the T-bill or any other investment would be greater, because 95% of
the investment is compounded rather than 40-60% of the whole life
amount compounded ( at least for the first several years --which makes
all the difference over a period of time)

Sorry..too many more questions than Answers..but I think I gave you
something to consider.
Eric

opps forgot the most important part. The TAX burden.

Whole life if you take the CSV (cash surrender value-which is usually
less than the accumulation value) before your Death. It is fully
taxable as ordinary Income. Once policy is surrendered you assume the
WHOLE Lump sum -tax burden

401K- you can take out in chunks to to suppliment income, and minimize
tax burdon. While keeping the majority still under the tax deferred
Status. ( not to mention the benifit of a Roth-IRA)


So the end result of what you have for desposible income is Once again
Better with the 401k.  ( when comparing investment vehicals)

My thanks to those attempting to answer my question. While I
appreciate all the attempts to look at real returns based on total
commissions paid over the life of the policy, the real issue right now
is this: do I 1) Cash out the policy, 2) Use the annual dividend and a
portion of the cash value to fund the annual premium from funds
available within the policy itself and thereby erode the guarenteed
cash value and related dividend, 3) Pay the premium in whole or in
part -- thereby allowing the guarenteed cash value to continue its
annual accelerated growth?

Here are the facts about the policy: the $100,000 policy is 24 years
old, has $30,000 of cash value, increses in guarenteed cash value by
more than $2,000 annually (and is expanding), provides an annual
dividend of approximately $1,000 annually (not guarenteed like the
expansion of the guarenteed cash value), and has an annual premium of
$1,300. I am told while I would be taxed on that portion of the cash
value in excess of the total premiums I have paid (minus the dividends
on which I have paid taxes annually) into the policy when cashing it
in, whatever expansion in guarenteed cash value occurs from year to
year is not taxed annually -- only the annual dividend would be taxed
annually.

In essence, it appears to me, given that I already have this policy in
place, that the annual growth (and guarenteed expansion) in the
guarenteed cash value is substantially above the "investment" of the
annual premium which I would pay (thereby appearing to provide a
substantial "return" on the investment of premium), plus the policy
would generate an annual dividend, and the total cash value would grow
without annual taxes, that it makes sense to keep the policy in force
and continue to make the "premium investment".

What say you?

Stop paying into the policy.  At this point in the life of the policy
it will pay its own premiums for years to come without costing you
another dime (except the relatively small amount that you could
withdraw from it after taxes).
I highly suggest investing the money that you would have paid as
premium into an IRA.  If you already max out an IRA every year ($4000
per person starting in 2005 I believe) then look at annuities as they
are atleast tax differed.  There is an extremely good chance that your
investment will be worth more than the increase of value in your life
insurance policy would have been (they tend to average 1-3% as stated
by Blackbelt where-as an average mutual fund will tend to be on the
upside of 10%).
Also, should you die anytime when you are still covered by your policy
then you get the full amount of the death benefit no matter how much
cash value you currently have in the policy.  The only way you could
possibly lose money is if the policy runs out of money to fund itself
and you die between that time and the time it takes your investment to
reach the value of the death benefit (and for this to happen you would
have to be extremely unlucky... and even in this case your
beneficiaries get the current value of the investment which won't be a
small chunk of change).
Hope that's helpful.  I didn't actually put in the math here as I'd
like to do if I had more time, but I think the point was made ok.

Ask yourself, What is the "Goal" of this policy?  Is it holistically
as an insurance policy to protect the finacial interests of your
family in the event of your death?  Is it an Investment?  Is it a
combination of Both?

Now do you have other insurance? A term policy? or is this the only
policy of insurance?

Based upon how you answer those questions, then decisions are made.

Jack-of-few-trades comments are valid.  

Let look at numbers, You are paying a whopping $1300 for whole life a
year.  If you are still "insurable", $1300 a year would buy well over
$1,000,000 in term life insurance.  Something to consider if this is
solely for insurance purposes.

As an Investment:  $1300 invested a year,  Returns of 2000-1300=  $700

"""increses in guarenteed cash value by more than $2,000 annually (and
is expanding), provides an annual
dividend of approximately $1,000 annually (not guarenteed like the
expansion of the guarenteed cash value."""

I pay $1300 i make $700 a year and potential dividends of $1000.

If you follow the advice given by Jack, Et Al,  and let the cash value
pay for your premium, so you are not paying out of pocket any more,
wouldn't you still receive the 2K guarentee? and the 1K dividends? 
That being the case and if insurable you can increase the Life
Insrance via Term Life, and also still have money to invest in a tax
deferred IRA, Roth-IRA, annuity (YUCK), or tax free municiples.

You know your situation, so make the smart call based upon your
situation, goals, lenght til retirement, and overall full portfolio.

I have been told that so long as the policy is kept in force there
would be no tax on any cash that I take out of the policy. I'm looking
at the tax that I will have to pay on my 401K withdrawls and by
deferring it to a point latter in my life I'm still going to be paying
34%. If I invested the money into a insurance policy and draw off the
cash (while the policy is still in force) there's no tax. I understand
that the insurance policy is being funded with after tax $$, where the
401K is pretax.

