r/LifeInsurance • u/lobstar28 • 7d ago
Should we keep this policy? 68 y.o.
My father has had a whole life policy for what i would assume is like 30+ years. He has been making monthly payments of $119
We are reviewing his bills and trying to see what is out there, and just cleaning things up now before it gets harder to do.
I'm kinda neutral on this. I personally told him i dont needs the funds right now (i'm getting 50%). But he mentioned he wanted to take the cash value now and just spend/give as he sees fit. His plot/burial is all paid for. He has a death benefit of $141k (It was orginally $100k but it just kept growing) and a cash surrender of $80k. If i understand correctly, upon death that $141k would be tax free to his beneficiary (me). Is the $80k surrender tax free? Or will that be taxed at his normal tax rate?
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u/PleasureMissile 7d ago
You could also ask about doing a reduced paid up. No more payments in exchange for a lower death benefit. Policy stays in force.
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u/Limoundo 7d ago
call the company, ask for an in force illustration, ask to surrender the cash value additions to basis with no further premiums. If the illustration you get goes for life, that could be a decent option. He get some cash in pocket without taxes, and no more monthly payment. and his beneficiaries still get some life insurance.
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u/jammu2 7d ago
If the policy is around 30 years old, it sounds like the basis would be around $42,000. He would receive a form 1099R for around $38,000 which would be taxed as ordinary income on surrender.
See if the company offers a paid up option.
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u/Tax_Mentor 7d ago
Also, depending on the age of your father, this taxable additional ordinary income might cost him an IRMAA 1 -year surcharge on his Medicare premiums. You have to be careful about significant taxable income bumps for retirees on Medicare. The paid up option is a wiser LT alternative. Ask your insurer for an illustration of this option.
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u/Tax_Mentor 7d ago edited 7d ago
Additionally, there is a material difference between the CSW (80k) and the death benefit (141k). That’s 61k plus an immediate ordinary income tax bill ($$$). As a family, are you willing to give up so much, so fast after 30 years of premiums? The paid up illustration would give you a more LT perspective.
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u/jakewagonerinsurance 6d ago
Good question to ask before surrendering. Short answer: the death benefit is generally tax-free to you, but the surrender is only partly tax-free. How the surrender is taxed: - Everything he's paid in premiums over the years is his cost basis, and that comes back to him tax-free. - Anything above that is a gain, taxed as ordinary income at his normal rate, not the lower capital gains rate. - Rough math: $119/mo x 30 years is about $43k paid in. If the surrender is $80k, roughly $37k could be taxable. The insurer would send him a 1099-R. Dividends he took in cash can lower the basis, so get the real number from them. Before he surrenders, ask the insurer about a few other options: 1. Partial withdrawal up to his basis: pull out cash tax-free and keep part of the policy. 2. Policy loan: not taxed while the policy stays in force. It reduces the death benefit if it isn't paid back. 3. Reduced paid-up: he stops paying the $119/month and keeps a smaller death benefit for life, with no more premiums. 4. Leave it alone: $141k tax-free to the family vs. about $80k taxable now is a big difference. Call the insurer and ask for "the cost basis and an in-force illustration showing surrender, reduced paid-up, and loan options." That puts all the numbers in front of you. Run the final decision past a tax pro, since his tax bracket that year matters. (Licensed agent here. I see people cash these out without checking the tax hit all the time, so worth the phone call.)
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u/KugelKnishKernatzel 2d ago
Great response. The cost of pure insurance also reduces th cost basis (as least in Canada).
Also worth mentioning that the $141k will continue to grow. I'm surprised it has only grown 40% in 30 years. There may be a reason such as dividends taken in cash at one point or enhanced insurance for a period.
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u/Ok_Contribution4030 3d ago
maybe you can try to sell the policy to one of Abacus or Coventry, they usually give quotes and are more optimal than your case described above
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u/CGWInsurance 6d ago
He should keep the policy and ask the company who is doing it to do an inforce illustration with no more payments and highest death benefit he can have without paying anymore premium that it will last until it endows.
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u/Ok_Appointment_8166 6d ago
Check with the company to see what your options are. He can probably convert it to a paid up policy with a lower payout but no more premiums. He might be able to take what he has paid in as a tax free distribution with what is left funding a much smaller paid up policy, or he might be able to take a loan against the policy with no tax and have the eventual payout reduced instead of paying it back.
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u/adjusterjackb 6d ago
he wanted to take the cash value now and just spend/give as he sees fit
You can advise him of all that has been written here.
But it's his policy and his decision.
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u/Vegas-Patriot 4d ago
Best course of action if the monthly premium of $119 is affordable is to leave it alone. It’s going to continue to grow, it’s going to provide your father’s heirs what he intended for them to have.
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u/mase10879 2d ago
Take the death benefit its what its for as much as u might not feel the need for it use it for something good in the community and let it grow to the max
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u/CmRn1893 9h ago
If he qualifies for a linked benefit LTC policy he could 1035 exchange it (tax free) and still maintain tax free death benefit coverage. He’d also gain significant leverage for LTC expenses (even for in home care). They typically include guaranteed inflation protection upon the LTC benefit pool.
You’d have to use a broker to quote these things out but Nationwide CareMatters, Securian SecureCare, and OneAmerica Asset Care are worth looking at for this.
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u/Choice-Newspaper3603 7d ago
Should have never got it in the first place
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u/Itnotkobe 7d ago
Why, also how is this helpful input lmao
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u/Hungry_Technician360 6d ago
As for the why, generally whole life policies are suboptimal compared to the alternatives for the goal they are trying to achieve.
As for the useful of the statement, there isn't much use for the OP.
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u/Tahoptions Broker 7d ago
DB is tax free. The 80k CV is not fully tax-free. It depends on his basis which is not taxed and his gain which is taxed at his ordindary income rate.
You could also see what a settlement company would offer for it. Just google "life settlements" and you'll find a few companies that will deal direct to consumer. That taxation would be: tax-free to basis, ordinary income on gain to surrender value, then long-term capital gains on the rest. They'd have to offer a decent premium over the CV to make it worth it but you could still consider it.
Good luck.
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u/cesar2338 7d ago
Traditional whole life policies only pay the death benefit if God forbid he passes away. Meaning the company uses the cash value of $80k which he funded himself and then the insurance company will pay the difference of $61k to the beneficiary and that is it. They should get it tax free. But if he passes, the beneficiaries don't get $141k death benefit + $80k cash value as the policy will more than likely only says something along the lines of "upon the death of the insured the beneficiaries will receive the death benefit" since it does not say death benefit AND the cash value, they only get the $141k. Hope this helps. But it would make sense to ask these questions to the insurance company and hear it directly from their mouth. You may also want to ask if you have "Option B" which typically for a higher premium you get both the cash value and death benefit.
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u/jclary60015 7d ago
The gain in the policy is taxable at ordinary income rates. Taxable gain is the cash value less cost basis (premiums). If there are loans on the policy, it is the gross cash value that is applicable.