Paying the Insurance Penalty

Brian and his wife have whole life insurance. If they cash them out, there's a 7% penalty. If they wait a few years, they won't have to pay into the premiums anymore. Should they cash out the policies anyway?

QUESTION: Brian in New York and his wife have whole life insurance for a number of years. If they cash them out, there’s a 7% penalty. If they wait a few years, they won’t have to pay into the premiums anymore. Should they cash out the policies anyway?

ANSWER: The reason you won’t have to pay into the premium anymore is that you built up enough savings and they are not paying you anything on the savings to amount to anything. The amount they should have been paying you versus the way they were ripping you off will buy the life insurance.

It’s not like you can pay for it because you still have probability of death. As long as there is a probability of death, there is a cost of life insurance. The only question is whether you’re paying out of your savings account or your checking account. In this case, you’re paying out of your savings account.

The 7% is just your surrender charge. I would get out of that policy. Here’s the problem: If you die today, do you know what they are going to pay? They will pay face value. They won’t pay face value plus the savings you paid for. You are going to lose your savings, in other words.

I would get term life insurance in place by the end of the week. Price the term insurance out because you’d be surprised at the differences that some of these companies charge for term insurance. You need 15-year to 20-year level term and about 10 to 12 times your income.