I disagree with blackbeltdomains comments on whole life. Blackbelt you
mentioned that were a former investment advisor.  If you didn't
understand the power of whole life then maybe you were not educated on
the numerous benefits that wholelife insurance can provide as an
investment. You mentioned that life insurance does not accumulate fast
enough because of high commissions. I agree that wholelife commissions
are high, there is also expense in underwriting, and certain portions
of premiums that are set aside and invested to pay a permanent and
increasing death benefit whenever that may be. If Life insurance were
to gain cash value to quickly it would become a (MEC)modefied
endowment cotract and it would be taxable.The power in whole life
Insurance cash value is not just the cash value, it is also death
benfit and how it is used in ones Estate Plan that can make it one of
the most powerful investment vehicle you own.  Well lets get started
Does a 401 k have a death benefit No. Does it have a waiver of premium
disibility to continue vesting. No. Can You borrow monies if needed
for an emergency, Yes, but it is penalized and taxed and its limited.
Most whole life policies allow for access to monies any time there is
cash value, loans are not subject to tax or penalized, policy loans
are given buy the insurance company and they can charge an interest
rate like a bank, however in most cases interest is offset by
dividends that you are earning in the policy cash value. Note that
mutual companies may pay a lower dividend while policy loans are
outstanding this is typically known as direct recognition, as apposed
to a stock held company. Can a 401 offset estate taxes, No. Life
insurance is a tax deferred vehicle but never taxed as long as the
life policy is inforce Death benefits are are paid tax free.. Unless
for example you were using an executive bonus plan through a business
and tax deducting premiums, Then premiums would be taxed upon death
but not the additional death benefit. Premiums also do not have to be
payed for the life of the policy, excess dividends can also pay
premiums in an estblished life policy so at some point depending on
health of the insured it can fund itself. A whole life policy gives us
the freedom to spend down our estate with out disinheriting the
family. If a whole life policy like the company I work for has
averaged around 6-7% with lower risk. I might have to take risk to get
around 11-12% in the market minus taxes/management fees. etc. Another
benefit is that it is not subject to liablity, or creditors.Obviously
there are numerous companies to buy wholelife from. I reccomend that
the person buying it should research the companies they buy from and
their policy provisions. For example Mutual life companies that may
apply direct reccognition to policy loans which means lower dividends
when cash is borrowed from the policy, as to stock held companies do
not have direct reccognition. So the cost or interest charged by the
insurance company to use your own money through a policy loan will be
offset buy dividends earned. This also depends on the companies policy
loan provisions. Just Note that Mutual companies have some different
rules or procedures than stock held companies it is up to the client
to understand the different benefits or rules that apply to these
companies. So when you comment that whole life is not a good
investment vehicle, Think about Disney world. Walt Disney took cash
value from whole life to start his fantasy land we know as Walt Disney
World. Hmmm! For people to just think that whole life is just an
expensive life policy or just for the death benefit, get out of the
box you are living in.

Holistic,

I worked in personal finance for a while and I saw alot of whole life
insurance policies.  And I would always do the math for my clients
showing them that had they taken a term policy and invested the
differend (even at 9% which is a below the market average and not at
all unrealistic... that's the example I used) they would have much
more "cash value" and have the same insurance coverage.
I'm quite curious about the 6%-7% you claim your company makes (I
assume you mean in the cash value account).  Whenever I did the math
for the policies I looked at (many policies), for the first couple
years they were lucky to get 1% then after that I never once saw a
policy making more than 3% on average.  The investment portion of the
policy was... well... junk every time.  Have you actually done the
math for the policies you're working with?  Sometimes the policies I
saw said they provided much more interest than they did.  I never did
figure out how they legally claimed the higher returns without ever
performing at that level.
To say I'm a skeptic of any whole life policy would definately not be
an overstatement.  I've seen far too many of them and they're never a
good deal as far as an "investment".
I will however agree that as far as estate planning they can have
their purposes, but I can only see that for the wealthy who will be
passing on millions of dollars (a very small minority of the
population).  Also, there is quite a fight going on in congress now
about killing off the death tax.  I think there's a very good chance
it will be permanently gone or greatly reduced in the near future.

I totally agree with  holisticplanner-ga.  I am working on the
insurance industry now and I know that wholelife insurance is a great
investment.  holisticplanner-ga was right when he was saying that it
gives you 6-7% interest rate... and that is just because the interest
rates right now are low... just wait and see. Maybe you can get
investments with "better interest rate", but i am not talking about
JUST interest rate. In fact, I am not concerned about Interest Rate no
more... but in the possiblities that a Whole life policy can give you
(if you buy one on a mutual company with a good reputation)  ... And
just to show how much I trust on the wholelife insurance,... only This
year i bought 2 for myself. You can become your own banker and do
infinite stuff with it.... its not just about interest... its about
ALL the things you can do....its a way of living.... its not just a
death benefit... its the life benefit!!  When i am thinking on an
investment... i dont see just the rate of return... I look at many
factors like... Security, liquidity, Tax benefits, rate of return,
etc... There is too much things to say here and I dont have the time
to start writing a book on it... but if you are really interested, let
me know.

Arshus,

If you wouldn't mind, I'd love to see the numbers that led you to the
conclusion that whole life policies are giving 6-7% interest.  I've
done the math on many many policies and find the numbers to be far
lower.... dispite the insurance company claiming the higher numbers.

Blackbeltdomain

In response to your "Oppurtunity Cost" statement above. The next time
you do a Whole Life Insurance analysis against the S&P. I want you to
add to the Policy's projected cash value at 20 years, not only what
the cost of term insurance would be instead, but the "Lost Oppurtunity
Cost" of 8% compounded over that 20 year period. That is the real cost
of money. Whne we do those "Real" comparisons, I think you are going
to be shocked.