Group Universal Life - Worth keeping after retirement?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Group Universal Life - Worth keeping after retirement?

Post by dsivi » Mon Feb 02, 2015 8:20 pm

Hi,

I am seeking opinions about how to deal with group life insurance that my father purchased through his former employer. Two years ago, my dad (he is now 70) had to abruptly retire because of a severe heart ailment. He had heart surgery, which went badly and ended up causing a stroke. He's doing much better now, but the stroke permanently impaired him, so I am more or less managing all of his finances.

When he was employed, he purchased group universal life insurance through deductions from his paycheck. He was paying $500.00 a month for a $300,000 death benefit policy. Honestly, I am not sure why he purchased that much at his age given that all his kids were grown and he had a good pension with a lump sum option (which he intended to take and we eventually did take) and a decent size 401K. When he had to abruptly retire, he was given the one-time option to convert to an individual life insurance policy. We elected not to do so and instead just continued to pay the monthly premiums at the group rate that prevailed when he was employed and received the same amount of coverage. So, he still effectively has a group universal life insurance policy that costs us $500 a month in premiums. It has no cash value (if we are more than 60 days late on a premium, the policy is surrendered.) We also no longer have the option to convert to an individual policy. It is a Prudential life insurance, btw.

We kept paying the premiums for the first couple years because his health problems had been so severe. Things have now settled down and he is doing much better and we are wondering if it is worth keeping the policy. I looked into the life settlement market, but after talking to a couple brokers, it seems that group life policies cannot be sold in the life settlement market (does anyone know if this universally true?) The premiums will ramp up sharply every 5 years. When he is 75, the premiums will double. I am getting close to deciding to surrender the policy altogether.

Here are my parent's assets and income:

$1.1 M Vanguard mutual funds in IRA
$100,000 Vanguard mutual funds in taxable account
$60,000 in bank money market account

$2,600.00 / month Soc Sec - Dad
$1,100.00 / month Soc Sec - Mom
$700 / month rental income
$100 / month - Mom's pension

Home and cars owned outright. Rental condo owned outright. No outstanding debt.

They live pretty frugally and seem to be doing OK just living on their combined monthly income. For the time being, I think they may be able to take all or most of the RMD and just invest it back into the taxable mutual fund account.

So, anyone have thoughts about the pluses and minuses of surrendering the policy?

Thanks

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Mon Feb 02, 2015 11:14 pm

I'm not in the insurance industry by the way.

As I'm sure you know, it probably wasn't a good idea to purchase this but that's old news now. Really what you are trying to do at this point (since he doesn't need insurance) is to come to a conclusion if its a good bet to keep this policy. All the money previously paid is water under the bridge. You shouldn't consider it in your current assessment. You need to make an honest estimate of his life expectancy given his health problems and request an in force illustration from the company. This will give you an idea of the costs to keep this in force both using the guaranteed cost of insurance and the current illustrated cost of insurance. At the moment you or he is paying 6k a year for a possible payout of 300k (I'm assuming current illustrated and not guaranteed cost of insurance). I'd also look into costs of paying monthly vs yearly. Some polices have additional costs for paying monthly. So in 5 years, he will have paid 30k for possible payout of 300k. Over 10 years, he will have paid 90k (given what you wrote although the illustration will confirm the costs of insurance both illustrated and guaranteed) for 300k. The death benefit is income tax free so that also needs to be considered. Based on what you wrote, id be guessing his life expectancy is below average which is around 79 years of age but I may be reading too much into what you wrote. I'd be considering keeping it. If you look at all the money spent, the return is poor on these things, but if you look at the return just going forward (since you can't get the money back) and that his health has decreased, it can be a reasonable bet to keep it. IF I did keep it, id be ready to keep it in force until his death period. You sort of half to be all in unless medicine changes drastically over the next few years and those conditions can be reversed and thus his health greatly improved. Sorry for your difficulties and I hope you find this helpful.

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Mon Feb 02, 2015 11:22 pm

I should also say that people like Glenn daily and James hunt will for a fee help evaluate your situation from a current illustration. I think hunt charges around 100 bucks and not sure what the other guy charges. I don't have any association with either.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Mon Feb 02, 2015 11:50 pm

I appreciate that reply. You have given me a lot to think about. It seems this is going to be a more complicated decision than I thought. The difficult part for me has been to just look at the hard numbers of this because it deals with my father's life expectancy. It's tough because for what he's really recovered a good deal since his ordeal but clearly has weaker heart than he should given his age. I think I will need a totally dispassionate opinion by an expert. I am going to sign up for Vanguard's new personal advisor services to manage all the funds. Apparent, if you have over $500K in AUM they will look at your life and long term care policies and give advice. I'll see what they say.

