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Helping my father-in-law with their Universal Life Insurance

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I did a lot of reading and researching on FW a couple of years ago that helped me realize that the Variable Universal Life Policy I bought at 22 years old was not my best option. I ended up buying some term policies for my wife and I. I also ended up keeping the VUL policy but stopped paying the premiums. Rather than just cashing out my VUL, I'm letting the cash value pay for the life insurance until the funds expire. 
In the past week, my wife's parents revealed to her that they are paying $700/mo  to try to keep up with their insurance policies and the premiums keep rising. They have a definite issue the way I see it. While I believe that they are probably out of debt and have some assets (at least several hundred thousand in property and land), they are both retired (she is 77 and he is 79). They can't continue paying $700  monthly.  The death benefit for is only $50,000 with two $50k riders equaling $150k total! Yikes. They'd like to leave something for their four children, but the death benefit total is not going to go real far anyway after being split four ways. And as I mentioned, they will have other assets in land perhaps other investments.
My first. thought is to just cancel the thing already. I have done some more recent research, but I just want to see if anyone sees any flaws with the conversation points I plan to have with them tonight. 

First, this is what they own: A flexible premium adjustable life (universal life) insurance policy. The insured is my father in law, the owner of the policy is my mother-in-law.
According to the most recent statement they provided me, it appears that there is a $50,000 death benefit with two $50,000 "covered insurance riders". 
Cash Value is: $3,824.  Surrender Charge: $0, Outstanding Loans: $0
It appears that the cost of the riders is $387/month

*The first thing, I"m a bit unsure about is the term "flexible premium adjustable" policy. From what I gather, that means that they would have the option to decrease the amount of the benefit, which would decrease the premium? 
*One possibility would be to try to drop the 2 riders, which would cut the policy benefit to $50k, but would hopefully lower the payments to roughly $313/month.  
*Another possibility would be to stop paying the premiums (like I did with my policy) and let the cash benefit just continue to the pay for the cost of insurance (which would leave the insurance policy in place for probably only a few months).  
*Another option would be to take their $3800 cash value and cash out.
*I suggested that they meet with a term life agent just to see whether one of them would be able to get cheaper term life at a more affordable rate than they are already paying if they truly want to keep an insurance policy. I doubt that they would be able to get anything affordable at their ages (77,79), but would it be any cheaper than what they are already paying?

Again, my feeling is that they should just either cash out or let the cash value pay for the cost of insurance until the cash value expires. We don't need the $ that they'd like to leave us. We're not wealthy at all, but we can handle ourselves just fine. And they probably will have some assets to pass on anyway. I'm worried for them because they are proud and they were trying to do a good thing, but didn't realize, like many people, what they were getting themselves into when they bought this whole life policy. They've already paid $44,500 fin premiums over the life of this policy and will have nothing to show for it. I will try to explain that term life insurance has lost costs also. It wouldn't have been this expensive, but they still would have paid something and gotten nothing in return when the policy expired. 

Anything I'm off base here or any other suggestions I should offer them? 


 

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Do they each have policies for $50k each with a combined cost of $700/mo?

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I don't know if they can get cheaper life insurance, that is something to look into. Technically they probably don't need life insurance.  

That being said, we now have a situation where they are paying $8.4k a year with a payout of $150k at some point in the future. How is their health? Because absent better alternatives, what we have here is a break-even analysis. $150k/$8.4k is around 18. It's actually lower due to if you invested the money it would grow. But still, at 77 and 79, unless they are in fantastic health and have extreme longevity, it probably pays for someone to fund these policies, even if they can't. 

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This is just one $50k policy (with 2 $50k riders) making this a $150k policy total if I am understanding correctly. 


Do they each have policies for $50k each with a combined cost of $700/mo?

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Rajjeq said:   I don't know if they can get cheaper life insurance, that is something to look into. Technically they probably don't need life insurance.  

That being said, we now have a situation where they are paying $8.4k a year with a payout of $150k at some point in the future. How is their health? Because absent better alternatives, what we have here is a break-even analysis. $150k/$8.4k is around 18. It's actually lower due to if you invested the money it would grow. But still, at 77 and 79, unless they are in fantastic health and have extreme longevity, it probably pays for someone to fund these policies, even if they can't. 

