Parental life insurance: Surrender or sell?

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z3r0c00l
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Parental life insurance: Surrender or sell?

Post by z3r0c00l » Tue May 30, 2017 6:50 am

Hi all, thanks in advance for your help. Yes ago my father was sold an annuity, life insurance, and other items by an adviser who of course, took a massive commission on everything. Not going to undo the past or dwell on what those thousands would be worth today had they simply been invested in stocks and bonds... : )

My father is of an age where the cost of insurance will soon increase dramatically and we all agree it is no longer worth paying since the amount, $325,000, is unlikely to be worth the ca. 1200 per month they will start asking next year. (Perhaps more.) And he no longer has to worry about replacing income to take care of children as we are all out of the nest. The details:

Athena Universal Life Flexible Premium Universal Life
Amount: $325,000
Annual premium+fees: $2400
Expected increase to: $12,000 - 16,000
Surrender charge $6,500
Age 74 - life expectancy 11 years from present
Paying new premium would strain annual living income and cash reserves but home equity always available.

Three possibilities as I see them:
Keep the insurance despite the high cost and lack of need.
End before premium becomes astronomical and pay surrender charge.
Sell to Coventry Direct for unknown amount as they have made an unsolicited offer but did not give a price.

My question here is primarily about those options. I presume one must pay the surrender charge, is that correct? (Of course, a nice back end fee on top of all of the costs along the way. No doubt the CFP gets a slice again.) Would an insurance company ever wave such a charge or even pay to end an account for a person who is older? After all, it is a guaranteed safe return once the account closes.

Does anyone know the likely range of Coventry Direct payments? Why would Coventry want to buy it in the first place? I am concerned at not understanding the appeal of buying a policy; it sounds like one company betting against the other and I doubt an insurance company can be wrong on their math. Or does Coventry sell the policy back to the insurer to close it and remove from books?

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BL
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Re: Parental life insurance: Surrender or sell?

Post by BL » Tue May 30, 2017 8:28 am

Is there a cash value?

Have you received an "in-force illustration" of guaranteed values if that is possible?

If there is a surrender fee, it seems there must be cash value, but I don't understand these things very well. Unfortunately most folks don't.

Is that offer connected directly with the policy? It sounds like viatical where someone is betting you won't live long enough for them not to make a profit. There is something that makes me somewhat uneasy about that. It used to be a shady business but perhaps things have improved over the years.

pintail07
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Re: Parental life insurance: Surrender or sell?

Post by pintail07 » Tue May 30, 2017 9:46 am

I assume they have had this policy several years. This problem is common with policies sold years ago when interest rates were higher. Now i nterest rates are low and the mortality charges are higher because of low rates. Doesn't hurt to get an offer to sell, doubt it will be much if anything unless they have health issues. Probably little if any cash value, might look at a 1035 exchange to a deferred annuity.

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powermega
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Re: Parental life insurance: Surrender or sell?

Post by powermega » Tue May 30, 2017 2:28 pm

We need more information. How old is the life insurance policy? What is the current net cash value? What is the purpose of the life insurance (what is your dad's need)?
Even a stopped clock is right twice a day.

z3r0c00l
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Re: Parental life insurance: Surrender or sell?

Post by z3r0c00l » Tue May 30, 2017 9:00 pm

Thanks for your help all. My laypersons impression is that this policy has little value, less than the surrender fee in any event. I have the annual report in hand and can list whatever few stats they provide there. Else I will have to have my father ask for more info. Unfortunately all other parties have ulterior motives.

Register date 2003
Planned periodic (semi-annual) premium: $1,052
Face amount $350,000
Death benefit $350,000
Death benefit option A
Policy Account $999
Less:
Surrender Charge $6,663
Outstanding loan $0
Net Cash Surrender Value $0

Summary of policy Account Activity (Lists above including premium and fees amounting to $400)

Reverse page:
Chart showing payments and admin charges including money subtracted from policy account. (About to be exhausted.)

Termination date 11/25/2017 assuming periodic premiums are paid death benefit $350,000
Lapse protection Fund has $4,835
Minimum premium of $1,900 due in next year to avoid loss of policy
Next semi-annual premium is $7,689 (ca. $15,000 per year.)

BruDude
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Re: Parental life insurance: Surrender or sell?

Post by BruDude » Tue May 30, 2017 9:06 pm

Did they skip a premium (or several) at some point? 14 years is an extremely short amount of time for a UL policy to last unless it was designed that way up front. $2100/year is nowhere near enough for a $350k permanent policy on a 60-year-old. The premium should have been at least double that every year to keep it in force to age 100+.

Something is missing here - either the agent is an idiot, your parents insisted on this level of premium and/or time horizon, or they skipped or lowered their premiums somewhere along the way.

The agent does not get any compensation from the surrender charge. Most policies have a 10-20 year surrender charge window. You do not pay an actual surrender charge fee, that is only taken out of the cash value of the policy is surrendered. Since there is little to no cash in the policy this wouldn't really apply.

Unless your father is very unhealthy I would be surprised if he got any kind of offer for the policy. The investor has to pay taxes on the death benefit upon death and paying $15k/year for a $350k taxable policy isn't very attractive to them unless he has a very short life expectancy. Investors only look at the annual premium cost to guarantee benefits to age 100, so it could well be more than $15k/year to do that.