I really wish this policy could be sold in the life settlement market as it would free me up from having to worry about it and let someone else assume all of the risk and premium payments.

BruDude
Posts: 2754
Joined: Thu Dec 30, 2010 12:28 am
Location: Las Vegas

Re: Group Universal Life - Worth keeping after retirement?

Post by BruDude » Tue Feb 03, 2015 12:05 am

In order to sell the policy on the life settlement market it would have to be converted to an individual policy first. Although his health is improved, that would also mean his life expectancy has increased and therefore the policy becomes less attractive to a life settlement company. Life settlements can be a pretty complex transaction with a lot of moving parts, so an experienced broker would be needed to help facilitate that. If he truly has no need or want for the insurance and has no ethical problems with it, that may be the best way to go, depending on the premiums for the converted policy and his age/life expectancy.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 12:19 am

The policy cannot be converted to an individual policy. That option was offered at the time of his retirement and we did not take it. I've asked Prudential since then and they said we no longer have that option. I'm glad you told me that because I want to make absolutely sure that the policy can't sold before I make the decision to surrender.

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 8:52 am

Glenn daily's site has life settlement stuff. I bet he would know if you can or can not. But frankly you don't want to. You either want to surrender or keep in force. They take so much for the settlement that you are likely better off with the return you can get.

bluemarlin08
Posts: 1561
Joined: Wed Aug 29, 2007 12:18 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by bluemarlin08 » Tue Feb 03, 2015 9:43 am

You really need to determine what type on Universal Life you have, does it have a rider that guarantees the premium to some age or is it a current assumption policy? If it is a current assumption what interest crediting rate are they using? Asking for an illustration showing future projection using the current rate and lowering the rate to see the impact on premiums.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 1:32 pm

I just pulled out the insurance rate table from the policy description. The table lists the monthly premium rates per $1000 of coverage. It list the premiums all the way to age 99. I'm not sure what happens after age 99.

Here are the rates and age thresholds:

Age 70 to 74 - $1.683 per $1000 of coverage
Age 75 to 79 - $3.349 per $1000 of coverage
Age 80 to 99 - $5.037 per $1000 of coverage

Those rates come from a table that is included with every premium bill. Now, what I am not completely sure about is whether those rates are guaranteed for the entire life of the policy. As I look at the policy document itself, there is a page with a table labeled "Table of Maximum Rates." It lists maximum rates for $1,000 of coverage by age. Those numbers hits $8.40 at age 75 and increase sharply every year to $12 at age 80 and $28 at 90. There is also a table of corridor percentages. I'm not quite sure what that table references.

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 2:03 pm

The maximum will be the guaranteed.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 2:36 pm

Well, I am assuming those premium rates are the absolute maximum we can be asked to pay per $1000 of coverage. My question is what determines ultimately what we will pay at any given age (how close to the maximum we will be asked to pay at any given age.)

As I understand it, his former employer actually owns the policy. I only have a vague understanding of how universal life insurance works. As I understand it, the dynamics of the remaining policy holders in the group covered by this policy will matter to the premiums we pay in the future. Is that how you understand how these policies work?

For example, if more policyholders die at an earlier age than the actuaries predicted, that could raise premiums for everyone left in the group? As people surrender their policies, could that loss of premium intake by the policy raise the premiums for the remaining members of the group?

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 2:57 pm

dsivi wrote:Well, I am assuming those premium rates are the absolute maximum we can be asked to pay per $1000 of coverage. My question is what determines ultimately what we will pay at any given age (how close to the maximum we will be asked to pay at any given age.)

As I understand it, his former employer actually owns the policy. I only have a vague understanding of how universal life insurance works. As I understand it, the dynamics of the remaining policy holders in the group covered by this policy will matter to the premiums we pay in the future. Is that how you understand how these policies work?

For example, if more policyholders die at an earlier age than the actuaries predicted, that could raise premiums for everyone left in the group? As people surrender their policies, could that loss of premium intake by the policy raise the premiums for the remaining members of the group?

They want people to surrender the polices. Almost nobody keeps these in force until death. Paying a death benefit is a large expense. They would much rather pay a cash surrender value.