  
Ok. So what you are saying is basically don't be blinded by the high costs of insurance that have already been paid, just take things at the value from this point on? And that if they died within 18 years from now, we'd at least come out ahead. So if they wanted to stop paying, their four children could pay the cost of insurance if they wanted to take the risk of coming out ahead?  The 77 year old mother-in-law is in pretty good shape. The 79 year old father in law is not in fantastic shape. He's pretty good but has had a stroke.
 

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Rajjeq said:   I don't know if they can get cheaper life insurance, that is something to look into. Technically they probably don't need life insurance.  

That being said, we now have a situation where they are paying $8.4k a year with a payout of $150k at some point in the future. How is their health? Because absent better alternatives, what we have here is a break-even analysis. $150k/$8.4k is around 18. It's actually lower due to if you invested the money it would grow. But still, at 77 and 79, unless they are in fantastic health and have extreme longevity, it probably pays for someone to fund these policies, even if they can't. 

  Although I should note that the premium continues to rise almost annually from what it appears. I don't believe there is any sort of guarantee that the premium will be $700/month beyond the next couple of months. It could very well continue to rise.

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I'm confused about there being one policy for 2 people. Is it covering both of them or one of them?

You also have to consider that the premiums have been going up so it won't be $8400 a year in the future. And rather than paying the $8400+ to the insurance company they could get some returns on their money if they had used/invested it elsewhere. The break even of 18 years assumes no growth or interest on the $8400/yr

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jerosen said:   I'm confused about there being one policy for 2 people. Is it covering both of them or one of them?

You also have to consider that the premiums have been going up so it won't be $8400 a year in the future. And rather than paying the $8400+ to the insurance company they could get some returns on their money if they had used/invested it elsewhere. The break even of 18 years assumes no growth or interest on the $8400/yr

  I'm a bit confused myself honestly. I'll have to get clarification from them, but I'm not sure they know for sure. It appears to me there is one policy.There is only one policy number.  The paperwork says:
Insured: "father-in-law"'s name Owner/Payor: "mother-in-law"'s name.  

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abbygayle65 said:     I'm a bit confused myself honestly. I'll have to get clarification from them, but I'm not sure they know for sure. It appears to me there is one policy.There is only one policy number.  The paperwork says:
Insured: "father-in-law"'s name Owner/Payor: "mother-in-law"'s name.  

  There is only one policy covering the life of your FIL. It was purchased by MIL who is responsible for paying the premiums. There should be a third name listed as well---the beneficiary; could be MIL but not necessarily.

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fwuser12 said:   
abbygayle65 said:     I'm a bit confused myself honestly. I'll have to get clarification from them, but I'm not sure they know for sure. It appears to me there is one policy.There is only one policy number.  The paperwork says:
Insured: "father-in-law"'s name Owner/Payor: "mother-in-law"'s name.  

  There is only one policy covering the life of your FIL. It was purchased by MIL who is responsible for paying the premiums. There should be a third name listed as well---the beneficiary; could be MIL but not necessarily.

  
It better be, or there will be a big tax problem.  If MIL owns that policy, she must be the beneficiary or the entire death benefit will be a taxable gift.  Never have the insured, owner, and beneficiary be three separate parties.

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Forget what was paid up to now. It's irrelevant. This policy will become (maybe already is) prohibitively expensive. If the coverage is not needed, surrender it now. Why waste $3800 on a few months of insurance.

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The breakeven is likely less than 10 years. You can invest the money going towards the premium. The premiums will keep going up

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The ship on this one is half sailed.  Probably could have $150k in the bank for how long they have been putting this aside for insurance.  Would be good to see if they really need the $150k should one perish.  I think SS survivor benefits might carry them on and perhaps all they need is money for a funeral?  In one year you should have enough for one unless they are getting extravagant for the ceremony after this they are just saving and enjoying life with more resources.

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Shopping for term isnt going to work.

Flexible premium is a marketing thing. They like to pretend you can just forgo payments at times if you want to. I can forgo paying my cc for a month but we all know ill get hit with fees/interest. These things become completely inflexible with time because the cost of insurance rises and if you dont pay it, then it immediately crashes.

