Retiree’s whole life—What if dividends won’t cover premiums

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PostPosted: Wed Jun 17, 2009 2:30 am   Post subject: Retiree’s whole life—What if dividends won’t cover premiums  

Retired coupleÂ’s primary asset is set of Mass Mutual whole life policies, face amount of coverage approx $480k (one @ $200k, one @ $100k, plus several smaller policies), total cash surrender value approx $290k (less $15k in loans). Dividends have been applied to cover premiums fully in recent years, but 2008 dividends of $11,200 did not quite cover premium total of $11,700. Concern is that if Mass Mutual reduces dividends significantly, we wonÂ’t be able to cover premiums out of pocket, and weÂ’re wondering about use of CSV to make up the difference between dividends and premiums and maintain the policies as-is. Is this the best strategy? What are the tax implications? What factors should we be considering? What other options are there? Our Mass Mutual rep has been nonresponsive lately, and in any event, we would like independent advice on this. Any guidance would be greatly appreciated. Thanks.

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PostPosted: Wed Jun 17, 2009 2:53 am   Post subject:   

How old are they and what is their relative health status? What are their goals - to keep as much insurance in force as possible, or to keep the cash value in place in case they need it, or just to keep their out of pocket expense to a minimum?

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PostPosted: Wed Jun 17, 2009 9:12 am   Post subject:   

What's the current death benefit of the policies?

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PostPosted: Wed Jun 17, 2009 12:17 pm   Post subject:   

Hi rlee2,



Quote:
Dividends have been applied to cover premiums fully in recent years, but 2008 dividends of $11,200 did not quite cover premium total of $11,700.




Yeah, I could see a gap of $500 over there.

But for how long are your dividends making up for the premiums?



Quote:
Concern is that if Mass Mutual reduces dividends significantly, we wonÂ’t be able to cover premiums out of pocket, and weÂ’re wondering about use of CSV to make up the difference between dividends and premiums and maintain the policies as-is.




Does Mass Mutual provide you with such updates from time to time?



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PostPosted: Wed Jun 17, 2009 12:49 pm   Post subject:   

Quote:
What's the current death benefit of the policies?




Looks like $480k, unless that was the starting death benefit.
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PostPosted: Wed Jun 17, 2009 1:07 pm   Post subject:   

I would suspect that if the CSV is $290,000 that the death benefit would be much higher than $480,000.



This would mean that even if the dividends don't cover the whole premium they are still going to be high enough to keep the death benefit above $480,000.



Additionally, even with a drop in the dividend scale, it is possible that the total dividends will remain the same or be higher.



We don't have a full set of facts, but I would very much doubt if there is going to be any issue with just using the dividends pay the premium even if the dividends are less than the total premium.

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PostPosted: Wed Jun 17, 2009 1:41 pm   Post subject:   

I somewhat got the impression that the initial death benefit was lower than $480k but has been increased to that level with the cash value and whatever paid-up additions there may be. It's always easier to figure out when you have the actual statements to look at.

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PostPosted: Thu Jun 18, 2009 12:28 am   Post subject:   

We'll see if we ever get a response from the OP.

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PostPosted: Thu Jun 18, 2009 4:02 pm   Post subject:   

Thanks to all for your replies--my own response time is slowed because I'm posting this on my parents' behalf (we're 800 miles apart, they are not online, so the back-and-forth is a little slow). Also because my own understanding of whole life is regrettably limited.



Some additional/clarifying info:



As to ages/health: H is almost 76, health a 4 on a scale of 1-10 (relatively active, e.g., regular golfer who walks the course, but does have a heart condition under management; W is 74, health a 5 or 6.



As to primary goals: clearly the least important concern is keeping as much insurance in force as possible (children all grown, no significant obligations). Other factors of minimizing out of pocket expenses and having cash value in place for future needs are main concerns. Other than SS, they have no income. So this is about maintaining funds to cover their own living expenses.



The 480k is the death benefit I believe--I may have mischaracterized in my original post- Basic coverage of policies totals 445k---paid-up additions on some of the smaller policies bring total coverage up to the 480 figure.



Real concern as expressed by father is "if Mass Mutual reduces dividends to point I cannot afford premiums, what should I do?" He is particularly concerned about possible tax implications of taking cash value or even using some to cover premiums. He wonders whether these policies are a "luxury" that he can afford.