It is up to the insurance company what they charge up to the max. Now if a company is known for just charging people the max then they will have a harder time getting new business thus there is some pressure for them to only increase rates "if they have to" meaning after paying all their fees/commissions/big profit they don't have enough for their death benefits then yes they are increasing up to max.

CFOKevin
Posts: 109
Joined: Sat Jan 04, 2014 4:07 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by CFOKevin » Tue Feb 03, 2015 3:13 pm

If i was your dad, I'd want you to continue to pay it.

It seems to me you are making a bet each year 70-74 that there is at least a 1 in 50 chance that it is his last year. Actuarial tables can be used and discounted given his health issues. From 75-79, the bet makes sense at 1 in 33 and keeps making sense thereafter.

If that approach is too morbid for you, let the policy lapse. It doesn't seem that your Mom is going to need additional money in retirement.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 3:27 pm

CFOKevin wrote:If i was your dad, I'd want you to continue to pay it.

It seems to me you are making a bet each year 70-74 that there is at least a 1 in 50 chance that it is his last year. Actuarial tables can be used and discounted given his health issues. From 75-79, the bet makes sense at 1 in 33 and keeps making sense thereafter.

If that approach is too morbid for you, let the policy lapse. It doesn't seem that your Mom is going to need additional money in retirement.
Yeah, this is a tough decision. From 75 to 80 we'd be paying $1000 a month with no guarantee that they won't raise the premium above that. I am leaning to maybe dropping to a lower level of coverage in steps. Like to $200,000 for 6 months and then to $100,000 and maybe holding it steady at that for a while. Paying $1000.00 a month (from age 75 to 80 assuming he gets there) thinking that the sooner he dies the more profitable this becomes is difficult. There is also the opportunity cost of lost investment gains on that money.

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 3:39 pm

If you don't like the return on investment then why tolerate it at a lower death benefit? He has been paying for the higher death benefit all these years. If I were to take that strategy id wait until I couldn't pay the premium bc of rate increases or unexpected financial difficulties.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 3:47 pm

dhodson wrote:If you don't like the return on investment then why tolerate it at a lower death benefit? He has been paying for the higher death benefit all these years. If I were to take that strategy id wait until I couldn't pay the premium bc of rate increases or unexpected financial difficulties.
You're right, it's not a rational judgement about ROI on my part. It's more of just the emotional difficulty of paying $1000 a month. Paying $333 a month for $100K coverage seems more affordable than paying $1000 for $300 K coverage. I do realize the fact the he's been paying for $300K coverage all these years and and dropping the coverage to $100K sort of "wastes" much of the premiums previously paid. Its just that big $1000 number that is scary.

Snezz1e
Posts: 26
Joined: Wed Mar 14, 2012 11:48 am

Re: Group Universal Life - Worth keeping after retirement?

Post by Snezz1e » Tue Feb 03, 2015 4:33 pm

With no cash value all past payments are a sunk cost that you should not factor into your decision.

Assuming the expected future premiums stay at 500/1000/1500 per month if you were to invest that money at a 7% rate of return it would take you about 15.5 years to accumulate $300,000. So if he lives to 85 your roi is 7%, higher if pass sooner, and lower if he lives longer.

Note that past payments are a sunk costs. This means that if he lives to 85, it does not mean you should cancel the policy. At that point, yes you made a bad bet and could of received a better return in the market if you had cancelled 15 years ago but you should still keep the policy going forward. Running the numbers at 85 the premium is 1500/month and at a 7% rate of return it would take 11 years to accumulate $300k. At that point the decision is if he will live past 96 or not to decide to cancel or not.

ralph124cf
Posts: 2011
Joined: Tue Apr 01, 2014 11:41 am

Re: Group Universal Life - Worth keeping after retirement?

Post by ralph124cf » Tue Feb 03, 2015 5:20 pm

I am 66, and I kept the group term universal life policy from work after I retired at 65. My insurance premiums are $159/month for $357,000 of insurance. If your father was paying $500/month before he turned 70, that would be very high priced insurance. Universal life insurance normally has an investment component, sometimes with choices of investments, sometimes without. I would double-check on the possibility of an attached investment account.

You didn't mention long term care insurance. Your parents have too much money to qualify for LTC assistance, but not quite enough to pay out of pocket for extended stays, and your father has an increased risk of needing LTC due to his stroke.

One thing that you might consider in your planning is that when your father passes, your mothers SS will increase. You might want to check with SS about how much the increase will actually be.