What you need to do is request an inforce illustration and look at the guaranteed and illustrated columns. It is true you should ignore previous money spent and focus on future. The healthier he is, the more likely he is to live a lot longer, the more investing is better. The sicker he is, closer to death, the more you want to keep this in force to get the maximum death benefit.

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I own an independent life/disability/health/long-term care insurance brokerage and can echo what others have mentioned. This policy looks to be a Current Assumption Universal Life (UL) policy which was sold many years ago. The "flexible premium" is definitely a double-edged sword, and that's where may of these policies can get off track, as some policyholders miss payments over the years and then don't make up for it, in which, the policy will not sustain itself. Of course, this isn't even taking into account the very poor interest rate environment for the past decade or so.

My gut is that since there is no surrender charge, the policy is at least 15-20 years old at this point. If this is the case, many of these ULs were taken out when interest rates were much higher than they've been for the past 10yrs or so, and they are now imploding, due to the accumulation values not performing as initially illustrated. Because the Cost of Insurance (COI) continues to increase every year, this thing is going to just get more and more cost prohibitive with time, so better to find out now rather than later. As others have mentioned, you NEED to order an inforce illustration, as well as an illustration guaranteeing the policy out to age 85, as well as 90, or age 100, depending on their current health. This will provide a hypothetical illustration (ie: projection) as to how long the policy will last, given the current interest crediting rate, as well as the project COI's based on their current and future ages. I would then assess both of their health and do a calculation with this info in order to determine whether it makes sense to stay the course with this policy. I would also recommend speaking with a knowledgeable insurance broker/agent, and I would be happy to help.

You may order these illustrations from the insurance carrier and then find out that in order for the policy to stay inforce to age 90 or 100, the premiums will most likely have to be increased to an amount over $700 a month, in which case, you'd look at their health and do the math in deciding how much more you're going to put into these policies over that time period. Also, if the MIL is the Owner with your FIL being the Insured, and she is NOT the Primary Beneficiary, then that violates "The Goodman Rule", hence making it a taxable transfer. Any agent should know this, as this is Life Insurance 101, and a big "no no". You can also read more about it here - https://metlifepro.metlife.com/RPP/Public/StaticFiles/SHARED/CS/...

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Thanks for all of the help on this. After discussing with them and taking a look at some of the illustrations, they decided to cancel. As christlands18 noted, the interest rate situation seems have been a big issues (high in the 1980's when this was opened).Also, they did stop paying for two years at one point. 
Interesting side note, two days after cancelling the insurance, my F-I-L had a scare with death, having to put a pacemaker in. He was able to inject some sick humor in at the hospital before going into surgery, asking whether the policy would extend through the end of the month, since  a payment was made for that month or whether the policy ended the day he asked them to cash it out. We never did take the time to check for an answer on that question and he hopes to come home from the hospital today, but it just shows that you never know...

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abbygayle65 said:   Thanks for all of the help on this. After discussing with them and taking a look at some of the illustrations, they decided to cancel. As christlands18 noted, the interest rate situation seems have been a big issues (high in the 1980's when this was opened).Also, they did stop paying for two years at one point. 
Interesting side note, two days after cancelling the insurance, my F-I-L had a scare with death, having to put a pacemaker in. He was able to inject some sick humor in at the hospital before going into surgery, asking whether the policy would extend through the end of the month, since  a payment was made for that month or whether the policy ended the day he asked them to cash it out. We never did take the time to check for an answer on that question and he hopes to come home from the hospital today, but it just shows that you never know...

  
WOW! Glad your FIL is OK and happy that I could help.

Just so you know, with most life insurance policies there's usually a 30 day free Grace Period where you're still covered, where you can just remit payment and put the coverage back on-track, but if they flat out surrendered the policies in order to obtain the Cash Surrender Value, then the coverage would've ceased on the date that the policy was surrendered. To be honest, we've even had clients who mistakenly forgot to pay the premium on their term policy for a couple months, and then passed away after the policy had officially lapsed, and the carrier (in this case, American General) actually paid the $500k death claim, when in actuality, they weren't contractually obligated. In this case, they just made the beneficiary pay the 2 outstanding term premiums (which they were obviously happy to do), and the carrier paid the $500k within 30 days, including interest while the claim was being processed. Although this is not guaranteed and you definitely never want to be in this predicament, it was obviously a very gesture on behalf of the insurance carrier.