Again, thanks for your input.


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PostPosted: Fri Jun 19, 2009 12:56 am   Post subject:   

There is something about these two quotes that don't seem to go together:



Quote:
As to primary goals: clearly the least important concern is keeping as much insurance in force as possible (children all grown, no significant obligations).




Quote:
Other than SS, they have no income.




It is very possible that your mom will outlive your dad for 10+ years. It should be important to keep insurance in force if your dad feels that he has an obligation to take care of your mom. I sure want to take care of my wife when I'm old (and dead).



Let me explain why it is so important to try to keep these policies in force. For ease, let's pretend that it is one policy with a $485,000 death benefit and a $270,000 cash surrender value. If the policy is cancelled, they'll get $270,000. They will pay income tax on the gain. Maybe they walk away with $200,000 (complete guess). LetÂ’s say that over the next two years, that $200,000 earns 5% a year after tax ($10,000), but they spend the money. Your dad then dies. Your mom has $200,000.



What happens if they borrow the money out instead? Each of the next two years, they borrow $10,000 out of the policy. At death, this needs to be paid back. Assuming the $485,000 death benefit stays the same, after paying back the loan, after tax, your mom will have about $460,000. This is more than $200,000 the last time that I checked. Borrowing money will have no impact on the policy dividends.





Without knowing anything about your dad, I can confidently tell you, "Your dad can absolutely afford these policies." The dividend will be able to handle the premium for them even if it is lowered. This is what you should do. With your parents on the line, call the agent. Have him run an illustration with a dividend that is 1% lower than what they are currently paying and with no future out of pocket premiums. Take a look at whether the policy is in trouble. (It wonÂ’t be.) If you arenÂ’t getting a quick response, just call the insurance company directly.
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PostPosted: Fri Jun 19, 2009 4:26 am   Post subject:   

Quote:
ace amount of coverage approx $480k (one @ $200k, one @ $100k, plus several smaller policies)




How many policies do they have in total? What are the death benefits on each policy? I guess the total death benefit is coming to $480k, right?
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PostPosted: Fri Jun 19, 2009 4:35 am   Post subject:   

Hi Expert,



I was just wondering if they can surrender the smaller value life plans to use the money towards increasing the death value of the existing high value one, would that be beneficial for them? Can this be done?

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PostPosted: Fri Jun 19, 2009 11:29 am   Post subject:   

They could surrender the smaller value plans, but it won't make sense to do it and it won't be necessary. Old people don't want to cancel life insurance policies. When they do this, they are trading a smaller taxable cash surrender value for a larger tax free death benefit.

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PostPosted: Sat Jun 20, 2009 6:50 am   Post subject:   

Quote:
Old people don't want to cancel life insurance policies.




I think the idea isn't restricted to old people only. Anyone, who has a dependent to take care after his death wouldn't trade his life insurance for smaller cash surrender value than death benefit.
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PostPosted: Sun Jun 21, 2009 2:44 pm   Post subject:   

FROM RLEE2 (ORIGINAL POSTER)



First, to clarify, yes, keeping insurance in force to provide for my mother if my father predeceases is VERY important. What I meant to communicate was that there are no particular OTHER obligations to worry about (e.g, no other dependents, no other debts, etc), just covering father's and mother's expenses .



To InsuranceExpert: can you please elaborate on your guidance? I want to make sure I understand.



Are you saying that my father should plan to take out small loans against the policies each year if and as necessary to cover any gaps where annual premiums exceed annual dividends? (or at least be prepared to do that as the situation unfolds each year)



Or in your suggestion about requesting the illustration with no out of pocket premiums, are you saying that there is a way to set things up with MassMutual such that my father would not get billed for premiums any longer, e.g., that future costs of maintaining coverage would automatically be offset against dividends, with any premium-minus-dividend differential being handled by reduction of cash value and/or death benefit?



And what are the tax implications (particularly immediate tax implications) here? Are there any immediate tax implications associated with borrowing against the policies, or does borrowing just impact the amount of death benefit/cash value available for later payout? If any scenario involves use of cash value to pay current premiums, would there be any immediate tax implications there?



Again, sincere thanks again for your input (and patience).


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