# Ditching Permanent Life Insurance - What are my options?



## PillowRage (Sep 5, 2012)

I'm 26 years old, and last November I was sold a $50,000 permanent life insurance policy from Great West Life through my 'financial advisor', in addition to a $250,000 term policy.

Since then, I've been able to do a LOT more reading on personal finance/investing, and have been realizing that my advisor's best interests are not aligned with my own, and have realized that this permanent life insurance policy is not all that my advisor had claimed it to be. I was sold the insurance as being an investment tool, and foolishly agreed to it without having done any research (my advisor is a family friend that I actually grew up with, and I was far too trustworthy).

Face amount: $50,000
Premium: $78.71 monthly

I looked at the 'table of values' and it looks like I'm screwed if I want to cancel this insurance policy so that I can invest that $78 monthly somewhere else:
Here's the first few years of the table:

End of Policy YearCash Surrender ValueReduced InsuranceExtended Term Insurance1$0$002$0$003$0$004$0$005$0$006$0$007$0$008$150$5001yr 53 days9$1650$495010yr 221 daysetcetcetcetc

What are my options here? I see there's a section in my policy on non-forfeiture benefits, which appears to have two options: A) Reduced paid-up life insurance or B) Extended term insurance. Based on the table though, it looks like I wouldn't receive anything from either of those options until at least 8 years since the start of the policy, and by that time I will have paid in $7556.16 :upset:

Any suggestions would be appreciated. Do I lose the $700+ for the past year and chalk it up to stupidity and gullibility? Keep the policy? I'm trying to figure out my options and learn the facts before confronting my advisor about this and moving my investments to self-managed index funds.

Thanks,
PillowRage:mad-new:


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## brocko (Apr 20, 2009)

Actually as a former insurance industry guy but not a life guy I think you made a good purchase. Perhaps it could have been explained to you not to look for anything for the first number of years with respect to cash value. The insurer has to cover the policy expenses and acquisition costs and these take 5-6 years. A permanent policy is exactly that which means down the road if you were ever to become uninsurable for whatever reason you still have the coverage. What do the cash values look like in 25 years? Much better than what you are showing for the first 9 years right? There are arguments pro and con galore on term versus permanent but that is another discussion. You bought and frankly people are sold life insurance moreso than the individual waking up one morning saying think I will go and buy some insurance today. I wouldn't blame your friend and I wouldn't broadly condemn insaurance agents as the vast majority follow to the tee the codes of conduct/ethics of the industry and of the companies they represent. Think of it this way at age 85 or 90 and your on the golf course the permanent would likely be the only insurance you would have as term at those ages would be costly. It was a good mix of product from a very reputable and strong insurer in my opinion but in the end its your call on any action you plan to take.


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## Rusty O'Toole (Feb 1, 2012)

The best deal is to buy term insurance and invest the rest. There are lists of insurance companies by rating agencies. Pick one with a top rating and low rates, it will probably be a mutual.

Insurance is quite a racket. When people buy a "whole life" policy they don't realize how they are getting ripped off. Look at it this way. You have an insurance policy that will pay off if you die, if you don't die you get a pension when you are 65 right? Well that is a "heads I win, tails you lose" investment.

You are paying for an insurance plan and a pension plan but you can only collect one. When your 65th birthday rolls around you will either be alive or dead. In one case you get the insurance payout and the pension money is gravy for the company. In the other case you get the pension but they get the insurance money for nothing.

Better buy cheap term insurance and invest the difference. If you die your heirs get to keep both. If you don't you will have your investment plan which should do better than the insurance company's payout anyway.

When investing go by math not by feelings. If the policy you bought is a bad deal, get out. Take your loss and get out, it will be cheap for a lesson of that kind. If the worst financial mistake you ever make only costs you $700 you are remarkably lucky.


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## MoneyGal (Apr 24, 2009)

So...at 26 years of age, do you need insurance? Who would be on the hook financially if you were to die?


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## Rusty O'Toole (Feb 1, 2012)

MoneyGal said:


> So...at 26 years of age, do you need insurance? Who would be on the hook financially if you were to die?