In any case, crazy timing nonetheless, and just shows you that none of us have crystal ball when it comes to our health and mortality.

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chislands18 said:   To be honest, we've even had clients who mistakenly forgot to pay the premium on their term policy for a couple months, and then passed away after the policy had officially lapsed, and the carrier (in this case, American General) actually paid the $500k death claim, when in actuality, they weren't contractually obligated. In this case, they just made the beneficiary pay the 2 outstanding term premiums (which they were obviously happy to do), and the carrier paid the $500k within 30 days, including interest while the claim was being processed. Although this is not guaranteed and you definitely never want to be in this predicament, it was obviously a very gesture on behalf of the insurance carrier.
 

  This is indeed a (pleasantly) surprising behavior. What was the sequence after premium due date and grace period passes (with no premium received) and insured dies subsequently?
(a) Someone sends in the premium, which somehow "activated" the policy. A claim was subsequently filed and processed by company.
or
(b) A claim was filed; insurance company informs about the "lapsed" state of the policy due to premium not received. Processes claim but asks for outstanding premium to be paid first.

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abbygayle65 said:   Thanks for all of the help on this. After discussing with them and taking a look at some of the illustrations, they decided to cancel. As christlands18 noted, the interest rate situation seems have been a big issues (high in the 1980's when this was opened).Also, they did stop paying for two years at one point. 
Interesting side note, two days after cancelling the insurance, my F-I-L had a scare with death, having to put a pacemaker in. He was able to inject some sick humor in at the hospital before going into surgery, asking whether the policy would extend through the end of the month, since  a payment was made for that month or whether the policy ended the day he asked them to cash it out. We never did take the time to check for an answer on that question and he hopes to come home from the hospital today, but it just shows that you never know...

 If he's ill enough that this is happening, perhaps you should reconsider your decision and request it be continued.

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fwuser12 said:   
chislands18 said:   To be honest, we've even had clients who mistakenly forgot to pay the premium on their term policy for a couple months, and then passed away after the policy had officially lapsed, and the carrier (in this case, American General) actually paid the $500k death claim, when in actuality, they weren't contractually obligated. In this case, they just made the beneficiary pay the 2 outstanding term premiums (which they were obviously happy to do), and the carrier paid the $500k within 30 days, including interest while the claim was being processed. Although this is not guaranteed and you definitely never want to be in this predicament, it was obviously a very gesture on behalf of the insurance carrier.
  This is indeed a (pleasantly) surprising behavior. What was the sequence after premium due date and grace period passes (with no premium received) and insured dies subsequently?
(a) Someone sends in the premium, which somehow "activated" the policy. A claim was subsequently filed and processed by company.
or
(b) A claim was filed; insurance company informs about the "lapsed" state of the policy due to premium not received. Processes claim but asks for outstanding premium to be paid first.

  
Sorry for the delayed reply - Been swamped with work!

In this specific situation, the policy was for a gentleman who was required to have the life insurance, due to a previous Divorce Decree. He had 3 children with his ex-wife who lived in another state, and his EFT (automatic monthly withdrawal) was returned by his bank, due to insufficient funds. American General then sent him out a notice via mail, which he forgot to pay within the standard free 30 day Grace Period. Upon this initial free 30 day Grace Period, another 30 days had elapsed, and he passed away shortly thereafter.

When he passed away, the ex-wife called us in order to let us know to start the death claim process. Turns out, he was past the initial free 30 day Grace Period (where he was still technically covered), and he had even went beyond the additional 30 day "Reinstatement Period", where he was technically NOT covered. As I mentioned, although you are not typically covered during this Reinstatement Period, the carrier will usually allow you to submit payment for all back premiums owed (in this case 2 months), and then the policy would go back in-force and revert to a current status, where the client is covered. If you reinstate a policy during this time, the carrier will not require you to re-qualify and provide new evidence of insurability, which is REALLY important, especially if you have had a drastic change in health, and could no longer qualify for the same health class that you qualified for previously.

With this specific case, American General did the right thing and allowed the ex-wife to pay the 2 monthly premiums of $51.63 ($103.26 total) beforehand, and they then processed the $500k death claim, as they would with any other policy. They even paid 3% interest on the $500k ($1,602.90) while the death claim was being process, which was also a very nice bonus to give to the client!



 

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