Life Insurance - Whole vs Term vs Universal

[John Hjorth]

It's getting a bit morbid here, Mephistopheles, - but I guess we must live with that here,

 

I've been in exactly that situation twice within the last four years in an advisory role for family members.

 

To me, it's a two-step process mentally.

 

1. Please don't start with even trying to do some calculations. [Here, I assume - and hope - that you still have your mother.] The thing you have to acknowledge and realize is, that this decision is actually not about your father, but about your mother. So start mentally thinking about that you tomorrow get a call from your mother about that your father has suddenly passed away. What is your mothers situation then - with and without the USD 350 K? - You have to take a view at the economic sphere of your parents, as whole, to make some overall judgement about that. [Perhaps the saved balance can be split from the coverage and the life insurance coverage can be maintained, -likely not possible, but sometimes possible here in Denmark.] The real key here is to understand that this should actually be a conversation with your mother as the decision maker with your father as a listener, not the other way around. So draw the overall picture of these two alternatives for your mother, and listen carefully to her reaction, and draw a final conclusion with her on that basis. Your mother will never forget that you have cared for her by assisting her through that particular exercise.

 

2. [if any step 2] Calculations on taking control of the savings.

[Mephistopheles]

It's getting a bit morbid here, Mephistopheles, - but I guess we must live with that here,

 

I've been in exactly that situation twice within the last four years in an advisory role for family members.

 

To me, it's a two-step process mentally.

 

1. Please don't start with even trying to do some calculations. [Here, I assume - and hope - that you still have your mother.] The thing you have to acknowledge and realize is, that this decision is actually not about your father, but about your mother. So start mentally thinking about that you tomorrow get a call from your mother about that your father has suddenly passed away. What is your mothers situation then - with and without the USD 350 K? - You have to take a view at the economic sphere of your parents, as whole, to make some overall judgement about that. [Perhaps the saved balance can be split from the coverage and the life insurance coverage can be maintained, -likely not possible, but sometimes possible here in Denmark.] The real key here is to understand that this should actually be a conversation with your mother as the decision maker with your father as a listener, not the other way around. So draw the overall picture of these two alternatives for your mother, and listen carefully to her reaction, and draw a final conclusion with her on that basis. Your mother will never forget that you have cared for her by assisting her through that particular exercise.

 

2. [if any step 2] Calculations on taking control of the savings.

 

Thanks for the kind response. Fortunately, my mother would be well off with or without the policy. This is something my dad signed up for many years ago at the urging of the an insurance salesman.

 

I guess step 2 it is.

[jmp8822]

Who would have thought all these fancy life insurance policies would be so hard to understand, even for investment experts like us?

 

My dad has had a "flexible premium variable life insurance" policy for many years. I'm sure it was a bad deal when he signed up but after all these years I'm trying to figure out whether it's worth to keep going or to cash out. I have very little information at the moment but can look more things up and post.

 

For now what I know is:

- Face amount of policy is $350,000

- Portfolio value is about $200,000

- Death benefit adds the 2 to make $550,000

- Every year there is like a $1,000 + in insurance fees taken from the portfolio

 

The portfolio is invested in a mix of equity and bond funds. If we move the money out now, we'd lose the $350,000 potential in terms of death. However we'd save whatever thousands of annual on insurance fees.

 

Can anyone tell me how to figure out what the most economic course of action is?

 

Assuming you're based in US:  It's worth looking into the tax situation. Usually, policies work where the total premiums paid over the life of the policy are the 'basis'. If the cash value is lower than the basis, there should be no tax to terminate the policy.  If the cash value is higher than the basis, there might be income tax owed on the gain. Check that with someone who knows for sure.

 

Also, the price of insurance inside the policy probably rises over time. I.e. the cost of insurance inside the policy is $1k today, but might be $3k in 5 years.  The cost of insurance is usually a factor of the age of the insured, and changes as the insured ages.  That might worth finding out the schedule of internal premiums.  All that data is found on what's called an "in-force illustration" - it would probably help you to call the insurance company's 800 number and request one.  That will get the agent on the policy rattled FYI, because normal people don't request such a thing.  :)

 

Also, depending on the age of the policy, consider using it as a bond allocation if the policy has a minimum guaranteed rate. I.e. roll all the money to fixed income inside the policy and then invest more aggressively outside.  Old policies can have a minimum rate of say 4-5% because no one thought long-term rates would ever hit 2% - could be worth looking into.

[maybe4less]

It's getting a bit morbid here, Mephistopheles, - but I guess we must live with that here,

 

I've been in exactly that situation twice within the last four years in an advisory role for family members.

 

To me, it's a two-step process mentally.

 

1. Please don't start with even trying to do some calculations. [Here, I assume - and hope - that you still have your mother.] The thing you have to acknowledge and realize is, that this decision is actually not about your father, but about your mother. So start mentally thinking about that you tomorrow get a call from your mother about that your father has suddenly passed away. What is your mothers situation then - with and without the USD 350 K? - You have to take a view at the economic sphere of your parents, as whole, to make some overall judgement about that. [Perhaps the saved balance can be split from the coverage and the life insurance coverage can be maintained, -likely not possible, but sometimes possible here in Denmark.] The real key here is to understand that this should actually be a conversation with your mother as the decision maker with your father as a listener, not the other way around. So draw the overall picture of these two alternatives for your mother, and listen carefully to her reaction, and draw a final conclusion with her on that basis. Your mother will never forget that you have cared for her by assisting her through that particular exercise.

 

2. [if any step 2] Calculations on taking control of the savings.

 

Great advice

[John Hjorth]

Thank you, maybe4less.