Why Should I Cash In My Whole Life Insurance Policy?
There are very few reasons you should continue making payments towards whole life insurance. The principle reason for owning whole life insurance is to ease the burden on someone who would suffer financially by your death. Fewer consumers are focusing on that reason alone. You may have used your whole life insurance to diversify your investment portfolio, in which case you are essentially treating it like an asset. As an asset whole life has some benefits, but many more flaws. This means that the money you would earn as a lump-sum payment could go into a wide array of other investment vehicles that would have better annualized returns.
First, you are probably paying monthly premiums. These premiums drastically increase the length of your break-even period. In addition, the front-loaded nature of the investment into the policy makes other investments much more attractive. Very few insurance policies actually pay dividends. Those policies that do pay dividends typically have an annualized return of fewer than 2%. Many certificates of deposit pay out between 2-3% of the principle, if you don’t consider taxes. These are some of the most safe investment vehicles with the exception of treasury bills. Also, larger principle investments yield much higher rates over time.
Even if a dividend were included, it would not cover the cost of the monthly premium, and would still come out to a lower return than the CD. Other investments yield dividends, as well. For example mutual funds are a great way to grow money without much risk. Cashing in your whole life insurance could give you a nice amount to seed an initial mutual fund investment.
Mutual fund owners are required to pay capital gains taxes, but these are at a much lower rate than income taxes. Even though insurance policy holders can avoid tax payments, they still require monthly premium payments. These variables cancel each other out, so the only point of comparison remains in the rates of return. Most mutual funds (specializing in low volatility markets) have rates of return in excess of 5%. Insurance policies rarely beat 2%. So, for incurring a little bit more risk you would stand to make 3% more on the money you invest.
There are a lot of different options. If you are seeking tax free contributions, you can cash in your whole life insurance policy to start a Roth IRA account. These should be an integral portion of your investment portfolio. You can contribute up to 5,000 dollars annually. Though the insurance policy is tax-deferred as well, the cumulative nature of growth is a great retirement fund seed. As a pure investment strategy, the whole life insurance policy yields far fewer benefits that a Roth IRA.
These are just a few of the many reasons you should consider cashing in your policy. The return rate of a whole insurance policy barely keeps pace with insurance at current rates. Also, if you are looking to reduce outstanding debt, then the cash would reduce further damage to your credit rating.