Help Me Advise 81/85 YO Parents on Their Life Insurance Policies

[chris1975]

My 81- and 85-year-old parents asked for my help in managing their finances. They have about $2.7 million in bank accounts and mutual funds and a house worth about $300k. I have a good understanding of their investments, with one exception – their life insurance policies. Pretend I’m completely ignorant on this topic, and you won’t be far off.

Dad (85) has a “Flexible Premium Variable Life Insurance Incentive Life” policy from Equitable Life Insurance. His December 26, 2023, statement covers the ~8 months since the policy anniversary (April 24, 2023) and shows the following:

• Face Amount: $160,000
• Death Benefit: $316,598
• Policy Account Value: $301,522 (invested in stock-based, Equitable mutual funds)
• Premiums: $1,800 (he writes a monthly check for $200; this represents 9 payments)
• Insurance costs: $753
• Other charges: $104

I don’t know how long he has had this policy or his basis in the mutual funds.

Mom (81) has a similar policy with a death benefit of $113,900 and a “net cash surrender value” of $101,224. She does not make any monthly payments.

My questions:

• 1. Do they need life insurance?
• 2. What is Dad getting for his premiums?
• 2a. Is Dad paying approximately 1.5*($1600+$753+$104) = $3,686 per year for a potential benefit of $15,076 (the difference between the death benefit and the policy account value)?
• 2b. What happens if Dad stops paying $200/month from his checking account toward the premiums? Do the premiums come out of the mutual fund investments?
• 3. Should they surrender/cash out these policies?
• 3a. Would they receive the “Policy Account Value”?
• 3b. Is the investment portion tax-deferred? Would cashing out likely come with a major tax bill?
• 4. Can they regularly withdraw some of the cash value (e.g., for living expenses) or is it “all-or-nothing”?
• 5. Assuming the investment portions are tax-deferred, can they be rolled over into an IRA or other tax-deferred investment, getting rid of the life insurance aspect?
• 6. Could doing nothing be the best choice?
• 7. What are other issues? What else should I be asking?
• 8. How would you advise them to proceed?

Thank you for your help!

 

[godservant777]

@chris1975 These questions should be asked of the advisor who serves as the agent on their policy. They can gives specific answers based on their company guidelines/rules.

Here is some GENERIC information that should still be discussed with their advisor:

• Do they need life insurance? Completely subjective, but if they have a ton of cash and the family wouldn't be strapped for money to bury them or settle the estate . . . then usually it's not a "need." Some people use life insurance for things other than what I mentioned, so the purpose of the policy should be answered by your parents.
• Personally I think variable life policies are a sales gimmick. Had they bought term and invested the difference they would likely have a higher net worth. He is getting a combination of life protection muddled with "investment returns" that are stifled from the market because the company keeps a portion of gains. The short answer is yes, when he dies the beneficiary receives the death benefit, unless there is some crazy rider that also surrenders the account value (which is unlikely).
  • What is he getting? Don't factor in the insurance costs in "gains". Even though it's a blended product there is a cost for insurance and a portion of cash value.
  • Stop paying? Depends on the policy terms. Some policies will debit the account balance to cover insurance costs and fees. This is commonly why you hear of variable or UL policies imploding when people don't pay the premium.
• Should they cash out? Again subjective. Any tax treatment should be evaluated with how the policy is set up and any potential capital gains from the basis of the assets. This is also why you should never use an insurance policy as an investment. There are some laws that define things but it's not the most effective way to do it.
  • The generic answer is an insurance policy isn't usually taxed if the cash value doesn't exceed the death benefit or face value. It can then be treated as a modified endowment contract (MEC).
• Depends on the company and policy terms. Some policies allow actual cash distributions which then affect the death benefit and other values. Some policies only allow personal loans that use the policy as collateral.
• Rollover. Talk to your advisor.
• Do nothing? Depends on their purpose for having the policy or what their priorities are now.
• and 8. Talk to their advisor.

 

[chris1975]

@godservant777

These questions should be asked of the advisor who serves as the agent on their policy.

Great point. We need to get with the agent to nail down policy-specific parameters and options. I'll add many of these items to the list of things to discuss in that meeting. Thanks!

 

[cbraden816]

@chris1975

Do they need life insurance?

Insufficient information: it could be one spouse wants to provide some extra cash for other in event of untimely demise, could be they set it up ages ago and haven’t paid attention, etc.

The specific product they have is intended to be a combination investment (with tax sheltering) and insurance product and, tends to be unpopular in most circles as it’s seen as fee intensive.

A good independent advisor would be merited to do a proper review before you decide anything drastic as they have significant enough cash values, that would trigger taxation and so on if surrendered; a good advisor can model out whether it’s worth keeping (I’d argue at their ages it may very well be worth keeping, given how much is in there, and instead look at if the investment income can pay the premiums as an offset…)

What is Dad getting for his premiums?

