I'm five years into a whole life insurance plan (or scam?) with 20 years of premium payments. My mother set it up in my name five years ago when I was not paying much attention, and we've paid about $25k into it. At present, the "cash value" of the plan is around $14k.
I understand that everyone here says whole life plans are terrible. But I plugged some numbers into a spreadsheet and it seems like the cash value growth they are promising is actually not bad. "Promising" is the catch here, of course. They guarantee pretty bad returns, but also show a table of expected returns given current firm (NYLife) performance that is about 6% for a few years and then 5% after.
If I took the cash value out right now, invested it (plus the same premiums for 15 years) assuming a conservative 5% return, and paid for a term life policy (assuming $400 a year for the first 20 years and $600 after that), I wouldn't be able to beat their 'trend' promise.
My questions are:
a. Is that 'trend' promise generally pretty untrustworthy? Is that part of the whole life scam?
b. My current investments are a 403b my employer pays into without matching contributions, and the rest in index funds. Is 5% too low of a 'conservative' planning assumption? I'm in my late 30s.
c. Am I actually past the crossover point that finishing paying for the whole life plan has become worth it?
Escape from Whole Life Plan
byu/Ok-Holiday5907 inpersonalfinance
Posted by Ok-Holiday5907
1 Comment
So your comparison involves:
> (NYLife) performance that is about 6% for a few years and then 5% after
> conservative 5% return, and paid for a term life policy
So your evaluation is only as good as your assumptions.
Let’s start with the “conservative 5% return.”
Is this *after* inflation is considered?
If so, then is the NYLife performance also *after* inflation is considered?
It’s fine if you don’t want to consider the “after” inflation part. But if so, then you need to make sure that *both* of your ROIs are *before* inflation.
In other words, you must compare *like* with *like*.
Your NYLife performance is likely *before* inflation. Marketing materials likes to show off better numbers. Before inflation numbers are higher and therefore “look” better.
Your conservative 5% is likely *after* inflation. Most use 7% as a general *after* inflation ROI. Therefore, assuming 3% inflation, a conservative 5% after inflation is really 8% before inflation.
Start with re-running your numbers there.
There is more to consider once you’ve done that.