[edited now with screenshots of life insurance illustrations and some clarifying text]
Dear all! I’ve been reading for a decade (and occasionally posting here for 6+ years) and very thankful to the community. I’m well-versed now on investments, portfolio theory, etc., but only recently doing a deep dive about life insurance. I am in the following situation that I believe is on the unusual side, but I’d like the BH community to weigh in, especially if you were in a situation like mine:
In short, I’m a 45yo male. Back in 1988, when I was just 8, my late father bought a life insurance policy in *my* name (i.e. as named insured) with Prudential. It was called Pruco Variable Appreciable Life. When he died in 2013, ownership transferred to my mom, and I helped her pick out lower-cost investments and allocated in a Boglehead(ish) way within Pru but kept it going. In 2022, she transferred ownership to me and I left everything as is. Note that none of us has paid premiums into it after 2010—it deducts premiums out of the contract value (more on this in a bit).
I’m writing on this forum now because two months back two new Prudential agents contacted me to inform me our family's decades-long Pru agent (whom I was not in touch with for good reason) had retired. The first agent ("Jesse") was pushy about my applying for new life insurance because the current product is outdated (later learned it was discontinued in 1992), and it rates me in the "standard" health class, meaning not the most advantageous health class. This agent promptly disappeared and all subsequent dealings (Zooms, phone calls) have been with a very decent agent ("Matt") who is not pushy. "Matt" even wore his CFP hat (though he's not my fiduciary) and said all of the following options are valid, including surrendering the policy and directly investing the proceeds. That being said, I underwent the new life insurance application and health screening anyway (no cost to me) and was re-rated for the highest health category (“preferred best, non-smoker.” in what would be a new line of Prudential products.
The contract value of the current (old, grandfathered) policy is around $116,000, and the cash-out value is the same (no surrender charge). The death benefit is around $330,000. Noteworthy: my late Dad only paid a total of $6,700 in premiums into it, so any surrender/cash-out would mean taxable income all taxed as ordinary (not CG). But, yes, a good problem to have.
Note that in the many discussions I’ve had with the Pru agent, any number of paths have opened up, and I’ll lay out the most salient ones in logical order. I’m leaning toward Option 5 (i.e. cashing out this policy) as I am not married, don’t have kids, and don’t have dependents, and thus feel I should not even *have* life insurance, and definitely not universal/whole life. (One caveat, later).
Option 1: Do Nothing (and let the policy continue, paying for itself out of the contract value indefinitely). I got an “illustration” for this, and while premiums and cost of insurance is low now, they’re increasing and will skyrocket in two decades. This illustration shows the premium but not the "cost of insurance," which you can calculate in seeing the discrepancies between each row.
![Image]()
Option 2: Transfer to new life insurance policy. This is what the Pru agents originally wanted me to do): do a 1035 transfer to close out the old policy and take out a new policy with different pricing structure and potential benefits, including higher accumulation of value in the longest term and also the ability to take a loan against the policy at a very low interest rate locked forever (1%)! However, there would be a $6,400 cost just to do the 1035 transfer (this was unclear at first). There is also a 10-year-window of surrender fees that gradually taper off. The only reason this would be beneficial is if I want to stay insured but want a higher contract value 10 years from now (with death benefit capped at $420,000). Alternatively they have a version of this with a multi-million dollar death benefit but with higher fees (they wanted to steer me into this, initially). But here is the new one *with* premium and cost of insurance separated out. It doesn't seem like that great a deal to me.
![Image]()
Option 3: Transfer (1035 exchange) to a Variable Annuity to avoid a taxable event now. They recommended their Flexguard line of products, about which I read the Bogleheads discussion avoiding against it. My agent insisted that this has no fees - not even an expense ratio - that it mimics/models the handful of indices it has. So if I’m in an S&P 500 fund and the S&P 500 goes up exactly 27.333%, my account value will go up exactly that much. The catch is a 6-year hold on keeping the Annuity, after which it could be rolled over into a Traditional IRA. (I helped my mother do this before for my late father’s Pru annuities—we rolled them over to a Vanguard Traditional IRA).
