Should I surrender my kids' insurance policies?

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Topic Author
BH13
Posts: 62
Joined: Thu Oct 20, 2011 2:38 pm

Should I surrender my kids' insurance policies?

Post by BH13 »

My parents bought and funded $1m variable life insurance policies on each of my kids when they were born in the mid 90's. They paid premiums into the policies for 3-5 years. No additional premiums were paid after that. At this point I've inherited the policies and am wondering if it makes sense to keep them.

- Policies have surrender values of ~95k & 55k.
- Each kid (young adult) is launched and is maxing out their respective tax deferred accounts.
- Each has their mega-corp term policies I believe at 3x base income.
- I get annual premium billings which I've ignored for a number of years.
- I would expect the funds to grow faster outside the insurance vehicles.

Questions:
- Does it make sense to keep these policies? We have no need for the insurance aspect.
- What would be the tax implications of surrendering these? I suppose I'd have to ask the company for cost basis?
- After sale, I plan to gift over the policy values to each kid, maybe equalize them. Keeping the gifting under $30k per year. Any gotchas on the gifting?

Thanks!
02nz
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Re: Should I surrender my kids' insurance policies?

Post by 02nz »

Don't mix insurance and investment - it's a surefire way to overpay for complex products you don't need. So, yes, get rid of them and invest the money in line with your overall investment plan.
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Stinky
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Re: Should I surrender my kids' insurance policies?

Post by Stinky »

BH13 wrote: Mon Sep 14, 2020 5:22 pm Questions:
- Does it make sense to keep these policies? We have no need for the insurance aspect.
- What would be the tax implications of surrendering these? I suppose I'd have to ask the company for cost basis?
- After sale, I plan to gift over the policy values to each kid, maybe equalize them. Keeping the gifting under $30k per year. Any gotchas on the gifting?

Thanks!
You've answered your own question about keeping the policies. Unless a child is uninsurable, lapse the policies. No reason to keep unneeded life insurance.

You will have taxable income equal to the excess of surrender value over premium paid.

For “equity” reasons, I’d equalize the amounts, and take out your tax expense if you see fit. Distribute to your children as you’d like. It would make sense to keep it under gift tax limits.
It's a GREAT day to be alive - Travis Tritt
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Nate79
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Re: Should I surrender my kids' insurance policies?

Post by Nate79 »

If your children have a need for life insurance they should price out term insurance outside their employers at the appropriate level before surrendering. 3x income of term is pretty low if they have an actual need for insurance.
petulant
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Re: Should I surrender my kids' insurance policies?

Post by petulant »

The problem is that keeping these policies is now much less of a problem than taking them out in the first place. Most VUL policies have 10-20 year periods of high costs that end, resulting in a modest annual administrative charge around $100 per year along with an asset ratio for most policies. Keeping the policy can be especially helpful for policies that have a generous fixed account (often 3% or more) and if they allow policy loans with very low interest rates (often 0-0.5%). It may be more advantageous to keep using them until the kids need more life insurance, then increase the death benefits on these policies, while using the fixed accounts plus policy loans as a form of liquidity. (If you think the money would grow faster outside, you could use the insurance policy as an extended emergency fund and have the kid invest more of their other money more aggressively.) You could post more information about the investment options and otherwise, or tell us the name of the product to review. This is a situation where it's very possible that keeping it is worth more than getting rid of it.
Topic Author
BH13
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Joined: Thu Oct 20, 2011 2:38 pm

Re: Should I surrender my kids' insurance policies?

Post by BH13 »

Thanks all for the feedback.

Researching this further, I found out the policies have combined gains of about $50k. Also realized this is taxed as ordinary income rather than long cap gains, which cancels my plan of using harvested losses to offset those taxes.

Ah well, as always - taxes are a good problem to have.
Nate79 wrote: Mon Sep 14, 2020 5:48 pm If your children have a need for life insurance they should price out term insurance outside their employers at the appropriate level before surrendering. 3x income of term is pretty low if they have an actual need for insurance.
Appreciate your post. Currently we & they have no need for the life insurance. I'll advise them down the road as they hopefully establish their own families.