Another good point. Insurance is always a bad deal, financially and statistically. They must charge more than the risk is worth, to stay in business. So buyers of insurance pay out more than they get back. The only time it makes sense to buy insurance is for protection from a risk you can't afford to take. If you have a young family that would be left destitute without you, buy insurance. Or if you can't afford to laugh it off if your house burns down, buy insurance. If you can't afford a major wreck buy car insurance.

I have car insurance but not collision. Years ago I figured out that my collision insurance cost 1/3 of the value of my car (I owned a cheap car). You know what? I don't write off a car every 3 years. I haven't written off a car in 30 years. In that period of time I have saved thousands by not having collision. And any damage to my car that has occurred, would have been under the deductible anyway.


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## PharmD (Dec 21, 2011)

MoneyGal,

I just wanted to see if you think that permanent insurance (probably universal life) would ever be a good option for tax arbitrage reasons? I am just a few years older than the original poster and my wife and I are planning to have a baby in the next couple years so I do have a looming need for more life insurance than my work provides. I also have maxed my TFSA and RRSP and am paying down my mortgage aggressively. Would it make sense to get a universal life policy in this case for it's tax free growth if the other option is an unregistered account?


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## MoneyGal (Apr 24, 2009)

In fact, that is the *only* reason for permanent insurance, in my view. Basic article with basic examples to make the point: http://www.thestar.com/article/208457--using-life-insurance-to-your-tax-advantage


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## PillowRage (Sep 5, 2012)

Thank you for the responses everyone.

Referring to brocko's statement about being 85 or 90 and at that time my permanent policy would be the only insurance that would be available at the time: If I were to take my $78 monthly, and instead invest it for the next 60 years at a conservative rate of 4%, by the time I'm 86 I would have $234k. In the same time period, I would have paid $56,160 into this policy, and it's value upon my death would only be $50,000? Is this a valid way of looking at it, or am I missing the way these policies are apparently investment tools? Looking at it this way definitely makes me want to get out.

MoneyGal, you raise a valid point that I have been asking myself as well - am I over-insured? The answer is very likely "yes." I have no dependents, my parents are my beneficiaries, and my girlfriend and I aren't living together and don't plan on getting married for another few years. My term policy is a much more reasonable $18/month, and combined with my policy through work is likely far more than enough at this point in my life.


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## PillowRage (Sep 5, 2012)

I've been doing more and more reading on this. My policy is of the participating variety, and so "Each year, Great-West will determine the dividend, if any, to be credited to the policy. Crediting will be on the policy anniversary." There doesn't seem to be a guarantee that GWL will in fact pay any dividends.

There was an article on CanadianCapitalist from just a few weeks ago (linked here and further discussed here) in which a life insurance broker specifically discussed the issue. Many commenters stated that the cases presented weren't very realistic (particularly the 2nd case with a 20 year average rate of return of only 3%). What I don't understand now, is how the permanent insurance policy discussed in this article apparently guarantees a return when, based on the policy contract in front of me, there are no guarantees laid out. Are there different types of participating whole life insurance policies, in which dividends are guaranteed?

Again, what it seems to boil down to though, is as MoneyGal asks, do I actually need this insurance at 26 years old? And the answer is likely no. Even the $250k term insurance that I do have is probably overkill at this point in my life.


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## brocko (Apr 20, 2009)

Indeed I do hope you make it to ages 85,90 and beyond. Life insurance is to help create an estate or pay off the debts of an estate. It is not an investment. When one buys life insurance they are essentially betting they are going to die prematurely and the insurance proceeds will help with the needs of the estate. The insurer when selling the product is betting your going to live a long life and they will make money on the risk element. Millions of dollars are paid out each and every day in life policy proceeds so the insurers do not win every bet they make. Feeling lucky kid?


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## jamesbe (May 8, 2010)

I'm 34, got my universal life of $300,000 for $130 a month a couple of years ago, sounds like you did get a bad deal....


