Question re: Single Premium Life purchased for an infant

[hu1tz]

My son, now 19, has a single premium life policy for $100K which was purchased when he was 1 month old, back in 2005. My husband and I are listed as co-primary beneficiaries and his older brother (age 23) is listed as the successor beneficiary.

My (estranged for 10+ years) parents are long-time insurance agents. It was not unusual for them to purchase policies in my kids' names when they were minors at year end to make their production bonuses (yes, they did that). I've chased down most of them and dealt with them but I found a new one this week. I'm waiting on confirmation from the issuer as to who "owns" the policy.

My son is in good health and has no debts. If god forbid he were to pass, we have resources to pay for burial expenses, etc. The cash surrender value on this policy is almost $17K. I'm inclined to cash out the policy and invest it for him instead of carrying a $100K policy for him.

I'm hoping for some feedback - I'm clouded a bit by emotion because of my parents' behavior, so I want to make sure that surrendering it is the right decision and not just one based on spite. Ultimately, my son will have a say but I want to have my facts in order first. Thank you kind redditors for your input.

 

[levnishbar]

@hu1tz One thing to consider is that you'll have to pay taxes on the gains.

 

[hu1tz]

@levnishbar Totally get that - if they paid him directly instead of us parents (which I'm assuming they would), I'm curious if his tax burden would be less since he has no other income as a full time student. The cash out would be the only "income" he would report for the year. That's probably a better question for a tax pro. Appreciate your feedback.

 

[levnishbar]

@hu1tz I believe that's true. You might have to make them the owner before surrendering. Tax professional is the way to go for better tax advice.

 

[jeshurun1111]

@hu1tz They will pay the owner. Is that your parents or you?

 

[hu1tz]

@jeshurun1111 Not sure yet - I’ve reached out to the issuing company to find that out. If my parents are the owners, then there’s not much I can do.

I did receive via mail an “annual policy statement”, addressed to me, earlier this year. That’s what brought the policy to my attention. I’m thinking that they wouldn’t send me a statement if I had no ownership…? This is all just conjecture until I get confirmation.

 

[resjudicata]

@hu1tz How much was the single premium in that?

 

[hu1tz]

@resjudicata Not sure - that’s a question I asked but don’t have an answer to yet. That is certainly a factor to consider. The $17k cash value isn’t really “free and clear” without knowing what the initial outlay was.

 

[jeshurun1111]

@hu1tz Old insurance is good insurance. Speak with an agent from that company to understand the trajectory of the policy and what you'll be taking away from your son in the long term if you do cash it in. Ask for an inforce illustration. I wish someone had set this stuff up for me as a kid and I didn't have to do it myself at older adult rates.

 

[hu1tz]

@jeshurun1111 Totally understand where you’re coming from about the old policy.

Thanks for the recommendation on the “in-force illustration.” That was a new term for me and looks like a smart idea before making any decisions.

 

[ativyl]

@hu1tz Single Premium Life likely means a MECed policy. This could cross over from an insurance question to a non taxable bond fund question. There is a very different conversation if you are wealthy, your son owns businesses.... I'm going to assume no since the policy is small. But otherwise a if it is MECed most of the useful banking functions this policy would have don't apply. This is worse in most senses than normal insurance. That being said taking out the $17k, paying what little taxes he owes and investing in stocks is probably more useful for a 19 year old. So I'd find out if it is MECed and if it is exit, pay the taxes and invest the rest.

 

[hu1tz]

@ativyl Thanks for this - I had to read up on MEC as I’m not familiar with it. Have added this to my list of questions.

 

[savannahcbc]

@hu1tz You can call and request the policy’s “basis”. That is the amount you can withdraw without paying taxes.

Or you can transfer ownership to your son. If he chooses to cash it out, he would pay the taxes and not you.

 

[guacamole]

@hu1tz Cashing it would not be very smart it’s paid up just leave it. Borrow money if you need funds but cash value is only going to increase larger.

 

[aatif]

@hu1tz There is no downside to the policy

The cash value will continue to accumulate and probably will start to accelerate in how quickly it grows (depending on some stuff). Does it earn dividends? Not all single premium policies do but many do.

17k for an investment is... Not much honestly. Like, if you own the policy and cash it out... Cool. But... Meh

Maybe maybe take the 17k as a tax free policy loan (or however much they will let you) and then invest that and either pay the loan interest or just let it accumulate interest. But... Mostly I would probably not recommend screwing with it.

 

[hu1tz]

@aatif Thanks for this - you're absolutely right in that $17K really isn't a windfall. Looking through a 19 year old's eyes, it seems like more than it really is.

As far as dividends, the statement I received shows cumulative dividends of $718 since the policy inception on 1/1/2005, so 19 years. I have no idea how much they paid for the policy upon issuance. I'm assuming I will find this out once they respond back about the policy ownership.

Thanks again for your perspective - I appreciate it.

 

[ativyl]

@aatif Be careful it is a single pay policy. A policy loan is likely a distribution not tax advantaged.

ping u/SnooCookies9421

 

[aatif]

@ativyl Ah good point, it's probably a MEC.

Still even if you pay the taxes, you still have the bulk of the insurance

Since it is earning dividends that accumulation will likely accelerate as the dividends build. Find out what's happening to them. If it is earning dividends that gives you less reason to pull the money as it is earning some level of compounding interest (sort of) already