8 years ago I was talked into a whole life policy. Big mistake, I know. Currently, the cash value of the policy is around 50% of what I've actually paid in premiums. I would like to cut my losses but want to do it at the right time.
Is it "the sooner, the better" or will the cash value eventually catch up to my premium payments? Is there a "sweet spot" for ending a whole life policy early?
There is no sweet spot in most whole-life policies. The cash value will eventually catch up to the face value, and in fact, you might not even be required to pay premiums for the last couple of years before the policy matures because the earnings on the cash value exceed the premium due. The real question is: if you do need the life insurance, are you currently insurable at reasonable cost, or do you have health issues that will make a replacement term-life policy prohibitively expensive to buy? Be sure to check that that the replacement policy is guaranteed renewable till the need for life insurance no longer exists for you, e.g. grown children not needing support for college any more, spouse provided for, etc. and don't you go buying variable-life or universal-life policies now no matter how much your agent pushes those!
I would get a term policy in place as soon as possible, and then cash in the whole life policy. As @Dilip Sarwate said in his answer, make sure you get a long enough term + guaranteed renewable for enough time that you will no longer need life insurance. If you look at the difference in premium between the two policies, you should find that the term policy will be significantly cheaper, and that you can get a much better ROI by investing the difference yourself (assuming you have the discipline to do that).
Also, read your current policy carefully to see what happens to the cash value in the policy if you die. Many, if not most, of these policies only pay out the face value of the policy upon death. They keep the cash value that you've built up over the years. If that's true of your policy, then what's the point of paying the higher premiums?
You can pay a professional to evaluate your policy.
http://www.evaluatelifeinsurance.org/
This website is sometimes discussed on the Clark Howard radio program where I live. For a fee (less than USD100 as I write this) you can submit your policy and get a full evaluation with a recommendation on what to do with it.
(I haven't used this service myself as I don't have a whole life policy)
Ok so I am adding another answer because I think it is appropriate,
So I have thought about what you put here and consulted my financial adviser, and I believe you have a few flawed assumptions. Firstly, At least with my Whole Life, it gains a guaranted amount of interest (there are non-guarantee ones) in my case this is 3%. Remember you could always take a loan for your cash balance and invest that.
You should not use a Mutual fund here, because it is an entirely different investment with a lot higher risk profile. The proper comparison (at least for the guaranteed ones) is a risk free (or semi risk free) vehicle. For this I would use either T-Bills or a portfolio trying to replicate exactly the risk profile of the company (since your only risk is the default of the life insurance company). You could even borrow against your policy and invest that in a mutual fund (not advised) or in my example T-Bills so that $750 now becomes more like $350. That $350 is more than made up for on year 31 (assuming a 30 year term policy) when you lose all death benefit. Even all this doesn't give a good profile because there are tax implications but we will ignore these. Another thing most people miss is the "gain" from the death benefit. As we talked before if you have a 1/2000 chance you will die, you can multiply that by the benefit (300k in my case) in order to get a better "Overall Asset Balance".
After doing the math this way, you can easily see, in a lot of cases, Whole Life is a more prudent investment than Term Life, especially with T-Bills at <3%. If you have stuck with the Whole life for longer than say 3 years and are going through a good company, keep it current and augment it, but I would be hesitant to say you will be saving (or making) heaps of money by switching.
The most important thing to any portfolio is balance and a lack of emotional speculation.
UPDATE:
In order to prevent another -1 because they didn't read the question, 100% whole life may be cost prohibitive. This means you still may need to use term life but that is outside of the scope of this question. Again please refer to my comment about balance.