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## PillowRage (Sep 5, 2012)

brocko said:


> Indeed I do hope you make it to ages 85,90 and beyond. Life insurance is to help create an estate or pay off the debts of an estate. It is not an investment. When one buys life insurance they are essentially betting they are going to die prematurely and the insurance proceeds will help with the needs of the estate. The insurer when selling the product is betting your going to live a long life and they will make money on the risk element. Millions of dollars are paid out each and every day in life policy proceeds so the insurers do not win every bet they make. Feeling lucky kid?


Well even if I "win" that bet, and were to die tomorrow, as MoneyGal has pointed out, I don't have any dependants that would need that money. If I didn't have this whole life policy (or even the $250k term policy) my parents would sell off my condo, and get a year's worth of salary through my employer. Nobody's worse off (at least, financially). Again, looking like I'm over-insured.


Jamesbe, if I may ask, what was your reasoning for going with a universal policy? The tax arbitrage reasons that MoneyGal and PharmD mentioned?


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## MoneyGal (Apr 24, 2009)

brocko said:


> Indeed I do hope you make it to ages 85,90 and beyond. Life insurance is to help create an estate or pay off the debts of an estate. It is not an investment. *When one buys life insurance they are essentially betting they are going to die prematurely and the insurance proceeds will help with the needs of the estate.* The insurer when selling the product is betting your going to live a long life and they will make money on the risk element. Millions of dollars are paid out each and every day in life policy proceeds so the insurers do not win every bet they make. Feeling lucky kid?


No. Insurance is to manage a risk, the risk of dying early. You are not "betting" that you are going to die early - you are covering the risk associated with an early death. This is pretty much the opposite of "betting" in my view. 

And the company that assumes the risk is not "betting" that you are going to live longer than any particular lifespan - they are pooling the risk of an early death over many many people. They "win" (or "lose," depending on your point of view) a lot of the bets they make because they are spreading risk across a diverse pool, and because longevity is actually extremely variable over large groups of people. It isn't that they are "betting you're going to live a long life" - it is that they can afford to take the risk of your later-than-expected demise due to the variability of the human lifespan.


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## jamesbe (May 8, 2010)

PillowRage said:


> Jamesbe, if I may ask, what was your reasoning for going with a universal policy? The tax arbitrage reasons that MoneyGal and PharmD mentioned?


A few reasons, 1 being that my Uncle who has sold live insurance all his life suggested it was best to cover my estate upon death and it guarantees my rates for life. $130 a month seemed relatively inexpensive for $300k of insurance for life. I find term insurance seems more like a scam to me, money goes in and never comes out ... unless you die.

And yes as pointed out, my RRSP and TFSAs are maxed out so it is a good third place to put money for tax free growth.


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## MoneyGal (Apr 24, 2009)

jamesbe said:


> A few reasons, 1 being that my Uncle who has sold live insurance all his life suggested it was best to cover my estate upon death and it guarantees my rates for life. $130 a month seemed relatively inexpensive for $300k of insurance for life. *I find term insurance seems more like a scam to me, money goes in and never comes out ... unless you die.*And yes as pointed out, my RRSP and TFSAs are maxed out so it is a good third place to put money for tax free growth.


Just like that pesky house insurance that never pays out unless your house burns down, and that stupid car insurance that only covers you when you're in a car accident.


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## jamesbe (May 8, 2010)

This is true, but ...

If I die, It won't affect the quality of MY life. Where as if my house burns down or my car is stolen it would affect the quality of MY life.  LOL


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## MoneyGal (Apr 24, 2009)

Even more reason for you NOT to have life insurance.


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## Lephturn (Aug 31, 2009)

jamesbe said:


> This is true, but ...
> 
> If I die, It won't affect the quality of MY life. Where as if my house burns down or my car is stolen it would affect the quality of MY life.  LOL


That means that you should dump the universal life - and instead take a look at your disability insurance. At this age, that is a much more important risk to cover than death.


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## brocko (Apr 20, 2009)

MoneyGal said:


> No. Insurance is to manage a risk, the risk of dying early. You are not "betting" that you are going to die early - you are covering the risk associated with an early death. This is pretty much the opposite of "betting" in my view.
> 
> And the company that assumes the risk is not "betting" that you are going to live longer than any particular lifespan - they are pooling the risk of an early death over many many people. They "win" (or "lose," depending on your point of view) a lot of the bets they make because they are spreading risk across a diverse pool, and because longevity is actually extremely variable over large groups of people. It isn't that they are "betting you're going to live a long life" - it is that they can afford to take the risk of your later-than-expected demise due to the variability of the human lifespan.