Option 4: ?? Sell my life insurance to a 3rd party/settlement company? I did not discuss this with my Prudential agent nor do I feel I understand this option at all, but it comes up in web searches.
Option 5: Surrender the entire life insurance policy (i.e. cash out) and invest the proceeds in a taxable brokerage (e.g. Vanguard) for max accumulation of assets instead of trying to build wealth inside a hybrid insurance-assets-type structure. Of course, this results in a huge tax hit, but this is my current line of thinking, specifically:
- cashing out in fractional pieces over the next 2-3 years, which Prudential modeled for me and showed I could do while keeping the policy “in force” for a bit before it goes below a certain value
(2024 and 2025 are good years for me to do so within the low-taxation TCJA scheme before it legally sunsets)
- I could use some of the cash for living expenses while then maxing out my workplace governmental 457b (so indirectly this could be a transfer back to tax-sheltered)
For context, since this is Bogleheads after all: I currently have a salary of $84,000 as a schoolteacher, but this is not secure as I may change careers again or go into consulting for a bit. I have no kids and am not married, but my domestic partner is currently in grad school full-time and lacks income, at least this academic year, so this does give me pause. More context:
Net worth: $500,000 liquid-ish (incl $115k of Prudential contract value)
$460,000 non-liquid (mostly home equity plus collectibles, etc.)
Total $960,000 total assets
Current jurisdiction of home and residence: DC
It also bears mentioning that I hope to retire in my early/mid 50s if total net worth approaches $1.2mil. If I married, all the assumptions would change.
In sum, right now I’m wondering if my Option 5 makes sense? Are there reasons to keep the life insurance policy going in its original form because I’m somehow grandfathered into something “too good,” or because the exponential asset growth of $6700 (across the 90s and early oughts) into $115k tells us something about how low fees this VUL policy is?
Dear all! I’ve been reading for a decade (and occasionally posting here for 6+ years) and very thankful to the community. I’m well-versed now on investments, portfolio theory, etc., but only recently doing a deep dive about life insurance. I am in the following situation that I believe is on the unusual side, but I’d like the BH community to weigh in, especially if you were in a situation like mine:
In short, I’m a 45yo male. Back in 1988, when I was just 8, my late father bought a life insurance policy in *my* name (i.e. as named insured) with Prudential. It was called Pruco Variable Appreciable Life. When he died in 2013, ownership transferred to my mom, and I helped her pick out lower-cost investments and allocated in a Boglehead(ish) way within Pru but kept it going. In 2022, she transferred ownership to me and I left everything as is. Note that none of us has paid premiums into it after 2010—it deducts premiums out of the contract value (more on this in a bit).
I’m writing on this forum now because two months back two new Prudential agents contacted me to inform me our family's decades-long Pru agent (whom I was not in touch with for good reason) had retired. The first agent ("Jesse") was pushy about my applying for new life insurance because the current product is outdated (later learned it was discontinued in 1992), and it rates me in the "standard" health class, meaning not the most advantageous health class. This agent promptly disappeared and all subsequent dealings (Zooms, phone calls) have been with a very decent agent ("Matt") who is not pushy. "Matt" even wore his CFP hat (though he's not my fiduciary) and said all of the following options are valid, including surrendering the policy and directly investing the proceeds. That being said, I underwent the new life insurance application and health screening anyway (no cost to me) and was re-rated for the highest health category (“preferred best, non-smoker.” in what would be a new line of Prudential products.
The contract value of the current (old, grandfathered) policy is around $116,000, and the cash-out value is the same (no surrender charge). The death benefit is around $330,000. Noteworthy: my late Dad only paid a total of $6,700 in premiums into it, so any surrender/cash-out would mean taxable income all taxed as ordinary (not CG). But, yes, a good problem to have.
