Is interest paid on the face amount of insurance polices?

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PostPosted: Mon Jul 26, 2010 2:06 pm   Post subject: Is interest paid on the face amount of insurance polices?  

My father in law bought a life insurance policy from Globe Life in 1974, Face amount was $1782.00. He died recently and we received a check for $1782.00. However, my sister in law had a life insurance policy from Prudential with a face value of $1000.00 purchased in 1950. When she passed away in 2008 we received a check for nearly $5000.00. Interest was included on this policy. Could you explain the difference between policies, why we didn't receive any interest on my father in laws policy? Or were they wrong when they settled the claim?

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PostPosted: Tue Jul 27, 2010 12:27 am   Post subject:   

Quote:
Could you explain the difference between policies, why we didn't receive any interest on my father in laws policy?




Without seeing your father-in-law's policy, it is impossible to answer your question. What strikes me as odd, right up front, is the amount of the death benefit.



Who in their right mind purchases $1782 in life insurance? $1,000 maybe, $10,000 perhaps. But $1782? Very odd.



Quote:
However, my sister in law had a life insurance policy from Prudential with a face value of $1000.00 purchased in 1950. When she passed away in 2008 we received a check for nearly $5000.00. Interest was included on this policy.




Did someone have to pay income tax on $4000? If the answer is no, then the $5000 was the actual death benefit. It could have increased from the original $1000 face amount as the result of "paid up additions" that happen when some policies (known as "participating") pay "dividends" (which are actually a refund of excess premiums, not interest like you might receive from your credit union called a dividend).



However, Prudential was a mutual insurer until the early 2000s. What's more likely, is that her policy's face amount was increased as a result of Prudential's "demutualization". It would have been considered a form of compensation to her for giving up her "ownership" interest in the company as a policyowner instead of providing her with stock in the new holding company.



Now if the increase was truly due to "interest", there would have been a taxable event.



[For those who are tempted to offer other thoughts, you must remember that there were no 'exotic' policies such as universal life or variable life in the 1950s, so it was probably some form of plain vanilla whole life insurance, because there were no 50+ year term life policies being written then either.]



Quote:
Or were they wrong when they settled the claim?




Anything is possible, but unusual in death claims. When managing death claims for a former agency employer, I did have one company accidentally overpay a claim. I sent the check back, and they replaced it with one for the correct amount.


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PostPosted: Tue Jul 27, 2010 3:51 am   Post subject:   

Quote:
Without seeing your father-in-law's policy, it is impossible to answer your question. What strikes me as odd, right up front, is the amount of the death benefit.



Who in their right mind purchases $1782 in life insurance? $1,000 maybe, $10,000 perhaps. But $1782? Very odd.




Not that odd at all. Lots of times agents sell policies based on what the client states as their ability to pay towards the policy, and sometimes agents use the maximum dollar up to the penny. This could have been the case in this purchase. It worked out that the premium commitment bought $1,782 in death benefit.





Quote:
Did someone have to pay income tax on $4000? If the answer is no, then the $5000 was the actual death benefit. It could have increased from the original $1000 face amount as the result of "paid up additions" that happen when some policies (known as "participating") pay "dividends"




This is most likely the answer to the reason the Pru policy went from 1000, to 5000. Simply, the Pru policy was participating, and the Globe Policy was not. No dividends, no paid up additions, no increased death benefit.





Quote:
However, Prudential was a mutual insurer until the early 2000s. What's more likely, is that her policy's face amount was increased as a result of Prudential's "demutualization". It would have been considered a form of compensation to her for giving up her "ownership" interest in the company as a policyowner instead of providing her with stock in the new holding company.




No, all Pru whole life policy holders were given Pru stock during demutalization. So she would have held separate Pru stock that would have had nothing to do with the death benefit.



The question is, did Pru send out a 1099 for any earnings? Because dividends left at interest is a potential possibility.



Most like the answer is in the participating (dividend paying) vs non participating (non dividend) paying explanation.



Dividends and PUA's did exactly what they were supposed to do, increase the death benefit.
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PostPosted: Tue Jul 27, 2010 12:49 pm   Post subject:   

Quote:
all Pru whole life policy holders were given Pru stock during demutalization




Not necessarily. According to Prudential,



Quote:
Eligible policyholders received a fixed component of 8 shares, as well as a variable component of additional shares based on the policy’s value.




And "lost policyholders" (whatever that means) received $28.44 in cash for every share entitlement.



But, after finding that, my statement about the face amount of insurance possibly being increased in demutualization is wrong [it took nearly 10 years for them to complete the process, because different groups of policyowners kept suing each time an about-to-be-approved plan was put forth, and there were many different proposals, one of which was to give some folks more coverage for no additional premium].



So, the additional face amount almost certainly resulted from "paid up additions" as the result of dividends paid over the years prior to Prudential's demutualization in 2001.



Quote:
Lots of times agents sell policies based on what the client states as their ability to pay towards the policy, and sometimes agents use the maximum dollar up to the penny.




Very true. As I said, who in THEIR right mind buys an odd amount of insurance such as $1782? There are always answers to the questions, "How much did you want to buy?" (determines the cost) and, "How much did you want to spend?" (determines the amount of coverage). Most agents determine the need/amount differently.



I managed to overlook the opening statement naming Globe Life as the insurer. As a direct marketer, they don't use agents, so the insured would have had to specify that insurance amount, or specify a particular premium that would have resulted in that amount. Who knows how Globe operated in the 1970s? Today, they only offer round dollar amounts beginning at $5000.


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PostPosted: Sat Jan 21, 2012 11:48 pm   Post subject: value of policy  

My mother passed away January 5th 212. She purchased a $1000.00 whole life policy in 1970 with me as sole beneficiary. What is the value of this policy on D.O.D.?


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PostPosted: Sun Jan 22, 2012 6:23 am   Post subject:   

A $1,000 policy purchased in 1970 will provide a death benefit of $1,000 in 2012 (there is a small possibility that it was a dividend-eligible policy that could now have a larger death benefit on the date of death). In addition, a small amount of interest could be paid from the date of death to the date the claim check is written. Of course, someone has to file a death claim with proof of death.



Your other question is about "the value of the policy". I believe you were expecting the answer above to be very different than $1,000, perhaps believing that policies adjust the face amount to keep up with inflation. Most of the time this does not happen (and . . . it would only happen if a Cost of Living Rider was part of the policy).



The value of one thousand 1970 dollars on January 5, 2012 was about $172.41, thanks to the cumulative effect of inflation resulting in a rate of change of 479.7% (a $1 item in 1970 would have cost $5.80 at the end of 2011, or $1/$5.80 = $0.172413 * 1000 = $172.41).



By comparison, the Dow Jones Composite Average increased by over 1000% in the same 40 years, and the S&P500 rose by more than 800%.



So my condolences on both accounts: the loss of your mother, and the lost time value of money. $1,000 invested in the stock market in 1970 would be worth about $10,000 today, including all the intervening ups and downs. That's why life insurance should never be considered an investment.



On a positive note, in 1970 you could buy a 25" Color TV console (in a real wood cabinet built by American craftsmen) for about $800. Your $1000 will purchase a 46" Sharp Aquos LED TV at Sam's Club today (1-21-12) and leave $2 in your pocket (sales tax additional).



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PostPosted: Mon Jan 23, 2012 10:13 pm   Post subject:   

The most likely simple explanation is that some policies pay dividends and these policies can grow over time (like the Prudential policy). The Globe life policy didn't pay dividends and didn't grow.


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