Edit - just for reference, a policy guaranteed to age 121 (GUL) for a 60-year-old male with the best health rating is at least $5,300/year. For one in average health, it is at least $6,600/year. I have no idea how someone could have possibly come up with $2100/year as a premium for this policy unless there was a specific reason for it.

z3r0c00l
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Re: Parental life insurance: Surrender or sell?

Post by z3r0c00l » Wed May 31, 2017 5:56 pm

This is helpful even though I don't seem to have all the needed info. I understand that my father locked into this premium rate for 10 years, 9.5 years ago, but that time period will lapse soon. Is it possible the lower premium is by virtue of consuming any value the policy had ? That could explain why the policy account is about to reach zero and why they are now demanding more money to cover the current premium, let alone the much higher future one.

We will confirm that there is no real value and then cancel the policy. Any solace to be had would be that it served the purpose when it was needed, even though those premiums are down the drain now.

mhalley
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Re: Parental life insurance: Surrender or sell?

Post by mhalley » Wed May 31, 2017 6:11 pm

It might be worthwhile to spend the hundred bucks to have a professional evaluation.
http://evaluatelifeinsurance.org/

BruDude
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Re: Parental life insurance: Surrender or sell?

Post by BruDude » Wed May 31, 2017 6:32 pm

z3r0c00l wrote:This is helpful even though I don't seem to have all the needed info. I understand that my father locked into this premium rate for 10 years, 9.5 years ago, but that time period will lapse soon. Is it possible the lower premium is by virtue of consuming any value the policy had ? That could explain why the policy account is about to reach zero and why they are now demanding more money to cover the current premium, let alone the much higher future one.

We will confirm that there is no real value and then cancel the policy. Any solace to be had would be that it served the purpose when it was needed, even though those premiums are down the drain now.
Correct, the policy has a flexible premium, so your father chose to pay a lower premium for that 10 years. Perhaps at the time he decided he only needed the policy for 10 more years and decided to pay the lower amount to make it last for that period of time instead of paying the premium that would make it last for life, which is usually the goal of a universal life policy. I'm not sure why it was done that way instead of just purchasing a regular 10-year term life insurance policy, but that doesn't really matter now. Maybe he wanted to keep his options open in the event that he wanted to continue the policy.

Sounds like he got what he wanted out of it, the good news is you didn't have to use it!

Katietsu
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Re: Parental life insurance: Surrender or sell?

Post by Katietsu » Wed May 31, 2017 8:49 pm

Definitely many on this board with more insurance knowledge than me. However, I would not be too upset if your Dad had a desire for the life insurance aspect at the time he acquired the policy. A ten year term policy for a 65 year old would have taken a sizable percentage of those premiums.

z3r0c00l
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Re: Parental life insurance: Surrender or sell?

Post by z3r0c00l » Thu Jun 01, 2017 6:27 am

BruDude wrote: Sounds like he got what he wanted out of it, the good news is you didn't have to use it!
Very true!

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BL
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Re: Parental life insurance: Surrender or sell?

Post by BL » Thu Jun 01, 2017 6:55 am

OP, I believe that BruDude has more than the usual knowledge of insurance, based on reading previous threads. Just a FYI.

I expect there is no need to cancel as they will probably inform you when it has run out of money, since it has no value.

z3r0c00l
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Re: Parental life insurance: Surrender or sell?

Post by z3r0c00l » Thu Oct 12, 2017 8:29 am

Update: Coventry has come back with a low 5 figure offer that becomes a high 4 figure amount once they deduct the cost of putting the policy back in good standing. (It has entered some kind of probationary period and is using the lapse protection money now.)

I am today going to review the 50 pages of fine print for my father before he decides, the paperwork must be sent out Monday AM. This amount of money is enough to be interesting, but not life changing. I would be curious to investigate further what this industry is doing with their policies, I suspect they may be bundling and securitizing them. Wells Fargo is involved in buying and eventually selling the policy. Could be the next CDO!

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djpeteski
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Re: Parental life insurance: Surrender or sell?

Post by djpeteski » Thu Oct 12, 2017 9:16 am

z3r0c00l wrote:
Tue May 30, 2017 6:50 am
Not going to undo the past....

...he no longer has to worry about replacing income to take care of children as we are all out of the nest.

Surrender charge $6,500
Good of you to not dwell on the past. Yes this was a mistake, but as with most mistakes they are best solved by dealing with them as soon as possible. No need to prolong the mistake. Make the right decision and move on.

Life insurance is insurance for dependents. When you kids where 9 and 10, it was a much different solution and answer would be in place. Carrying life insurance at this point is not needed so it needs to be dropped.

The surrender charge is only charged on the cash value of the policy. If the policy had a zero cash value, then you would owe nothing. As is, anything up to and including 6500 in cash value would be surrendered to the insurance company. While that may seem like a bit, continuing the life insurance, to avoid the surrender fee is a "tail wagging the dog" scenario.

Drop the policy, go "oh well" about the surrender charge, and move on with your life.

If there is anything more of 6500 in cash value, that will be refunded to you via check.

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