Note that in the many discussions I’ve had with the Pru agent, any number of paths have opened up, and I’ll lay out the most salient ones in logical order. I’m leaning toward Option 5 (i.e. cashing out this policy) as I am not married, don’t have kids, and don’t have dependents, and thus feel I should not even *have* life insurance, and definitely not universal/whole life. (One caveat, later).
Option 1: Do Nothing (and let the policy continue, paying for itself out of the contract value indefinitely). I got an “illustration” for this, and while premiums and cost of insurance is low now, they’re increasing and will skyrocket in two decades. This illustration shows the premium but not the "cost of insurance," which you can calculate in seeing the discrepancies between each row.
Option 2: Transfer to new life insurance policy. This is what the Pru agents originally wanted me to do): do a 1035 transfer to close out the old policy and take out a new policy with different pricing structure and potential benefits, including higher accumulation of value in the longest term and also the ability to take a loan against the policy at a very low interest rate locked forever (1%)! However, there would be a $6,400 cost just to do the 1035 transfer (this was unclear at first). There is also a 10-year-window of surrender fees that gradually taper off. The only reason this would be beneficial is if I want to stay insured but want a higher contract value 10 years from now (with death benefit capped at $420,000). Alternatively they have a version of this with a multi-million dollar death benefit but with higher fees (they wanted to steer me into this, initially). But here is the new one *with* premium and cost of insurance separated out. It doesn't seem like that great a deal to me.
Option 3: Transfer (1035 exchange) to a Variable Annuity to avoid a taxable event now. They recommended their Flexguard line of products, about which I read the Bogleheads discussion avoiding against it. My agent insisted that this has no fees - not even an expense ratio - that it mimics/models the handful of indices it has. So if I’m in an S&P 500 fund and the S&P 500 goes up exactly 27.333%, my account value will go up exactly that much. The catch is a 6-year hold on keeping the Annuity, after which it could be rolled over into a Traditional IRA. (I helped my mother do this before for my late father’s Pru annuities—we rolled them over to a Vanguard Traditional IRA).
Option 4: ?? Sell my life insurance to a 3rd party/settlement company? I did not discuss this with my Prudential agent nor do I feel I understand this option at all, but it comes up in web searches.
Option 5: Surrender the entire life insurance policy (i.e. cash out) and invest the proceeds in a taxable brokerage (e.g. Vanguard) for max accumulation of assets instead of trying to build wealth inside a hybrid insurance-assets-type structure. Of course, this results in a huge tax hit, but this is my current line of thinking, specifically:
- cashing out in fractional pieces over the next 2-3 years, which Prudential modeled for me and showed I could do while keeping the policy “in force” for a bit before it goes below a certain value
(2024 and 2025 are good years for me to do so within the low-taxation TCJA scheme before it legally sunsets)
- I could use some of the cash for living expenses while then maxing out my workplace governmental 457b (so indirectly this could be a transfer back to tax-sheltered)
For context, since this is Bogleheads after all: I currently have a salary of $84,000 as a schoolteacher, but this is not secure as I may change careers again or go into consulting for a bit. I have no kids and am not married, but my domestic partner is currently in grad school full-time and lacks income, at least this academic year, so this does give me pause. More context:
Net worth: $500,000 liquid-ish (incl $115k of Prudential contract value)
$460,000 non-liquid (mostly home equity plus collectibles, etc.)
Total $960,000 total assets
Current jurisdiction of home and residence: DC
It also bears mentioning that I hope to retire in my early/mid 50s if total net worth approaches $1.2mil. If I married, all the assumptions would change.
In sum, right now I’m wondering if my Option 5 makes sense? Are there reasons to keep the life insurance policy going in its original form because I’m somehow grandfathered into something “too good,” or because the exponential asset growth of $6700 (across the 90s and early oughts) into $115k tells us something about how low fees this VUL policy is?
Statistics: Posted by NeoNeo — Tue Nov 05, 2024 12:59 am — Replies 3 — Views 245