petulant wrote: Mon Sep 14, 2020 6:36 pm The problem is that keeping these policies is now much less of a problem than taking them out in the first place. Most VUL policies have 10-20 year periods of high costs that end, resulting in a modest annual administrative charge around $100 per year along with an asset ratio for most policies. Keeping the policy can be especially helpful for policies that have a generous fixed account (often 3% or more) and if they allow policy loans with very low interest rates (often 0-0.5%). It may be more advantageous to keep using them until the kids need more life insurance, then increase the death benefits on these policies, while using the fixed accounts plus policy loans as a form of liquidity. (If you think the money would grow faster outside, you could use the insurance policy as an extended emergency fund and have the kid invest more of their other money more aggressively.) You could post more information about the investment options and otherwise, or tell us the name of the product to review. This is a situation where it's very possible that keeping it is worth more than getting rid of it.
Reviewing the annual statements, the policies are charging ~$750 in annual insurance charges, along with $216 in administrative charges.

Specifically, the product is Equitable Flexible Premium Variable Life Ins. Incentive Life. I've got the funds invested as:

60% EQ/Equity 500 Index (0.58% ER)
40% EQ/Core Bond Index (0.67% ER)

Logging into the accounts, I just noticed that there is a 4% Guaranteed Interest option which is very tempting in today's environment.

You've given me more info to ponder over. If I do end up holding on to these, I will definitely transfer from the Bond Index to the 4% Guaranteed Interest option.
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Stinky
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Re: Should I surrender my kids' insurance policies?

Post by Stinky »

BH13 wrote: Mon Sep 14, 2020 8:18 pm Thanks all for the feedback.

Researching this further, I found out the policies have combined gains of about $50k. Also realized this is taxed as ordinary income rather than long cap gains, which cancels my plan of using harvested losses to offset those taxes.

Ah well, as always - taxes are a good problem to have.
Nate79 wrote: Mon Sep 14, 2020 5:48 pm If your children have a need for life insurance they should price out term insurance outside their employers at the appropriate level before surrendering. 3x income of term is pretty low if they have an actual need for insurance.
Appreciate your post. Currently we & they have no need for the life insurance. I'll advise them down the road as they hopefully establish their own families.

petulant wrote: Mon Sep 14, 2020 6:36 pm The problem is that keeping these policies is now much less of a problem than taking them out in the first place. Most VUL policies have 10-20 year periods of high costs that end, resulting in a modest annual administrative charge around $100 per year along with an asset ratio for most policies. Keeping the policy can be especially helpful for policies that have a generous fixed account (often 3% or more) and if they allow policy loans with very low interest rates (often 0-0.5%). It may be more advantageous to keep using them until the kids need more life insurance, then increase the death benefits on these policies, while using the fixed accounts plus policy loans as a form of liquidity. (If you think the money would grow faster outside, you could use the insurance policy as an extended emergency fund and have the kid invest more of their other money more aggressively.) You could post more information about the investment options and otherwise, or tell us the name of the product to review. This is a situation where it's very possible that keeping it is worth more than getting rid of it.
Reviewing the annual statements, the policies are charging ~$750 in annual insurance charges, along with $216 in administrative charges.

Specifically, the product is Equitable Flexible Premium Variable Life Ins. Incentive Life. I've got the funds invested as:

60% EQ/Equity 500 Index (0.58% ER)
40% EQ/Core Bond Index (0.67% ER)

Logging into the accounts, I just noticed that there is a 4% Guaranteed Interest option which is very tempting in today's environment.

You've given me more info to ponder over. If I do end up holding on to these, I will definitely transfer from the Bond Index to the 4% Guaranteed Interest option.
You didn’t give your children’s ages, but it’s likely that they’re way overpaying for the life insurance component.

I looked at Zander.com. The premium for a $1 million 10 year term policy for a male non smoker age 25 in the preferred risk class is $300 per year.

You’re paying almost $1,000 per year in cost of insurance and expense charges for insurance you say that they don’t need. (I assume that’s per policy - you didn’t say).

As you consider what to do with the policies, don’t be seduced by the interest rates. Look at all facets of the policies - whether they need the insurance, and how much the insurance costs.
It's a GREAT day to be alive - Travis Tritt
Topic Author
BH13
Posts: 62
Joined: Thu Oct 20, 2011 2:38 pm

Re: Should I surrender my kids' insurance policies?

Post by BH13 »

Stinky wrote: Mon Sep 14, 2020 8:43 pm You didn’t give your children’s ages, but it’s likely that they’re way overpaying for the life insurance component.

I looked at Zander.com. The premium for a $1 million 10 year term policy for a male non smoker age 25 in the preferred risk class is $300 per year.

