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 Posted: Sat Jun 26, 2010 11:16 am Post subject: Former employer (life insurance policy) still is this legal? |
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| For a retirement reasons a policy was taken for me with a payout of 300,000 at 15 years of service and more if by retirement age. My age is 56 and do to down sizing they let me go and paid out the 300,000 . I said was this being paid by the insurance company , no I'll cut you a check next week out of payroll and you'll need to pay taxes, so we'll deduct the taxes out and I received 2 months ago a net payout of $209,000. I assumed the policy is null and void; but it may not and I'm concerned. So I sent a letter this week to the Massachusettes based life insurance company requesting a status of this policy and to make a cancellation of this policy. I had the policy number from the lab testing paper work and do not have a copy of the policy, I was clear on my being no longer an employee of the policy holder. What suggestions do you have? I do not want this former employer to have life insurance interest on me. |
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lisadiane777
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| Posted: Sat Jun 26, 2010 5:23 pm Post subject: |
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I don't mean to sound harsh, but what you want doesn't matter.
You are not the owner of the policy, thus have no policy rights. Your former company has every right to hold on to this policy. After all, they need you to die to recoup the money that they paid to you. The insurance company shouldn't divulge any information to you.
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fksaskfakr
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| Posted: Sat Jun 26, 2010 11:57 pm Post subject: |
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I don't know about that...
What is their loss now that the OP is no longer employed by this company? He could live another thirty years or better, without ANY association with this former employer...
We need max, or ins. teacher in on this thread..I'll send them a note
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Lori
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| Posted: Sun Jun 27, 2010 11:05 am Post subject: |
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Lori, insurable interest is needed when one purchases a policy. There is nothing that stops the company from keeping a policy when the employee leaves. This is identical to the situation where a husband buys a policy on his wife and then they get divorced. He can keep the policy.
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fksaskfakr
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| Posted: Sun Jun 27, 2010 1:35 pm Post subject: |
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Lori has asked me to join this thread. It sounds like the policy was the backstop to either (a) a qualified retirement/pension plan or (b) a nonqualified executive benefit plan. Unfortunately, the OP does not provide enough information to tell for sure.
What leads me to believe that it was a nonqualified plan (such as deferred compensation) is the fact that there has been an automatic distribution (most likely one of the "distribution events" is termination of employment -- aka: downsizing). If the plan was a qualified plan, the OP should have had the opportunity to roll the money into an IRA to prevent the taxation problem this large distribution is going to cause.
(By adding $300,000+ to this year's income, the OP is going to find himself/herself in the HIGHEST marginal rate tax bracket, subjecting ALL of the other earned income for the year to the same high rate, and likely result in a huge UNDERPAYMENT even with the 20% withholding (since the highest marginal rate is about 35%).
Further, if a "nonqual" plan, the employer is free to pay its liability to the employee with funds from any source of its choosing . . . general funds, insurance policy cash value loan, or cash value withdrawal (depending on type of policy).
As fksaskfakr has stated, the OP is not the owner of the policy and has no say in what the owner (company) chooses to do. The policy can be kept in force, surrendered, assigned to the OP for value (absolute assignment or collateral assignment), or even "sold" to a third party (absolute assignment). When the OP dies, the policy, if in force, will pay a death benefit to whoever is the named beneficiary.
There is no taxable event that would ever attach to the OP or their estate following death. So any fears the OP may have in that regard are unjustified.
| Quote: | | I was clear on my being no longer an employee of the policy holder. What suggestions do you have? I do not want this former employer to have life insurance interest on me. |
This is all well and good, but immaterial. The employer no longer has "insurable interest". But all that means is the employer could not increase the amount of insurance on the OP (other than by the value of future premiums paid if there is some sort of collateral assignment involved). But as any life insurance producer is aware, ownership and insurable interest, AFTER a policy is in force, are no longer a requirement when it comes to who may own a policy. This is what allows viatical and life settlement companies to obtain ownership of policies of terminally ill and aging insureds.
The employer has incurred the expense of owning the policy and now paying a deferred comp liability. It is entitled to recover its expenses. If it chooses to do so by waiting for the deaths of former employees and collecting the death benefit proceeds, it may. What it may not do is "influence" the date of an insured's death (as in sending Tony and Guido to "take care" of someone).