Ralph

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 7:05 pm

ralph124cf wrote:I am 66, and I kept the group term universal life policy from work after I retired at 65. My insurance premiums are $159/month for $357,000 of insurance. If your father was paying $500/month before he turned 70, that would be very high priced insurance. Universal life insurance normally has an investment component, sometimes with choices of investments, sometimes without. I would double-check on the possibility of an attached investment account.

You didn't mention long term care insurance. Your parents have too much money to qualify for LTC assistance, but not quite enough to pay out of pocket for extended stays, and your father has an increased risk of needing LTC due to his stroke.

One thing that you might consider in your planning is that when your father passes, your mothers SS will increase. You might want to check with SS about how much the increase will actually be.

Ralph
Both of my parents have long term care insurance. I should have mentioned this in my earlier post as it probably has some bearing on the life insurance decision. My dad and mom have group LTC through John Hancock. They both have an LTC lifetime max benefit of $375K. My dad pays $234 a month for his and my mother pays $310 a month (she bought hers much later than my father.) My father's LTC coverage is very important to us, because he absolutely cannot care for himself now. If something happened to my mother, we would need to get either 24 hour live in care for my dad or put him in a nursing home. He would definitely qualify for benefits right now and we may need to get some level of in home care soon anyway. BTW, the LTC policy has an inflation adjustment option every 36 months.

I don't know exactly when my dad started the group universal life insurance or what he paid when he first started it, but compared to yours it does seem expensive. You can pay more than the monthly premium and the excess premium goes into a certificate fund. From what I see in the policy, it looks like they guarantee an interest rate of not less than 4% a year on money in the fund. However, in another section of the policy titled "Contributions in Excess of Monthly Deductions", they write this:

"Each month contributions toward premiums may be made in an amount in excess of the Monthly Deduction. Prudential will make a fund charge of not more than $2 plus 6% of each such contribution. The balance of such a contribution will remain in the person's fund, subject to other provisions of the Universal Life Coverage."

Remember, that the policy I am quoting from was written for active employees, hence the reference to payroll deductions. The whole thing seems a little confusing. On one hand, it looks like I can add extra money to the fund it will earn at least 4% a year. That may then make it a good idea to just pay in a lump sum for a couple of years of coverage and get 4% safe growth on money I would owe for premiums. However, the second clause I quoted makes me think I would lose 6% right off the top of these contributions which would negate much of the value of this potential growth. Seems confusing.

My mom's SS will increase to match my dad's when he passes away I believe.

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 7:35 pm

You obviously don't have any money in the side fund otherwise it wouldn't lapse without premium.

It is common for the side fund to have a "load" before giving you interest on the money. If you want to see how it would perform then ask for an illustration with X amount dumped in.

Fortunately you already have LTCi, it really isn't a viable option to shop after one has had a disabling stroke.

dsivi
Posts: 33
Joined: Mon Feb 02, 2015 7:06 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dsivi » Tue Feb 03, 2015 7:57 pm

dhodson wrote:You obviously don't have any money in the side fund otherwise it wouldn't lapse without premium.

It is common for the side fund to have a "load" before giving you interest on the money. If you want to see how it would perform then ask for an illustration with X amount dumped in.
OK good. That means I was reading that part of the policy correctly.

It's interesting, I was also just looking carefully at the premium schedule they sent and in tiny print at the bottom they write:

"Rates may change if plan experience requires a change for all insureds."

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Group Universal Life - Worth keeping after retirement?

Post by dhodson » Tue Feb 03, 2015 8:04 pm

dsivi wrote:
dhodson wrote:You obviously don't have any money in the side fund otherwise it wouldn't lapse without premium.

It is common for the side fund to have a "load" before giving you interest on the money. If you want to see how it would perform then ask for an illustration with X amount dumped in.
OK good. That means I was reading that part of the policy correctly.

It's interesting, I was also just looking carefully at the premium schedule they sent and in tiny print at the bottom they write:

"Rates may change if plan experience requires a change for all insureds."

What that means is they can't target you in particular. They can't just say sky high your rates but keep all the others the same. They have blocks of business and they would need to do it for everyone in that block. If I were guessing, id guess that they will keep cost of insurance the same since they are going to have a hard time arguing that life expectancy is decreasing. I'd guess it would set them up for lawsuits but there is no magic in this world and if they aren't making any money then they are going to push on any lever they have in my view. These low interest rate environments aren't exactly to their liking.

Post Reply