Back when Shane and I were in college, Shane had an internship with a company that sold life insurance and various investments. This internship was so early, he wasn’t even admitted to the business school yet. We were both 19.
His supervisor talked up the policies to both of us, and it made sense. We could pay a small amount per month for whole life insurance and we could cash it out when we were older. It was “forced savings” and it would possibly grow up to 6%. What a deal!
Since we were young, our premiums would be low. Etc. etc.
It sounded good to us and the monthly premiums sure felt affordable (mine was $25ish/month for a $35,000 policy) so we went ahead with it. I should note that I didn’t discuss this with my parents, as I didn’t want to drag them down with the thought of me buying life insurance. Um, that was dumb. I should have talked with them about it. (Hi, Mom!)
We paid our premiums and forgot about it. This was during a time when neither of us really understood personal finance, investing, savings, debt or any of that.
Shortly after we got married, Shane’s old supervisor contacted him and sold him on a huge whole life insurance policy. He reasoned with him that since he was married, he needed to have this policy to provide for his family. Etc. He’s an excellent salesman.
Shane talked to me about it, and I said sure why not?
And then the bill came. It was something like $250/month. We could not afford it. For one thing, it was roughly 10% of our monthly take-home pay. We had credit card and car debt at that time, too. This “investment” was putting a huge strain on our budget, that much we knew.
I called to speak with the salesman to cancel it myself. He pushed back hard. I pushed too. The salesman had to return a hefty commission.
Big sad for the insurance salesman.
That policy went away and we were relieved, but we kept our original, much smaller whole life policies because they had been in effect for a longer time and they were a much smaller monthly amount. We thought we had paid this much into it already, if we cash it out we’ll be money way behind.
So we paid the annual premiums some more.
Sometime around then, we also picked up term life insurance for each of us. Shane had policies through work for us, but we also added private policies because we figured he wouldn’t stay with his company for a few decades (and we were right about that). The premiums for the term policies were lower than our whole life policies, and the death benefit was way higher.
Term policies only pay out if the policy holder dies during the term. Whole life policies have a death benefit, but they also accumulate cash value so you can cash it out if you want, without being 6-feet-under.
We are now cashing out our two whole life policies.
Originally, we thought maybe we could use the cash value a few years before retirement age since we could access the “investment” at any time. We viewed it as diversifying our investments, since we were also putting money away in the 401k and IRAs.
We were not maxing out our retirement accounts, and we were not contributing much to our kid’s college expenses, or any other investments. This diversification was not needed.
By this point, we had already sunk quite a bit of money in premiums. My policy had been paid roughly $2,100 already, and Shane’s a little more than that amount. YUCK. The cash value of it right now is *maybe* a thousand dollars but I’m waiting to find out the exact amount.
A total loss on the “investment” so far, but we are not willing to continue throwing good money after bad, in the hopes that if we held it long enough it will start being worthwhile. We were receiving no tax benefits on this investment, whereas we are getting tax benefits on our retirement and college savings.
So, time to dump it. We’ve processed the forms and we’re just waiting for our checks to arrive in the mail. We are treating it as a windfall to finish off our emergency fund and then also start saving up for our house to-purchase items if there’s anything left over for that.
I am excited for this money to come back to us, because while we try to be good with our money, I know we would have frittered away some of it over the years somewhere. So in a sense, the forced savings aspect was helpful to us now.
I do want to leave a few takeaway points that I’ve learned from our experience:
– Insurance salesman are good at what they do. They’re skilled at talking up their product and making it sound good. If they are working on commission (as ours was), they possibly are not looking out for your best interests.
– When the salesman sold Shane the big policy, he did not find out if we had debt (we sure did) or if we could even afford the premium (we could not).
– If we had taken the same amount of money and put it in an IRA, we’d likely be way better off at this point. If we had taken the premium and simply put it in a zero-interest savings account, we’d still be money way ahead.
– The past is the past — can’t get those premiums back. But we can get out of a bad deal now and make it better for the future. That’s $700 more a year in premiums that we will now have in our pocket to do what we want with, and the cash value windfall right now will definitely help.
– Term life insurance is cheap! I don’t know why the salesman didn’t try to get us to buy term policies. We probably would have kept them. We’re definitely keeping our term policies until it expires or we do.
Live and learn.