Whole life policy: Good or bad decision?

Last summer, my financial advisor talked me into a whole life policy with an annual premium of $9K. Two weeks after signing on the dotted line, Lehman crashed and the value of our country and planet spiraled. I have since been questioning my ability to keep up the payments, whether it’s the right product for me, the security of Mass Mutual, etc. I still don’t have a clue, but I have an odd source of perspective in my even odder personal history…

I’m thinking that it was a much better decision now than when I made it for a number of reasons, the first being that it has a guaranteed minimum appreciation. The main reason I went ahead with it despite not entirely understanding the nuances of how it works is that it’s nearly identical to a very popular mortgage-attached product in the UK called a “with profits endowment”, with which I have significant familiarity. In the UK, instead of having a traditional repayment mortgage, you could opt for an interest-only deal and the portion that would have gone towards the principle is invested in this product. However your ability to repay the mortgage in full at the end of the term hinged on whether that endowment achieved it’s projected value, not its guaranteed value. Bonuses to the policy’s value are locked in annually (again a feature of both the US and the UK products) and therefore protected from future market fluctuations. The worst that can happen is that the policy only increases by the guaranteed minimum. It seems that the UK product was heavily marketed as a mortgage alternative in the 80s and early 90s (possibly the 70s too, but I honestly don’t know), and there were all these delicious news stories  in the late 1990s about people who’d chosen the 15-year term option getting massive windfalls upon cashing in the policy. Think about where the Dow was in 1982 (800) v. 1997 (9000) and you’ll understand what I mean. No, people didn’t increase their wealth by a factor of 10, but it was extremely common to hear of people whose policy value exceeded the minimum value by 100% and their mortgage needs by 30-50% when the time came to cash it in. Now do the math based on a $100,000 mortgage.

Which brings me to my second reason for liking this Whole Life decision:  the economy is in the toilet. Anything, ANYTHING that Mass Mutual invests in was already down significantly when my money went in, and dropped further. I think that over the next few years, those locked-in policy bonuses will be rather sweet, since there’s so much room for rebound – which is a wonderful thing this early in the life of such an instrument…right? Or am I missing something?

The major hurdle for me is the monstrous premium. I based my level of savings/investment on my income not dropping more than 10% from its 2007 to mid-2008 levels, and it has dropped more like 25%. The premium will be due sometime in September, and right now I’ve got $5K out of the full $9K set aside. I thought I had two ways to make up the slack this year, but neither has come through – one being my brother’s huge bonus upon the sale of the company he works for (which fell through), the other being Bridezilla repaying a $6K car loan. She doesn’t start her first job as a nurse until August, is getting married in September…yeah, that’s not going to start coming through in time.

So here are my options for handling an anticipated shortfall of about $2500:

  1. Pay the full annual premium, making up the amount I’m short from my savings account (emergency fund), and cross my fingers that this is the only year I’ll have to do such a thing.
  2. Opt to pay in installments. The downside of this is that it’ll cost about 2-5% more because I’ll lose the little discount I get for paying up-front. The less frequent the installments, the smaller the extra amount. I could conceivably choose semi-annually with the next chunk due in March, but I really don’t like the proximity to tax time and IRA contribution deadlines.
  3. Pay what I can, call that the new premium, have the policy value adjusted accordingly. I hate this one because I get no benefit from the difference between what I paid last year and what I pay this year; the money just goes poof.
  4. Do 15 “naughty” massages in the next 10 weeks. Okay, that’s an absolute 100% joke – I just put that in there because this post needed something to wake you all up. And to shock any relatives who ignored my instructions from two posts ago to never ever visit my blog again. Heh. Serves you all right for ignoring my wishes.

6 Responses

  1. Holy smokes that is a lot for life insurance. I was looking at policies a few weeks ago and it was a small fraction of that (term not whole of course) for $1 million in coverage. Is there a reason you carry a big policy with no dependents? Is it because whole life is also like an investment? I hope business picks up soon for you 😦

  2. Oh, yeah, term and whole are completely different animals. I see whole life as an investment product, but the IRS treats it as an insurance product. There are tax and liability advantages, it actually has resale value, and I’m really looking to it as a source of retirement income. If I die any time soon, Mom gets a bit over half a mil.

    As for business, I’m SHOCKED I’ve been able to squirrel away $5K in the past 10 months. It’s wayyy below my usual capabilities, but I honestly thought I’d be lucky to set aside $1K.

  3. I’ve been sheepishly following Suze Orman’s mantra that whole life ins. is baaaaad. But I can see how it has its advantages. Not knowing how much you have in your EF, it’s hard to say what the best option is. But it would appear that it’s a toss-up between door #1 and door #2. I echo Miss M’s comment that I hope business picks up for you soon!

  4. hey!
    lol the $4 CVS.com EB was from them because they kept $4 of my coupons when I went there last? When I e-mailed them, they offered me $4 in ECB that would print out automatically from those CRT machines. The thing is, they kept $8 worth of my coupons and only gave me four!

    i thought I mentioned it in a previous posting – sorry!!

    I like your monthly budget idea by the way. The amount you set up for restaurants is sooo high though! There are so many free options these days or discounted. Even at Arby’s, buy a soft drink and you get a free Roastburger. haha Restaurant.com has deals pretty often where you can get a $25 gift card to a restaurant thats listed for only $3.

    or you can always just get a boy to buy you dinner. =)

    • I know all about the fast food deals and restaurant.com, but I rarely “qualify”. For one thing, I eat alone most of the time, so the restaurant ones are out because of all their conditions. For another, I live in NYC where a lot of fast food chains just don’t exist – no Arby’s, Sonic, Denny’s, Peet’s, and all of the smaller ones like Tim Horton’s and Long John Silver.

      And boys…ugh, it’s so not worth dealing with their expectations.

  5. shtinkykat – I think Suze Orman’s advice mainly applies if you’re “young, fabulous, and broke” … poor youngun’s hardly can afford their everyday living expenses, much less afford the cost of life insurance (term OR whole). Life insurance is usually an unnecessary expense for most YFBs as most do not have kids. For those that do have children, the goal is to provide enough protection for their kids in the case of death but while spending the least amount of money on a premium as possible. Term life is the better option for YFBs, if they even need it at all… but whole life might be a better option in a case where you have maxed your IRA and/or 401K options and are looking for alternatives to investment. There is no set “rule” … just depends on your personal goals and financial situation.

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