Life Insurance: Coverage for you and your family

Posted: Sat Dec 12, 2009 03:28 am Post Subject:

After a serious discussion within family, we have decided to surrender whole life insurance. So I understand that if we surrender now, we'll get the cash value plus the dividend, but is this a taxable event? Thanks.

Posted: Sat Dec 12, 2009 05:02 am Post Subject:

You haven't exactly been given 100% accurate information here.

For starters the cash value of your policies and you can have it if you want with or without taking loans, or surrendering the policy.

You can take money as a direct distribution from the WL policy, you will pay taxes if the money taken goes beyond your cost basis. Life insurance enjoys FIFO (first in first out) distributions for tax consequences.

Usually to avoid taxes loans are used. Dividends can repay loan interest (it's another dividend option that you have available to you), but you'll usually accumulate more cash value inside the WL policy if you leave the loan interest alone and keep purchasing paid up additions with the dividends. Paying the interest on the WL policy goes right back into your cash value, to suggest that the loan interest is a charge the life insurance company is charging that is 100% taken from you as a result of using your money is incorrect.

The dividends can be used to reduce the premium on the policy. The statement that you only have enough dividends to pay for 3 years worth of premium doesn't make a lot of sense. It might be the case that you have enough PUAs to surrender and pay for three years worth of premiums.

NO, it is not correct that your policy will endow at age 98, nothing you've diclosed about the policy would tell us this. It merely means that the policy will be guaranteed paid up (require no additional premiums) at age 98. The endowment age could be much later.

WL insurance has become a lot more flexible in recent years than a lot of people remember it to be. The problem is the rave of demutalization have left a lot of companies, and a lot of agents forsaking this form of life insurance and as a result few understand it very well. I don't care if the agent you talk to has the entire alphabet after his name, it's very possible he could mess this up.

Lapsing the policy is up to you, but I think there's a lot you still don't know, and might like to know about this product.

Posted: Sat Dec 12, 2009 05:37 am Post Subject:

BNTRS

I think you make good points all around. I don't think anyone has said that the interest on policy loans goes "to the insurer" and not to the policy's cash value, although it's possible that someone might misunderstand that to be the case.

Perhaps what needs to be said is that the accrued interest is also deducted from the cash value -- either in advance (at the time the loan is taken) or in arrears (at the end of 12 months if it has not been repaid) -- and added to the loan principal. What is factual is that unpaid loan principal and interest will be deducted from the death benefit proceeds.

You're correct about the "paid up at age 98" business -- that it doesn't necessarily mean the policy endows at 98 -- but I think you're mistaken when you say "The endowment age could be much later." The contract is from the 1990s (purchased 12+ years ago) so it would fall under the CSO 1980 mortality tables and their age 100 "ultimate mortality" (all dead on paper, statistically). That's the whole basis of policies endowing at 100. And why, under the CSO 2001 with its age 121 ultimate mortality, newer policies now endow at 120 or 121.

Although there is no reason to believe that this policy paid up at age 98 would require two more years to reach maturity, it would not be later than age 100 in any event. It's not like some of the UL policies that read "premiums payable throughout the lifetime of the insured."

It's also true that a lot has yet to be disclosed about the policy which makes it difficult for anyone to give fully accurate information or advice.

Posted: Sat Dec 12, 2009 02:39 pm Post Subject:

Maxx and BNTRS,
Thanks both for your help. Okay, below are all the details. Please let me know what else you need in order for you to help me. What would you do in our situation? Would you surrender the policy? How much would we get back if we surrender? Do we have to pay tax? What's your best suggestion.

Product type: Life Paid-Up at Age 98
My parent age: 53
Issue Date: 11/13/1997
Amount of Insurance: $150,000.00
Premium: Annual - $2,542.49

As of 11/13/2009:
Death Benefit Amount: $164,325.69
Surrender Value Quote: $29,528.51
Loan Value Quote: $29,528.51
Last Dividend Credited Amount: $936.00
Dividend Option: Paid Up Addtl Ins

Dividend/Rider Withdrawal:
Estimated Amount Available for Withdrawal: $6,428.51

Riders & Benefits:
Equity Additions(Variable Additional Insurance) Benefit / Coverage Amount: $14,325.69

When I inquired into the company, the responded below:

On 12/9/2009
"According to our records, your life insurance policy is a L98. This means the premium payments have to be paid to the anniversary date following your 98th birthday.

Your policy does not have the option of paying for itself. You policy has the Variable Additional Rider. This rider allow the owner to direct dividends into a separate account and purchase amounts of single premium variable life insurance."

On 12/11/2009
"I understand the importance of your concerns. Based on what you are
stating it sounds like your representative is talking about the
Accelerated Payment Arrangement.

