Is Life Insurance a Good Investment?

 Reader Question:  I am 52 years old and would like to retire soon and we have our home and all property paid for with $1.5 million in savings. We have cash value life insurance policies which are requiring payments every year. Should we keep them as an investment or cash them out?

Answer:  First, congratulations!  $1.5 million of net worth places you in the top 1% of wealth accumulators in America.  It sounds like you don’t need the life insurance for its traditional ‘protection’ value so the question is, “Is it a good investment?”  If the insured person is in much poorer health now than he/she was when policy was initiated, it’s probably a good investment.  If that person’s health is unchanged, it may still be a reasonable investment and there is a way to calculate this.  Your agent can run a report that shows the projected rate of return to the death benefit on a year-by-year basis.  Assuming the insured lives into his/her eighties or nineties; this return may be in the 3% to 5% range…a conservative return similar to historical returns for bonds, CDs and money market accounts.  If you’ve owned the policy for a long time, say thirty or more years, it may be at a point that no more premiums are required.  Again, your agent can provide you this answer. 

Reader Question:  I purchased a retirement variable annuity and my agent then left the company.  The new agent who was assigned to my account will talk with me but is unwilling to make any suggestions unless I pry an answer from him.  I realize that he didn’t receive any commissions but I feel left out.  I’m age 65 and plan to retire within twelve months.  Between my other investments, 401k and Social Security, I’ll have enough income so that I won’t need money from this annuity.  What do you suggest I do about my annuity?  T.H.

Answer:  Typically when an agent leaves a company all of the policies he sold are divided up among other agents who are responsible for servicing the business.  Often these are newer, less experienced agents, who, as you pointed out, receive no commissions on your business.  In a follow up email you also indicated that there is a substantial surrender charge if you were to terminate the contract.  Here are two things you could do: 

1.      You could contact the company and request transfer of your contract to another, experienced agent.  This may or may not help the communications issue. 

2.      With a high surrender charge, it is typically best to wait until the surrender period ends and at that time consider rolling the annuity to a regular IRA at a discount brokerage firm such as Vanguard or Charles Schwab. You will no longer have surrender charges and you will minimize your ongoing expenses.

Reader Question:  I am over 70½ years old and have been taking my IRA Required Minimum Distributions (RMDs) and reinvesting it.  The thought occurred to me that I may be able to put that distribution into a ROTH IRA.  If I do not need the cash, can I transfer the annual RMD, after withholding the taxable amount, into a ROTH IRA?  C.B.

Answer:  Technically the answer is ‘no’.  Each year you must calculate your RMD based on the total value of all retirement account balances as of December 31st of the prior year.  What you can do is convert part or all of your retirement accounts to a Roth IRA any time you wish.  Once converted you will no longer be required to take RMDs on your new Roth account and any distributions you choose to take from your Roth account will be tax free (to you or to heirs).  If you wish to convert to a Roth, be sure you can pay the taxes from sources other than retirement funds.