<p>Bear with me … I know that I’m out of my element here.</p>
<p>I’m going to spend some time with my elderly parents next week, taking them to appointments and trying to resolve some financial issues. I’m seeking advice on an issue involving a life insurance policy. I don’t have it in front of me so I’m just going on what my mom is telling me, which has been known to change.</p>
<p>My dad has a universal policy that will pay $35k upon his death. I believe the current cash value is $33K. According to my mom, the company is charging them $1,200 annual premium. My dad is now 85, so obviously isn’t long for this world. Is there any reason why they should continue paying this ridiculous premium rather than cash out now? Also, are there tax implications for taking the $33K now?</p>
<p>When I get to their house next week, I’ll call the “home office” to talk to them. Any advice for questions to ask/terminology to use would be appreciated.</p>
<p>Going by just the basics, if you take the cash value out, the portion that is accumulated interest (so beyond what your parents paid in premiums) would be taxable whereas the death benefit would be income tax-free.</p>
<p>You can ask the home office to run “in-force” illustrations showing what would happen under different scenarios- if they keep the policy and pay no more, if they pay $x premium, etc. It may be that they are hitting the point such that if they keep paying the benefit will increase.</p>
<p>Ask them what the death benefit would be to convert the Paid-Up-Whole-Life? Or, reducing the death benefit to something equivalent.</p>
<p>The difference between the cash withdrawn and the total premiums paid over the life of the policy is taxable. so, there may be some benefit to waiting until he dies to take the death benefit.</p>
<p>Thanks for the replies, though I’m already confused. :)</p>
<p>So, even though they are paying $1,200 this year (I think in previous years it was $400 so not sure what changed this year) the real thing to determine is how much has been paid in vs. what they can get out of it?</p>
<p>You may also be able to stop making premium payments … the value of the policy may freeze at the current value … but they may be able to stop the cash outflow now.</p>
<p>Last year we cashed out a small whole life policy my wife had that her parents took out 40 years ago. But each year we had received a 1099 for and reported the interest on our tax return. So the cash out was not a taxable event. So check if your folks have been getting a 1099 each year and reporting it.</p>
<p>Oh, good thinking, annoying dad! And you, too, 3togo. They don’t need the money so it would be fine with me if it sits there and not grows as long as it doesn’t cost them money! But we’d like to start streamlining their policies, annuities and other little things they’ve got here and there.</p>
<p>I stopped paying the premiums on my universal life insurance policy years ago! USAA takes the monthly premiums out of my cash value. Assuming the minimum guaranteed interest and maximum cost of insurance, my policy will remain in force until 2029, when I’ll be 72.
It sounds like there is enough cash value to pay the premiums for the rest of your dad’s life.</p>
<p>H has a policy that was unusual–it was one that was paid up in full once he turned 65, I believe. It also gives back an annual dividend every year and has a cash value. By the time he turned about 60, the dividend was about equal to the premium.</p>
<p>We kept it in force, even though we had an offer to convert it into a different policy that could be used for long term care or life insurance, but would lose the annual dividend. We opted to keep the dividend and policy as it is. We were able to use the dividend to pay the premium on a term policy H has from his employer, as they are about equal. The death benefit will be useful for cash flow and the good thing is that death benefits are NOT taxable and paid pretty promptly, upon presentation of the affidavit of death and request from beneficiaries.</p>
<p>I agree that the insurance company (and if you know who sold sold the particular policy and could speak with them) is a good source to figure out what options are available for your folks, Good luck! Your folks are indeed lucky that you’re willing to help sort this out.</p>