Accelerated Payment (AP) is a premium payment arrangement that allows
you to systematically apply accumulated dividends to pay the annual
premiums, after premiums have been paid out of pocket for a number of
years.

In other words, AP uses the current annual dividend in conjunction with
the available dividend balance to help "bridge" the policy to the point
where the annual dividend exceeds the annual premium payment.

It is important to understand that a policy on AP is not fully paid-up,
nor will AP reduce the number of years in which premiums are required to
be paid. Since the AP arrangement is completely dependent on
dividends, it is not guaranteed. Any fluctuations in the dividend scale
will directly impact this payment arrangement.

According to our records, the above arrangement is not available for
your policy. Therefore, you will have to pay the premium payments. I
can't explain why you were told this plan would be available on your
policy. I would encourage you to speak with your representative. If you
would like me to contact the sales office and request a callback for
you, please let me know when will be the most convenient time for the
representative to contact you.

I understand that this is probably not the information that you were
expecting to hear but I hope that it has been helpful."

Posted: Sat Dec 12, 2009 02:41 pm Post Subject:

You are correct, it would be CSO 1980 and as such would have an endowment age of 100.


To answer the OP's question about what they get at surrender, you get cash value from the policy. It's only a taxable event to the extent that your outlay is less than the cash value. Outlay = premiums paid - any dividends or PUA surrenders you've used to reduce or pay for premiums.

Posted: Sat Dec 12, 2009 02:53 pm Post Subject:

Looks like variable whole life insurance. Very popular back in the late 90s. Cash value at $29,528 means you can access $29,528 from the policy

There should be sub accounts associated with this if it's variable. Those would be on your statements. How often do you get statements?

Posted: Sun Dec 13, 2009 03:27 pm Post Subject:

Accelerated Payment (AP) is a premium payment arrangement that allows you to systematically apply accumulated dividends to pay the annual premiums, after premiums have been paid out of pocket for a number of years.

In other words, AP uses the current annual dividend in conjunction with the available dividend balance to help "bridge" the policy to the point where the annual dividend exceeds the annual premium payment.

It is important to understand that a policy on AP is not fully paid-up, nor will AP reduce the number of years in which premiums are required to be paid. Since the AP arrangement is completely dependent on dividends, it is not guaranteed. Any fluctuations in the dividend scale
will directly impact this payment arrangement.

According to our records, the above arrangement is not available for your policy. Therefore, you will have to pay the premium payments. I can't explain why you were told this plan would be available on your policy. I would encourage you to speak with your representative. If you
would like me to contact the sales office and request a callback for you, please let me know when will be the most convenient time for the representative to contact you.

I understand that this is probably not the information that you were expecting to hear but I hope that it has been helpful.

What would you do in our situation? Would you surrender the policy? How much would we get back if we surrender? Do we have to pay tax?

Please let me know what else you need in order for you to help me

Posted: Sun Dec 13, 2009 08:35 pm Post Subject:

I agree that it would be helpful to see the policy. Even an inforce illustration would be helpful.

Is the insured 53 now, or was 53 at policy issue?

I think we might be a tad too quick to jump on the original agent and vilify him/her. We don't know what kind of conversation took place 12 years ago, products were a lot different, and though the original agent made a big mistake if he/she suggested the policy would pay for itself by now, I think there are larger issues at hand.

I think I know what company issued this policy, and if I'm right, it's definitely an A+ top notch insurer, and there may be a few options concerning what the insured can do with this policy.

Posted: Mon Dec 14, 2009 07:54 am Post Subject:

You might be right, age could be 53 today, and not my assumption of issue age.

I have no doubt about the integrity of the insurer. I've run across too many clients over the years who seem to distinctly recall the agent telling them that after 7 or 10 or 15 years they wouldn't have to pay any more premiums. I had a prospect's husband literally tell me, as he got up and left the table, "The agent told us after 7 years we don't gotta pay. Next month gonna be 7 years, and I ain't payin' another penny. If the dude lied to me, I'll get him."

Okie dokie!

Any way, as presented so far, this is pretty interesting, but too many details still in the dark.

Posted: Mon Dec 14, 2009 07:26 pm Post Subject:

My parent's CURRENT age is 53. Insurance was bought in 1997. Insurance company is MetLife.

As my parent is entering retirement age, their income is decreasing and may not have the ability to continue to pay the annual premium. I want to evaluate if their current life insurance policy makes economical sense. If not, I suggest they surrender the policy, take the cash value (and the dividend? do they get the dividend too?) and enjoy their retirement. If yes, I may take on the burden and pay the annual premium.

Maxx, thanks for your help. I will try to send cover page of the statement and the policy, if possible.

In the meantimes, do you suggest I ask some additional questions to the company? And what would be the good questions to ask?

Thanks.