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MaxHerr
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| Posted: Sun Jun 27, 2010 1:54 pm Post subject: The company is not doing well, due to the economy |
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| Yes this employer divorced me, just like any relationship that becomes troubled with money issues. A lay off - however I do not want to be insured for my life by a non-family member. I see "marital breakup"; the retirement plan was to shelter paying taxes as the money accrued for my retirement. I thought I was signing up for a plan like an annuity upon retirement an election of lump sum or 10 year pay out. The company paid out the retirement funds out of there own bank account; i asked wasn't it coming from the insurance company - no we'll write a payroll check , you'll pay taxes on it. For all I know this policy could be upward of 2-5 million dollars (my retirement pay out max was to be 500,000 at age 65, I was vested only to a 300,000 with another 5 years to be fully vested). Would you want some one to have a life policy on you and if you did for such a larger amount; after you left there employ? If they are hurting they could sell this policy, I recently become ill with type 2 diabetes and was hospitalized 4 months later my employer lays me off and another employee with cancer age 56 my same age. |
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lisadiane777
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| Posted: Sun Jun 27, 2010 2:22 pm Post subject: |
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| Quote: | | I do not want to be insured for my life by a non-family member. |
I can appreciate your sentiments, but the facts behind the policy covering your life were disclosed to you by your employer. You had the right to disagree and not consent to be insured, but apparently you did not refuse to give consent.
| Quote: | | my retirement pay out max was to be 500,000 at age 65, I was vested only to a 300,000 with another 5 years to be fully vested |
This is the statement that troubles me. Were you in a "qualified" retirement plan or a "deferred compensation" plan?
When you speak of "vesting" and having to wait another 5 years, it could mean that you were a participant in a qualified plan and only worked for this employer for 2 years -- since the maximum vesting schedule in a defined benefit plan is 7 years. If that's true, something is amiss.
So something is not yet apparent to me in your posts, other than you would probably not be this angry unless you had worked for the employer for a number of years and have been "hurt" emotionally by your forced departure. If that's true, then you should have satisfied any "vesting" requirement a long time ago.
A non-qualified plan does not normally provide anything other than a lump-sum distribution or series of payments (usually limited to 5 years, not lifetime, as in an annuity) following separation or retirement. Since it does not have to play by any IRS rules, it could very well have a vesting schedule beyond the 7 year limit in a qualified plan. But thinking you would be getting an annuity by signing up to participate is probably not something that was stated in your plan summary or other information.
You can take your distribution to an insurance company and purchase an annuity today. You can choose to annuitize immediately or defer annuitization into the future -- that's your choice. A variable annuity would allow you to both protect the value of your premium and potentially increase the value of the annuity over time with good performance in the separate account.
But . . . no matter how much it disturbs you . . . you have no ability to determine what happens to the life insurance policy your employer owns, how much the death benefit is (unlikely to be much more than the company's liability to you, and certainly not $2-$5 million unless you were a very senior executive, in which case you probably would not be posting here), or what happens with the money payable after your death.
Please don't shoot the messenger! Just trying to help you understand the reality of the situation. Please be a bit more specific about what the type of plan was, because depending on the actual circumstances, failure to properly disclose the workings of the plan could be a cause of action for a civil suit against your former employer.
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MaxHerr
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| Posted: Sun Jun 27, 2010 2:39 pm Post subject: |
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Lisadianne, your frustration is very understandable. Nobody wants an outside party to benefit from their death. The death benefit may be sizeable. Insurance policies tend to be a good place to stick cash with no need to take investment risk. Regardless, nothing changes. You don't own the policy. You don't get a say in it.
Just a thought here...maybe they'd be willing to sell the policy to you. However, they'd be foolish to do so unless they are in a serious cash crunch.
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fksaskfakr
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| Posted: Sun Jun 27, 2010 3:39 pm Post subject: |
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Okay. let's get back to basics. In this case, one thing cannot be disputed; someone made the premium payment on the policy in question. Lisadianne, were the premium payments on this policy taken out of your check on a pre-tax basis (which could foster questions about the IRS's Incidental Insurance Rule) or did the company make these payments?
Hey Max, How's it going?
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InsInvestigator
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| Posted: Sun Jun 27, 2010 7:37 pm Post subject: |
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I don't think any premium payments came out of the OP's checks. I believe this was a nonqual defferred comp plan that (unfortunately) did not offer any distribution choice upon termination of employment. Since the plan doesn't require IRS approval, it can make any "ruled" it chooses. In this case, the OP will suffer the indignity of our tax system and probably lose close to $100,000 of her deferred comp to income tax in one year instead of being able to spread it out more comfortably over 5 years.
Hey, Mark! Nice to know you're around (I've referred a couple of posters to you recently).
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MaxHerr
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| Posted: Mon Jun 28, 2010 1:10 am Post subject: Mark most correct |
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I used vested incorrectly (I'm 56 now and worked for this company for 18 years, if I kept working till 62 i'd collect more), this was a non-compete slash retirement agreement, a life insurance the company said was for tax reasons and the policy was an asset held by the company. The employer posted a on my W2 $16,700 line 11 non-qualified plan.