MoneyGal, insurers are not insuring the general population. Only those who have applied and qualified based on a medical questionnaire or a full medical and charge appropriately. I joke about it but in fact the actuaries know their business quite well. Its sad to me but the insurers today are just wealth managers with a life insurance unit that in some cases keeps the company afloat.


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## PillowRage (Sep 5, 2012)

Would anyone be able to dissect this "participating life insurance financial facts brochure" from GWL?

The content definitely seems like it's trying to make it sound like a low risk investment with 'reasonable' returns, rather than just life insurance, but are they spinning the numbers somehow to make it look more appealing?


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## MoneyGal (Apr 24, 2009)

brocko said:


> MoneyGal, insurers are not insuring the general population. Only those who have applied and qualified based on a medical questionnaire or a full medical and charge appropriately. I joke about it but in fact the actuaries know their business quite well. Its sad to me but the insurers today are just wealth managers with a life insurance unit that in some cases keeps the company afloat.


You notice that nowhere did I say "the general population." I referred to "large groups of people" and "many many people." I am extremely familiar with life insurance group pricing, actuarial math, and assessing longevity risk across populations, and even with the problem of adverse selection in life insurance and annuity pricing, which is what you are referring to indirectly. 

My issue is with your characterization of life insurance as a "bet" by the insurance company.


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## MoneyGal (Apr 24, 2009)

PillowRage said:


> Would anyone be able to dissect this "participating life insurance financial facts brochure" from GWL?
> 
> The content definitely seems like it's trying to make it sound like a low risk investment with 'reasonable' returns, rather than just life insurance, but are they spinning the numbers somehow to make it look more appealing?


They won't be. Life insurance is a highly regulated profession. I think you are still wondering about how permanent insurance works. Can you get your hands on a copy of Insurance Logic, by Moshe Milevsky and Aaron Gottesman? It's out of print, but you should be able to find it in a library...there's a chapter on life insurance and the theory of insurance which will answer your questions. 

In a nutshell, though: any type of insurance is a lousy investment on a pre-tax basis, since the expected "return" is negative in the classical sense. Insurance is purchased for hedging purposes, not investment. The returns from insurance correlate negatively with your human capital, which implies that insurance hedges your human capital. 

However, life insurance is one of the last remaining tax shelters for building tax-favoured wealth. If you are going to do this, though, you should compare the returns you are getting, on an after-tax basis, with a low-cost index fund.


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## PillowRage (Sep 5, 2012)

MoneyGal said:


> They won't be. Life insurance is a highly regulated profession. I think you are still wondering about how permanent insurance works. Can you get your hands on a copy of Insurance Logic, by Moshe Milevsky and Aaron Gottesman? It's out of print, but you should be able to find it in a library...there's a chapter on life insurance and the theory of insurance which will answer your questions.
> 
> In a nutshell, though: any type of insurance is a lousy investment on a pre-tax basis, since the expected "return" is negative in the classical sense. Insurance is purchased for hedging purposes, not investment. The returns from insurance correlate negatively with your human capital, which implies that insurance hedges your human capital.
> 
> However, life insurance is one of the last remaining tax shelters for building tax-favoured wealth. If you are going to do this, though, you should compare the returns you are getting, on an after-tax basis, with a low-cost index fund.


Thanks for the suggestion. A good chunk is available on google books so I'll start with that.


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## MoneyGal (Apr 24, 2009)

Oooh, fantastic. When you get to the summary points for that chapter, you will recognize them!


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## brocko (Apr 20, 2009)

MoneyGal said:


> You notice that nowhere did I say "the general population." I referred to "large groups of people" and "many many people." I am extremely familiar with life insurance group pricing, actuarial math, and assessing longevity risk across populations, and even with the problem of adverse selection in life insurance and annuity pricing, which is what you are referring to indirectly.
> 
> My issue is with your characterization of life insurance as a "bet" by the insurance company.


