Term vs. Universal Life Insurance

[Dublin]

Hiya Folks,
I just found this community and am looking forward to it being a good resource in my becoming debt free. I'm currently in the process of getting my debts paid off and am starting to look at a Universal Life policy that my parents gave me years ago. Dave Ramsey speaks constantly about dropping Universal Life in lieu of Term insurance so that has got me thinking a bit about dropping this policy and using the cash towards debt reduction. Currently the policy is paying 4.75%. He states to replace it with "$7-8 a month term" insurance....well I can't find term insurance anywhere for less than $14 or so that provides the same level of coverage as the Universal policy ($50k). I also realize that if I cash out the policy, it will be considered ordinary income subject to taxes. So, any advice on where to go with this? I could nearly eliminate all my debts with cashing out and that is very appealing to me.
Thanks much for any advice.
Cheers,
cc

[Greebo]

Currently the policy is paying 4.75%.

That's impressive - if it's accurate. Question - how much has been paid into the policy since it was opened? In other words, what was the premium, and for how long? And what is the policy worth now in total if you cash out?

He states to replace it with "$7-8 a month term" insurance....well I can't find term insurance anywhere for less than $14 or so that provides the same level of coverage as the Universal policy ($50k).

Isn't that $7-8 per month per $25k? I'm not 100% sure. But - even if its per $50k, they are out there. I have a 20 year term life policy that's $6.75 per month per $50k.

I also realize that if I cash out the policy, it will be considered ordinary income subject to taxes.

Not exactly. It's actually a capital gains issue. You have to know the cost basis of the policy, which is the total of every dime put into it to date.

What are the details on your current policy? Do you have a recent statement for the policy you can provide #'s from?

So, any advice on where to go with this? I could nearly eliminate all my debts with cashing out and that is very appealing to me.

Sounds like a good plan - but lets get #'s to be sure.

[Dublin]

I don't have a statement handy but the numbers are pretty close. See my responses below. Thanks for the help.

That's impressive - if it's accurate. Question - how much has been paid into the policy since it was opened? In other words, what was the premium, and for how long? And what is the policy worth now in total if you cash out?

Cashout would be about $10k. The 4.75% is accurate. Total paid into it has been about $6k.


Isn't that $7-8 per month per $25k? I'm not 100% sure. But - even if its per $50k, they are out there. I have a 20 year term life policy that's $6.75 per month per $50k.

I'll have to keep looking then! I went to Zander Insurance and those were the best prices I could find.

Not exactly. It's actually a capital gains issue. You have to know the cost basis of the policy, which is the total of every dime put into it to date.

What are the details on your current policy? Do you have a recent statement for the policy you can provide #'s from?

No statement handy but my numbers are pretty close. Cap gains would be on about 4k it looks like. The premium is around $90 every quarter.

Sounds like a good plan - but lets get #'s to be sure.

[Greebo]

Try Met Life - thats who I went with.

That's actually not terrible. I'm impressed. Who's the policy with?

Yeah, cap on 4k or so sounds about right - so 6 in, 10 out, tax on 4, call it 20% (guessing) - bout $800, maybe a grand, so you end up with 9k free to use to repay debt.

By the way, any tax advice I give should be checked with a certified public accountant.

[Dublin]

Policy is with USAA.

I suppose my question really is whether there is a good reason NOT to cash out? Obviously, I lose the coverage and the interest rate but any other reason not to do this?

[Greebo]

Policy is with USAA.

I suppose my question really is whether there is a good reason NOT to cash out? Obviously, I lose the coverage and the interest rate but any other reason not to do this?

You're going to replace the coverage before you cancel this, so no problem where.

Interest rate... What's the interest rate on your debts? How much do you owe on them? How much are you paying them a year in interest?

[Dublin]

Here's a quick synopsis:

Mortgage #1 (property #1): Owe $11.5k at 6.75%
Mortgage #2 (property #2): Owe $143k at 4.75%
Car: Owe $1200 at 6.5%

Other debt is small stuff that I'm planning to have paid off this month. I'm looking at paying off my first house with the cancellation of the Universal policy (or at least a sizable chunk of it) and the car loan. I have some additional cash I plan to use to get them both paid off.
Cheers,
cc

[Greebo]

So you get that the 4.75% interest gain you're getting on the universal life is being completely negated by the interest loss on property 2, right? Times 14.5?

What's property #2? Investment? If so it cash-flowing?

[Dublin]

Yup I understand the interest etc.... The second property is my home. The first is a cabin in the woods that my family uses (no rental income from it).
Cheers,
cc

[a.nonymous]

He states to replace it with "$7-8 a month term" insurance....well I can't find term insurance anywhere for less than $14 or so that provides the same level of coverage as the Universal policy ($50k).

Just to get back on this topic: He typically says that you can get the same coverage for $7-8 for 20 year term versus $100 for universal life.
So it's more a 7 on the 100 statement.

We decided to pay way more than $7 per month because we're also looking at higher coverage amounts.
For reference, my previous combined universal life policies (only for myself) cost me €115 per month, the new term insurance costs me roughly €50 per month while offering more than 5x the coverage. That's leaving me €65 in pocket to pay down debt and eventually invest in retirement funds likely to bring in more than 4.5% down the line.
I had no capital tax gains since my universal life policies lost a whopping 40% on money paid into them.

[itlw8]

the only reason I know not to do it is if you had some health issue that you would not qualify for term ins at a reasonable rate.

[Greebo]

But if you have a health issue while you're already covered, then you're covered. Thus one should GET the term life when they *are* healthy.