I agreed to it thinking; I'm valuable to them and I'm going to retire with this firm, (the non-compete was released at the layoff), truly I was not knowledgeable on how it really worked and a few years afterward I showed an advisor who said you may never collect on this. However at the layoff I did get a sizable payout from the company, as mentioned before. All that said (wrong or right) I do not want my former company to insure my life as they do not have a vested interest in me. I'm bothered greatly about this, so last week I sent a letter to the insurance company for information; if this policy was still active, as I had the policy number but not the policy. I also stated my wishes that I did not want my life insured by a non family member.
Sorry all I'm learning as I'm writing - I should read the original agreement (which is not any insurance policy it's a written agreement with the company); that's all I have that explains to me what I was getting into when they offered me a retirement funding. I know a bit more now about key personal insurance - reading that they recommend 5 years of employees annual salary 200K = 1 million recommended --- It could be more which scares me, I never seen the policy. |
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lisadiane777
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| Posted: Mon Jun 28, 2010 9:35 am Post subject: |
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Again, your wants are meaningless. The insurance company shouldn't be willing to give you any information and they definitely can't cancel the policy at your request.
Your only chance here is to get your old company to agree to sell the policy to you in exchange for the $300,000 that they paid you.
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fksaskfakr
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| Posted: Mon Jun 28, 2010 2:01 pm Post subject: |
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| Quote: | | All that said (wrong or right) I do not want my former company to insure my life as they do not have a vested interest in me. I'm bothered greatly about this |
There is nothing to be "bothered" about. Your employer promised you a (nonqualitfied) retirement benefit that was 100% vested (as to your contributions, and possibly earnings) to your heirs if you died prior to retiring or leaving the company. It was, as the financial adviser told you, not a guaranteed benefit -- if the company failed, you would not have been likely to recover the deferred income (the one thing you still have not acknowledged) you had not received.
Without seeing the plan document, it is only speculation whether you had any options to receive your distribution in any manner other than a lump sum. If you did, and did not fully understand the differences between the options, then you might have a civil action against your employer for its lack of educating you about how the plan works. But that's about all you may have.
That benefit your employer "promised" you (which you have, fortunately, received) was backstopped with a life insurance policy. That's known as "informal funding", because the Internal Revenue Code does not actually permit "real money" to reside in a nonqualified plan, as is required in a qualified plan.
You did not receive the amount of income you deferred, and the company incurred a "liability" to you for it. Recognizing its responsibility to you and other plan participants, it did the "right thing" and purchased an insurance policy (actually a block of policies) WITH ITS OWN MONEY to help make sure there would be money available to make good on its nonguaranteed promise.
The company is entitled to keep the policy in force for as long as it chooses to do so, up until your death, at which time it would collect the death benefit. There is nothing unlawful or unethical in this, and because you are not the policyowner, there is nothing you can do to prevent it.
You can be as upset as you want about the fact that they have a policy on you and you no longer work for them, but what's your real complaint? That your "family members" will not receive any insurance proceeds when you die? If that's it, then you should purchase AND PAY FOR an individual life insurance policy WITH YOUR OWN MONEY.
| Quote: | | I know a bit more now about key personal insurance |
Actually, the concept is known as KEY PERSON insurance, and the policy in question which the company owns that covers you is NOT KEY PERSON INSURANCE. But even if a company purchases a key person policy on an executive, if that person leaves the business, the company can, and often does, keep the policy.
Every penny you spend on postage or phone calls to the insurance company about the policy is wasted money. As you have been admonished several times already, you are not the owner of the policy and the insurance company has no responsibility to you, cannot act in any way on your "instructions", and is probably going to send you a response that says so. Don't even think about getting an attorney to sue the insurance company, because that will be even more wasted money. Any good attorney would tell you so. But I'm sure you can find one who will take the case for an upfront fee, promise you the moon (which is more than your employer did), and take your money all the way to the bank without delivering on the promises.
As fksaskfakr states above, about the only thing you might be successful in accomplishing is getting your former employer to grant you an "absolute assignment" of the contract -- and you'll have to pay them at least as much as they paid in accumulated premium in order to prevent a taxable event as far as the death benefit is concerned.
You should really be spending your time, energy, and money talking to and working with a professional tax adviser about the effect this $300,000 distribution is going to have on your overall income tax situation when you file your return next year. At least you have six months left to try to minimize that impact. Don't wait until next April to discover that your tax bill is three times higher than it has ever been and complain then that you had no idea that would be the case.
| Quote: | | 1 million recommended --- It could be more which scares me, I never seen the policy. |
It's unlikely that the policy in question is for an amount that large. Probably more like $500,000, the amount of benefit you thought you were going to get in retirement. But, again, there is no reason to be "scared" about anything. Do you think the company is going to hire a hitman to murder you to collect on the policy? 