• 316K paid to his beneficiary when he dies.
• an investment account that’s sheltered from taxation whilst it grows, albeit plausibly an expensive one, insufficient information on fees here.

I’m also not 100% clear on the math but would probably be clearer with a statement / you should check, but unless I’m misreading:

• Face amount is the insurance death benefit of 160K
• policy account value should be value of all investments, at 301.5K
• ergo death benefit should be 301.5+160 which is >316.5, but again I’m probably missing some key info and facts here. Insurance co would likely happily answer questions if your dad authorized them to speak to you.

What happens if Dad stops paying

• It should have an option to pay from investment income; assuming it’s enough to cover the cost. If not likely draw from that investment balance.
• it requires paperwork; inquire with insurer about it, often called “premium offset”.
• they should be able to show a predictive model with the impact of that decision, on the investments.

Should they surrender/cash out these policies?

• See above RE pay an advisor to review as these sums are significant enough. Fee only, one that doesn’t sell anything, and specializes in whole/universal life policy analysis.
• they’ll break out tax impact and so on
• off cuff, not to be morbid but, parents are at the age where it may be better to keep, and have policies pay out at death, unless they’re hurting for cash…

As for other Q’s: advisor, advisor, advisor is my take. SO much goes into this: their other assets, income, tax bracket, what they want for beneficiaries, potential liability exposure these policies may protect (another reason people buy them), and so on. Far too much for a Reddit post.

Hope this helps.

 

[chris1975]

@cbraden816

A good independent advisor would be merited to do a proper review before you decide anything drastic

Adding this to the list of things to discuss with them!

I’m also not 100% clear on the math

That makes two of us. The phrases that I used and the dollar amounts shown are verbatim from the statement (except I rounded the cents).

As you allude to, we need to get with the insurance agent to nail down exactly what Dad's options are for paying the premiums.

not to be morbid but, parents are at the age

Yes, we need to critically evaluate whether no substantial changes is the best path. They don't have an immediate need for the money, and we need to define the potential tax bite.

As for other Q’s: advisor, advisor, advisor is my take. SO much goes into this: their other assets, income, tax bracket, what they want for beneficiaries, potential liability exposure these policies may protect (another reason people buy them), and so on. Far too much for a Reddit post.

You've given me lots to consider -- thanks!

 

[adoptedwatcher]

@chris1975 To find out how long they have had the policies, the issue date should be on the first page of the policy or you can look at the application date. The application should be attached to the back of the policy.

Of course, if you are just looking at a statement and not the policies you aren't likely to see any of that until you see the policies.

 

[chris1975]

@adoptedwatcher Thank you -- very helpful. They are pack rats, so I'm sure they copies of the policy and paperwork. I'll add that to the list of information to find.

 

[kat02]

@chris1975 try r/LifeInsurance

 

[chris1975]

@kat02 Good idea, thanks!

 

[chris1975]

Thanks all! You've really helped me get my arms around the issues, I've learned quite a bit, and you've changed some of my thinking. I will continue to explore all options, but my initial take is that the most attractive actions may be to help them:

• Stop paying premiums from external funds if the policy can be sustained by the investments.
• Change the investments to lower-cost index funds that align with their asset allocation
• Partially surrender the policy to the extent that the surrender is a “return of basis” without tax consequences.

Based on responses here and on bogleheads, I have compiled a list of information to find and/or questions to be answered. These are shown by information source:

Their Policies/Statements

1. Issue date
   
2. Are there any riders or financing?
3. What is the investment basis for tax purposes?
4. How did the Policy Account Value grow so much larger than the Face Amount?
5. What have the historical investment returns been?

Their Insurance Agent

1. *High-level explanation of how these policies work
2. Does the Death Benefit include the Policy Account Value?
3. What are the Insurance Costs and Other Charges listed on the statement?
4. How are the Premiums split between insurance and investment?
5. What portion of the investment gains does Equitable keep?
6. *Options for change
7. Is there an option to convert to a paid-up policy?
8. Is there an option to roll the policy over into a tax-deferred investment?
9. Is there an option to pay the premiums internally out of the investments? "Premium offset"?
10. Is there an option to make periodic partial withdrawals? "Partial surrender"?
11. Are partial withdrawals "return of basis" first, followed by earnings?
12. Is there a surrender charge?
13. If the policy is fully surrendered, how much will the policyholder receive?
14. *Other
15. In-force illustrations for various cases, including no changes, "no future premiums", and partial surrender
16. What is the full range of investment options besides Equitable mutual funds?
17. What is the process/cost of switching the investment options?

Independent, Fee-Based, Whole/Universal Life Analyst

1. Considering the cost of maintaining the policy, the tax costs of surrendering the policy, secondary financial impacts, and life expectancy, when does it make sense to surrender the policy?