You’re paying almost $1,000 per year in cost of insurance and expense charges for insurance you say that they don’t need. (I assume that’s per policy - you didn’t say).

As you consider what to do with the policies, don’t be seduced by the interest rates. Look at all facets of the policies - whether they need the insurance, and how much the insurance costs.
Ha, thanks for setting me back on track. I'll proceed with selling the policies and simplifying.
Grt2bOutdoors
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Re: Should I surrender my kids' insurance policies?

Post by Grt2bOutdoors »

Stinky wrote: Mon Sep 14, 2020 8:43 pm
BH13 wrote: Mon Sep 14, 2020 8:18 pm Thanks all for the feedback.

Researching this further, I found out the policies have combined gains of about $50k. Also realized this is taxed as ordinary income rather than long cap gains, which cancels my plan of using harvested losses to offset those taxes.

Ah well, as always - taxes are a good problem to have.
Nate79 wrote: Mon Sep 14, 2020 5:48 pm If your children have a need for life insurance they should price out term insurance outside their employers at the appropriate level before surrendering. 3x income of term is pretty low if they have an actual need for insurance.
Appreciate your post. Currently we & they have no need for the life insurance. I'll advise them down the road as they hopefully establish their own families.

petulant wrote: Mon Sep 14, 2020 6:36 pm The problem is that keeping these policies is now much less of a problem than taking them out in the first place. Most VUL policies have 10-20 year periods of high costs that end, resulting in a modest annual administrative charge around $100 per year along with an asset ratio for most policies. Keeping the policy can be especially helpful for policies that have a generous fixed account (often 3% or more) and if they allow policy loans with very low interest rates (often 0-0.5%). It may be more advantageous to keep using them until the kids need more life insurance, then increase the death benefits on these policies, while using the fixed accounts plus policy loans as a form of liquidity. (If you think the money would grow faster outside, you could use the insurance policy as an extended emergency fund and have the kid invest more of their other money more aggressively.) You could post more information about the investment options and otherwise, or tell us the name of the product to review. This is a situation where it's very possible that keeping it is worth more than getting rid of it.
Reviewing the annual statements, the policies are charging ~$750 in annual insurance charges, along with $216 in administrative charges.

Specifically, the product is Equitable Flexible Premium Variable Life Ins. Incentive Life. I've got the funds invested as:

60% EQ/Equity 500 Index (0.58% ER)
40% EQ/Core Bond Index (0.67% ER)

Logging into the accounts, I just noticed that there is a 4% Guaranteed Interest option which is very tempting in today's environment.

You've given me more info to ponder over. If I do end up holding on to these, I will definitely transfer from the Bond Index to the 4% Guaranteed Interest option.
You didn’t give your children’s ages, but it’s likely that they’re way overpaying for the life insurance component.

I looked at Zander.com. The premium for a $1 million 10 year term policy for a male non smoker age 25 in the preferred risk class is $300 per year.

You’re paying almost $1,000 per year in cost of insurance and expense charges for insurance you say that they don’t need. (I assume that’s per policy - you didn’t say).

As you consider what to do with the policies, don’t be seduced by the interest rates. Look at all facets of the policies - whether they need the insurance, and how much the insurance costs.
What’s the premium for 30 year policy? I’m not a fan of overpaying but if the premiums don’t rise as they age, it may be worthwhile to keep it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Stinky
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Re: Should I surrender my kids' insurance policies?

Post by Stinky »

Grt2bOutdoors wrote: Tue Sep 15, 2020 4:08 pm What’s the premium for 30 year policy? I’m not a fan of overpaying but if the premiums don’t rise as they age, it may be worthwhile to keep it.
30 year term policy, male age 25, preferred non smoker, is $770 per year. That is guaranteed level for 30 years.

I’m certain that the mortality charges on the UL policy will dramatically increase over the next 30 years.
It's a GREAT day to be alive - Travis Tritt
toast0
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Re: Should I surrender my kids' insurance policies?

Post by toast0 »

BH13 wrote: Mon Sep 14, 2020 5:22 pm My parents bought and funded $1m variable life insurance policies on each of my kids when they were born in the mid 90's. They paid premiums into the policies for 3-5 years. No additional premiums were paid after that. At this point I've inherited the policies and am wondering if it makes sense to keep them.

