Mar. 20, 2007

My husband purchased a whole life policy when he was 25. After 13 years the cash value of this policy has built up to about $18,000. We have been told that if we keep this policy and use it for retirement there will be a large chunk of change there, but in the illustrations I only see $44,000 guaranteed after 40 years. Would we be better off to cash this policy out and invest it in IRAs since they are used for retirement, not whole life policies?

Shelly, Washington

Dear Shelly,

Your decision about whether to surrender your whole life policy should be based on your entire financial situation, including other assets and investments, so I can't give you any specific advice about what to do, but I can point out some things that you should think about.

Do you still need life insurance? If so, determine how much you would pay to buy a similar level of coverage before surrendering a policy that you currently have in force. Considering how much older your husband is now, he might have to pay significantly higher premiums on a new policy — especially if he has developed any health problems.

Also consider how the cash value of your policy has performed in the past. Have you received more than the guaranteed rate of return? Some insurers will allow cash value to grow above the guaranteed minimum rate, but you are correct in basing your financial planning only on the guaranteed rate.

Does the individual retirement account (IRA) you are considering promise any guaranteed minimum rate of return? If not, you might decide that the safety net provided by the guaranteed minimum is valuable enough to sacrifice the possibility of larger gains with the IRA.

Remember too that surrendering your life insurance policy might cost you when it comes time to do your taxes. Use the Insure.com Life Insurance & Annuity Tax Tool to determine the potential tax consequences of your options.

Back to the Forum

Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.