Ask Jean: Too Much Life Insurance?
My husband and I are 44. We have several universal and whole life policies and are currently still paying monthly or quarterly premiums. We both have $10,000 policies we bought when were about 18. We also bought a $200,000 policy when we got married 20 years ago and when our daughter came into the picture four years ago we bought term policies ($500,000 each) with a 20 year term. My husband wants to cash out the universal and whole life policies (cash is approximately $10,000 +) to put into either our ROTH or 529 for our daughter…keeping of course the 20 year term policies. We also both have policies with our employers that are worth 1x our yearly salaries. Thoughts?
– Darlene
Darlene, I agree that this money could be working harder for you elsewhere, particularly what you’ve invested in the whole life policies. I generally advise term policies as the best life insurance option for most people – they are inexpensive and provide adequate coverage. Yes, whole life policies have an investment component, but you’re better off investing elsewhere because they carry high fees and commissions.
Depending on your life insurance needs – which you can find by using a calculator like the one at insure.com – you may be covered with those term policies and the insurance offered by your employer. There is no sense canceling either of those – group life insurance is generally cheap, and doesn’t carry a cash value, and the term policies are likely a good option for you. As for the whole life policies, are you still paying premiums on the $10,000 policies you purchased 25 years ago? If so, I would dig deeper into that, because it seems strange to me. If they are paid up, I would hang on to them.
Then take a very close look at the $200,000 policy – the terms, including the surrender fee, should be outlined on the documents you originally signed and you should be able calculate how much you would actually recoup there. Generally, cashing out a whole life policy isn’t going to yield much, particularly if you do it early, because it takes time to build cash value and if a surrender fee applies, that can eat a lot of your takeaway. But you’ve held this policy for a while so you may walk away with something worthwhile, and if you do, that money will work harder for you invested elsewhere, as your husband says.