- Policies have surrender values of ~95k & 55k.
- Each kid (young adult) is launched and is maxing out their respective tax deferred accounts.
- Each has their mega-corp term policies I believe at 3x base income.
- I get annual premium billings which I've ignored for a number of years.
- I would expect the funds to grow faster outside the insurance vehicles.

Questions:
- Does it make sense to keep these policies? We have no need for the insurance aspect.
- What would be the tax implications of surrendering these? I suppose I'd have to ask the company for cost basis?
- After sale, I plan to gift over the policy values to each kid, maybe equalize them. Keeping the gifting under $30k per year. Any gotchas on the gifting?

Thanks!
I'm not sure I'll ever understand the need to obtain life insurance for children (or grandchildren), but since the policy was issued, and the subjects are of age, why not give the policy to the kids along with a recommendation about what to do with it. It's a policy on their lives, let them sort it out?
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Nate79
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Re: Should I surrender my kids' insurance policies?

Post by Nate79 »

toast0 wrote: Wed Sep 16, 2020 2:27 pm
BH13 wrote: Mon Sep 14, 2020 5:22 pm My parents bought and funded $1m variable life insurance policies on each of my kids when they were born in the mid 90's. They paid premiums into the policies for 3-5 years. No additional premiums were paid after that. At this point I've inherited the policies and am wondering if it makes sense to keep them.

- Policies have surrender values of ~95k & 55k.
- Each kid (young adult) is launched and is maxing out their respective tax deferred accounts.
- Each has their mega-corp term policies I believe at 3x base income.
- I get annual premium billings which I've ignored for a number of years.
- I would expect the funds to grow faster outside the insurance vehicles.

Questions:
- Does it make sense to keep these policies? We have no need for the insurance aspect.
- What would be the tax implications of surrendering these? I suppose I'd have to ask the company for cost basis?
- After sale, I plan to gift over the policy values to each kid, maybe equalize them. Keeping the gifting under $30k per year. Any gotchas on the gifting?

Thanks!
I'm not sure I'll ever understand the need to obtain life insurance for children (or grandchildren), but since the policy was issued, and the subjects are of age, why not give the policy to the kids along with a recommendation about what to do with it. It's a policy on their lives, let them sort it out?
I think this can be an ok option as long as the kids clearly understand that the parent will not feel bad if the kids want to cancel it. Sadly that is a too often story where the kids feel obligated to keep a WL policy for fear of hurting their parents feelings. The other issue is that are the kids actually educated enough to know to cancel a WL policy? I would feel horrible to put a decision on my kids, punting the decision when they are not educated enough on the topic (and even worse if they call an insurance salesman for advice who may sell them an even worse product).
Topic Author
BH13
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Joined: Thu Oct 20, 2011 2:38 pm

Re: Should I surrender my kids' insurance policies?

Post by BH13 »

toast0 wrote: Wed Sep 16, 2020 2:27 pm why not give the policy to the kids along with a recommendation about what to do with it. It's a policy on their lives, let them sort it out?
A) As owner, I'm sure I could transfer ownership to each kid, but I suppose that would constitute a gift and I'd have to fill out a gift tax return. I'd rather not eat into the lifetime gift exclusion for now.

B) I'm 100% certain they would have no clue, so the decision would bounce back to me in any case. As it is, they ask me & I educate them on their 401k choices & Roth investments as well.

C) I'd prefer to equalize the value of the policies as gifts between the kids.
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Stinky
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Re: Should I surrender my kids' insurance policies?

Post by Stinky »

BH13 wrote: Wed Sep 16, 2020 3:40 pm
toast0 wrote: Wed Sep 16, 2020 2:27 pm why not give the policy to the kids along with a recommendation about what to do with it. It's a policy on their lives, let them sort it out?
A) As owner, I'm sure I could transfer ownership to each kid, but I suppose that would constitute a gift and I'd have to fill out a gift tax return. I'd rather not eat into the lifetime gift exclusion for now.

B) I'm 100% certain they would have no clue, so the decision would bounce back to me in any case. As it is, they ask me & I educate them on their 401k choices & Roth investments as well.

C) I'd prefer to equalize the value of the policies as gifts between the kids.
I think that you’re back to where you were when I posted upthread on Monday.

My recommendation at that time and now - surrender the policies, equalize the amounts between the two kiddos, distribute the cash to them over time so you don’t have any gift tax reporting issues.
It's a GREAT day to be alive - Travis Tritt
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