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Ask Dave

A bad move

Tanner found himself in a mess, thanks to his insurance agent's advice and a whole life policy. Dave helps explain and unravel things, and he advises Tanner on his next move.

QUESTION: Tanner has a whole life insurance policy with zero cash value due to the loans he took out per the advice of his agent. He now realizes this wasn’t a smart move, as he now owes premiums plus interest every year. Tanner asks Dave if he is still on the hook for the policy loans if he forfeits the policy to buy term insurance.

ANSWER: No. Get your term insurance in place first, then when you cancel the policy your cash value will offset your loans. They will not loan you more than your cash value.

It’s likely that you actually do have a cash value that is above your loan amount, so you could probably get a little cash back. It’s very seldom that they will loan you 100 percent of cash value.

But if they have, it’ll be an exact break even, and just canceling the policy means you cancel the interest, cancel the premiums. And your set of assumptions are correct — you got screwed over. It was bad advice to buy the policy, and even dumber advice to clean the whole thing out and sit there paying interest to borrow your own money and pay a premium to keep the loan open.

I recommend 10 to 12 times your income on a 15- or 20-year level term policy. During that 15 or 20 years, of course, you should be getting out of debt and building wealth so that you have a big pile of money and no need for life insurance.