by rlee2 » Wed Jun 17, 2009 02:30 am
Retired couple’s primary asset is set of Mass Mutual whole life policies, face amount of coverage approx $480k (one @ $200k, one @ $100k, plus several smaller policies), total cash surrender value approx $290k (less $15k in loans). Dividends have been applied to cover premiums fully in recent years, but 2008 dividends of $11,200 did not quite cover premium total of $11,700. Concern is that if Mass Mutual reduces dividends significantly, we won’t be able to cover premiums out of pocket, and we’re wondering about use of CSV to make up the difference between dividends and premiums and maintain the policies as-is. Is this the best strategy? What are the tax implications? What factors should we be considering? What other options are there? Our Mass Mutual rep has been nonresponsive lately, and in any event, we would like independent advice on this. Any guidance would be greatly appreciated. Thanks.
Posted: Wed Jun 17, 2009 02:53 am Post Subject:
How old are they and what is their relative health status? What are their goals - to keep as much insurance in force as possible, or to keep the cash value in place in case they need it, or just to keep their out of pocket expense to a minimum?
Posted: Wed Jun 17, 2009 09:12 am Post Subject:
What's the current death benefit of the policies?
Posted: Wed Jun 17, 2009 12:17 pm Post Subject:
Hi rlee2,
Dividends have been applied to cover premiums fully in recent years, but 2008 dividends of $11,200 did not quite cover premium total of $11,700.
Yeah, I could see a gap of $500 over there.
But for how long are your dividends making up for the premiums?
Concern is that if Mass Mutual reduces dividends significantly, we won’t be able to cover premiums out of pocket, and we’re wondering about use of CSV to make up the difference between dividends and premiums and maintain the policies as-is.
Does Mass Mutual provide you with such updates from time to time?
Steven
Posted: Wed Jun 17, 2009 12:49 pm Post Subject:
What's the current death benefit of the policies?
Looks like $480k, unless that was the starting death benefit.
Posted: Wed Jun 17, 2009 01:07 pm Post Subject:
I would suspect that if the CSV is $290,000 that the death benefit would be much higher than $480,000.
This would mean that even if the dividends don't cover the whole premium they are still going to be high enough to keep the death benefit above $480,000.
Additionally, even with a drop in the dividend scale, it is possible that the total dividends will remain the same or be higher.
We don't have a full set of facts, but I would very much doubt if there is going to be any issue with just using the dividends pay the premium even if the dividends are less than the total premium.
Posted: Wed Jun 17, 2009 01:41 pm Post Subject:
I somewhat got the impression that the initial death benefit was lower than $480k but has been increased to that level with the cash value and whatever paid-up additions there may be. It's always easier to figure out when you have the actual statements to look at.
Posted: Thu Jun 18, 2009 12:28 am Post Subject:
We'll see if we ever get a response from the OP.
Posted: Thu Jun 18, 2009 04:02 pm Post Subject:
Thanks to all for your replies--my own response time is slowed because I'm posting this on my parents' behalf (we're 800 miles apart, they are not online, so the back-and-forth is a little slow). Also because my own understanding of whole life is regrettably limited.
Some additional/clarifying info:
As to ages/health: H is almost 76, health a 4 on a scale of 1-10 (relatively active, e.g., regular golfer who walks the course, but does have a heart condition under management; W is 74, health a 5 or 6.
As to primary goals: clearly the least important concern is keeping as much insurance in force as possible (children all grown, no significant obligations). Other factors of minimizing out of pocket expenses and having cash value in place for future needs are main concerns. Other than SS, they have no income. So this is about maintaining funds to cover their own living expenses.
The 480k is the death benefit I believe--I may have mischaracterized in my original post- Basic coverage of policies totals 445k---paid-up additions on some of the smaller policies bring total coverage up to the 480 figure.
Real concern as expressed by father is "if Mass Mutual reduces dividends to point I cannot afford premiums, what should I do?" He is particularly concerned about possible tax implications of taking cash value or even using some to cover premiums. He wonders whether these policies are a "luxury" that he can afford.
Again, thanks for your input.
Posted: Fri Jun 19, 2009 12:56 am Post Subject:
There is something about these two quotes that don't seem to go together:
As to primary goals: clearly the least important concern is keeping as much insurance in force as possible (children all grown, no significant obligations).
Other than SS, they have no income.
It is very possible that your mom will outlive your dad for 10+ years. It should be important to keep insurance in force if your dad feels that he has an obligation to take care of your mom. I sure want to take care of my wife when I'm old (and dead).
Let me explain why it is so important to try to keep these policies in force. For ease, let's pretend that it is one policy with a $485,000 death benefit and a $270,000 cash surrender value. If the policy is cancelled, they'll get $270,000. They will pay income tax on the gain. Maybe they walk away with $200,000 (complete guess). Let’s say that over the next two years, that $200,000 earns 5% a year after tax ($10,000), but they spend the money. Your dad then dies. Your mom has $200,000.
What happens if they borrow the money out instead? Each of the next two years, they borrow $10,000 out of the policy. At death, this needs to be paid back. Assuming the $485,000 death benefit stays the same, after paying back the loan, after tax, your mom will have about $460,000. This is more than $200,000 the last time that I checked. Borrowing money will have no impact on the policy dividends.
Without knowing anything about your dad, I can confidently tell you, "Your dad can absolutely afford these policies." The dividend will be able to handle the premium for them even if it is lowered. This is what you should do. With your parents on the line, call the agent. Have him run an illustration with a dividend that is 1% lower than what they are currently paying and with no future out of pocket premiums. Take a look at whether the policy is in trouble. (It won’t be.) If you aren’t getting a quick response, just call the insurance company directly.
Posted: Fri Jun 19, 2009 04:26 am Post Subject:
ace amount of coverage approx $480k (one @ $200k, one @ $100k, plus several smaller policies)
How many policies do they have in total? What are the death benefits on each policy? I guess the total death benefit is coming to $480k, right?
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