Well at least I didn't call it "hocus pocus" which some folks I have known in insurance explain how your actuarial math works. Seriously the odds favor the insurer in the long run to make money off of the product. I also had it explained to me by people in the business that there are no absolutes but good odds that favor the insurer. Never the less I have never met any beneficiary who gave back the cheque.


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## MoneyGal (Apr 24, 2009)

Uh, of course the odds favour the insurer. How else would they stay in business? 

I'm not really sure what you're driving at here. First you suggest you're going to school me in how insurers apportion risk amongst the population they insure, and now you're suggesting you really should have called actuarial science "hocus pocus" and saying it's my area of expertise, not yours. Pick a position for a few posts! :encouragement:


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## brocko (Apr 20, 2009)

MoneyGal said:


> Uh, of course the odds favour the insurer. How else would they stay in business?
> 
> I'm not really sure what you're driving at here. First you suggest you're going to school me in how insurers apportion risk amongst the population they insure, and now you're suggesting you really should have called actuarial science "hocus pocus" and saying it's my area of expertise, not yours. Pick a position for a few posts! :encouragement:


Oh heck anything to do with actuarial science or even underwriting I know nothing of as you can tell. I am sure you have heard all of the actuary jokes. My favorite is an an actuary is just an accountant without the sense of humour.:biggrin:


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## Xoron (Jun 22, 2010)

MoneyGal said:


> Just like that pesky house insurance that never pays out unless your house burns down, and that stupid car insurance that only covers you when you're in a car accident.


Someone quite wise once told me this:
ONLY get insurance when it would be financially crippling if you didn't.

Example: 
1. You go on vacation, do you take the trip cancellation insurance? Well if 5K to get a return flight, hotel and accommodations will sink you financially then it is a small price to pay. 
2. You go on vacation, do you take the out of country HEALTH insurance? Well if a 1M hospital bill will sink you financially, then you had better buy that insurance.

That advice has served me well.
- Home insurance, hell ya, would sink me if I had to rebuild my house
- Auto insurance, hell ya, would sink me if I had to pay for someone's medical bills because I was uninsured.
- Life insurance, hell ya, my wife and kids would be in hard shape if I didn't have term life insurance.
- Disability insurance, hell ya, my income would be gone, and I'd be a drain on the family resources if I could never work again.
- Extended warranty (insurance) on that new 1k tv? No way. Would suck if it dies, but I'd recover :rolleyes2:


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## Plugging Along (Jan 3, 2011)

^ This is what I have been trying to follow. 

However, now I am beginning to wonder from an estate planning side should I even consider Whole or Universal insurance. Is there a good guideline on when one should even think about that. I know my parents years ago took out Whole/Universal (not sure which one), and the whole intent was to cover off the tax bill when they pass away. (I am sure there was much more too in, but I was too young to understand the details). 

After reading this thread, now I am wondering as what time does it make sense to do this from an estate planning standpoint.


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## Xoron (Jun 22, 2010)

Plugging Along said:


> ^ This is what I have been trying to follow.
> 
> 
> After reading this thread, now I am wondering as what time does it make sense to do this from an estate planning standpoint.


Without it, would it be financially crippling? What about just taking the premiums and banking them in a HISA. That could cover the taxes (You'd be taking the opposite bet of the insurance company).


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## MoneyGal (Apr 24, 2009)

It doesn't. You're just pre-paying a tax bill.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> It doesn't. You're just pre-paying a tax bill.


+1


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## fraser (May 15, 2010)

We are retired now.

My approach when our children were small and my wife was not working was to buy as much term insurance as possible. Fortunately, I worked for a company whose benefit program allowed me to purchase and addition 7X my salary in term-and at rates that were not available on the 'street'. Worked for us, notwithstanding all the calls from whole life salespeople shortlyh after each of our children were born. My goal was to protect my wife and children for that period of time when they would be vulnerable. We also did the mortgage insurance gig.

My advice...if you have, or plan to have a family is to buy as much term as you need or can afford.


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