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:
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:
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
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?