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MaxHerr
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| Posted: Tue Jun 29, 2010 12:23 am Post subject: no - no hitman |
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I would be more resolute if the policy is in line with the benefit being paid out, as you say $500,000.00.
Thank you for your advice on this, I see more of the position I'm in and what this is. Sadly I thought I was to retire with this company and on the good side a competitor hired me 3 weeks later (less salary with a smile I took it), working is better than sitting home upset with your pride hurt.
This issue , I did not understand - I've spent my energy the last 8 weeks starting my new job. The insurance policy on me , was not something I'm comfortable with. I spent a week in the hospital for type 2 diabetes , very dangerous ... Dec 24th through Jan 1st on my vacation I was in the hospital and did not miss any work. I was in work everyday and had to take insulin during the day. I had a bit of vision problems that lasted 6 weeks. Then 2 months later 3-29-10 9:00 AM they laid me off after 18 years of service ---- I think it was for health reasons age related. The good I've recovered fully with a strict diet to keep my sugars down. Maybe they are planning on selling this policy now that I've had this health problem, is this legal? I was reading about any terminally ill person can sell a policy of there own to help pay bills.
This is not the position I wanted to be in----However I got my payout, should I thank them for this? - I wonder; if you have a retirement you shouldn't be begging to receive what's promised. So many people have lost due to false promises.
I paid 90,000 in taxes when i took the lump sum payout of $302,000.00 , it was a payroll check and I took this and invested $150,000 with an advisor and the rest $60,000 in savings, maybe a CD until next years taxes are resolved.
Again thanks for your help! |
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lisadiane777
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| Posted: Tue Jun 29, 2010 7:02 am Post subject: |
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| Quote: | | Then 2 months later 3-29-10 9:00 AM they laid me off after 18 years of service ---- I think it was for health reasons age related. |
Although the courts have mostly decimated the laws regarding age discrimination in employment, this could be the basis for a civil action against your former employer under the heading of wrongful termination. A labor law lawyer would be the right person to ask about it.
| Quote: | | Maybe they are planning on selling this policy now that I've had this health problem, is this legal? I was reading about any terminally ill person can sell a policy of there own to help pay bills. |
Lisa . . . you continue to try to erase the line that separates you from the contract. Your former employer is the owner, and can do with the policy as they please. They are not going to sell it to a third party -- you are not terminally ill (Dr. diagnosed as having 24 months or less to live), and too young to be the subject of a life settlement. They could "assign" ownership to you in exchange for a payment equal to the premiums they paid.
| Quote: | | I got my payout, should I thank them for this? . . . I paid 90,000 in taxes when i took the lump sum payout of $302,000.00 , it was a payroll check and I took this and invested $150,000 with an advisor and the rest $60,000 in savings, maybe a CD until next years taxes are resolved. |
While you are indeed fortunate that your employer did not renege on its liability to you (or go out of business instead), I'm not so sure the word "Thanks" should be in the same sentence.
$90,000 in income tax withholding is probably insufficient. The $302,000 is going to put you squarely in the 35% tax bracket for 2010 -- with little or no way to escape that.
As a result, all of your income in 2010 (which prior to your termination most likely had withholding applied at a much lower rate), less any adjustments/deductions/credits that reduce your AGI or taxable income, is unlikely to be within the range of any lower tax bracket. Which means, to date, you are SERIOUSLY underwithheld. So you tell me, are you going to be thankful for that? Some of your savings will probably have to be used to pay taxes, unless you deliberately choose to be overwithheld for the remainder of 2010. As I mentioned in a previous post, you need to seek a good tax adviser to figure out what your situation is probably going to look like six months from now.
Did your "financial adviser" explain any of this to you? Probably not. Instead, he saw a commission check at the end of $150,000. What that "investment" does -- + or - -- also has the potential to further complicate your tax situation. $60,000 in "savings" probably means a few hundred dollars of interest that will INCREASE your AGI.
A professional tax adviser would probably have recommended a tax-deferred vehicle such as an annuity, or at least tax-free bonds/bond mutual funds, which your "financial adviser" may or may not have recommended.
| Quote: | | maybe a CD until next years taxes are resolved. |
I don't know enough of your situation to make any recommendations to you, but most of us here probably think of CDs as "Certificates of DEPRECIATION" (you might know them by a different name). That choice is going to create a taxable event every year the money is in the account, whether you touch it or not. I rarely recommend CDs -- especially today with interest rates at historic lows. There are tax-free alternatives that would provide a much better rate of return (with some risk to principal that you would need to understand) than any CD.
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MaxHerr
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