Permanent Life Policy

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P&C actuary
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Permanent Life Policy

Post by P&C actuary »

My father is 85 and I am getting more involved in his finances. He gets a monthly bill from MassMutual for Life Insurance. He appears to have ignored the bills for many years. MassMutual takes a Loan against the policy for the premium each month.

The current loan amount is $60k. The Current amount of additional coverage is $58k. The current cash value of additional paid up insurance is 52K.

Online, I can see the policy has Face amount 20k. And Cash value 7500. It is called a Permanent Life Policy.
I can not see a copy of the policy and would have to call for it.

What questions do I ask if I call MassMutual?

I don't think ignoring the bills is the answer. Should he cash out?
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David Jay
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Re: Permanent Life Policy

Post by David Jay »

Get an "in force illustration" (insurance industry term of art) from MassMutual. That will give you all of the actual, guaranteed values.

It sounds like you have $78,000 of coverage ($20,000 + $58,000) and a $60,000 loan for an actual death benefit of $18,000 which goes down each year with the increased loan amount. The in-force illustration will show the correct value.

I would probably take the $7500 cash value and be rid of the thing, just for simplification. Otherwise it will "go away" on it's own in a few years when the loan amount reaches the death benefit.
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Stinky
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Re: Permanent Life Policy

Post by Stinky »

P&C actuary wrote: Wed Apr 14, 2021 5:18 pm My father is 85 and I am getting more involved in his finances. He gets a monthly bill from MassMutual for Life Insurance. He appears to have ignored the bills for many years. MassMutual takes a Loan against the policy for the premium each month.

The current loan amount is $60k. The Current amount of additional coverage is $58k. The current cash value of additional paid up insurance is 52K.

Online, I can see the policy has Face amount 20k. And Cash value 7500. It is called a Permanent Life Policy.
I can not see a copy of the policy and would have to call for it.

What questions do I ask if I call MassMutual?

I don't think ignoring the bills is the answer. Should he cash out?
I agree with David Jay that the current amount of death benefit is likely $18k. That is, $20k face plus $58k additional minus $60k loans.

However, think that the current surrender value is approximately zero. That is, $52k cash value of paid up additions plus $7.5k policy cash value minus $60k loans.

If I’m right, the policy will lapse very soon as the loans overtake the cash value. What’s happened most likely is that the policy loan interest rate is higher than the accumulation rate for the policy. The loan has basically gobbled up the cash value.

The only way the policy will stay in force is if your father pays the current premium, plus enough interest to keep the policy from lapsing. The insurance company could tell you how much that is.

To add further insult to injury, it’s possible that your father will have taxable income if he lets the policy lapse. That’s because the loan balance is treated as a “distribution” from the policy. He should ask the insurance company what the taxable income (and surrender value, if any) will be if he surrenders the policy.

It may be that father is in a low tax bracket and doesn’t care about taxable income. But if he does care, likely the only way to avoid taxable income is to pay enough to keep the policy inforce until death. All death benefits are tax free.

This kind of mess happens sometimes with old permanent life policies with heavy policy loans.

Sorry that I don’t have better news for you. Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
P&C actuary
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Re: Permanent Life Policy

Post by P&C actuary »

Thank you David Jay and Stinky.

The interest rate of the loan is 5%. I also found out online that in addition to the loan, there is accumulated interest of 1750. The payoff for end of April is 62k, which I guess includes more interest.

So a cash-out may actually involve paying 2k. Alternative is taxes on a surrender.

The other option mentioned is paying premium and enough interest to keep it from lapsing until death. Does the "in force illustration" give the information to calculate how much to keep it from lapsing?
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Stinky
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Re: Permanent Life Policy

Post by Stinky »

P&C actuary wrote: Wed Apr 14, 2021 10:07 pm Thank you David Jay and Stinky.

The interest rate of the loan is 5%. I also found out online that in addition to the loan, there is accumulated interest of 1750. The payoff for end of April is 62k, which I guess includes more interest.

So a cash-out may actually involve paying 2k. Alternative is taxes on a surrender.

The other option mentioned is paying premium and enough interest to keep it from lapsing until death. Does the "in force illustration" give the information to calculate how much to keep it from lapsing?
I seriously doubt that the insurance company would let a policy get in the situation where you would owe money to them to lapse the policy. At very worst, it should be a break even.

As to what payments are required to keep the policy inforce until death, I would definitely get an inforce illustration. I really don’t know what it would show on a policy that is pending an overloan situation. If I were you, I’d talk to Mass Mutual, say that you’d like an illustration with the minimum cash outlay to keep the policy inforce, and see what they can do for you. Hopefully their illustration system has functionality to handle that.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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P&C actuary
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Re: Permanent Life Policy

Post by P&C actuary »

Stinky wrote: Wed Apr 14, 2021 10:17 pm I seriously doubt that the insurance company would let a policy get in the situation where you would owe money to them to lapse the policy. At very worst, it should be a break even.

As to what payments are required to keep the policy inforce until death, I would definitely get an inforce illustration. I really don’t know what it would show on a policy that is pending an overloan situation. If I were you, I’d talk to Mass Mutual, say that you’d like an illustration with the minimum cash outlay to keep the policy inforce, and see what they can do for you. Hopefully their illustration system has functionality to handle that.
Thanks again. I have a call into the insurance agent. I am thinking I may need to get full power of attorney before he will tell me anything. I am working on that. (I am the successor POA to my mother and have had trouble with other financial institutions accepting it.)
Topic Author
P&C actuary
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Joined: Fri Jul 19, 2013 12:27 pm

Re: Permanent Life Policy

Post by P&C actuary »

Stinky wrote: Wed Apr 14, 2021 10:17 pm
I seriously doubt that the insurance company would let a policy get in the situation where you would owe money to them to lapse the policy. At very worst, it should be a break even.

As to what payments are required to keep the policy inforce until death, I would definitely get an inforce illustration. I really don’t know what it would show on a policy that is pending an overloan situation. If I were you, I’d talk to Mass Mutual, say that you’d like an illustration with the minimum cash outlay to keep the policy inforce, and see what they can do for you. Hopefully their illustration system has functionality to handle that.
A few months ago, I did get an illustration and asked how much had to be paid to keep policy inforce. Agent was not able to answer the how much question, but did send illustrations.

I was able to figure out that cash value should cover 31 months of loan interest and premium payments. I will periodically go online and make sure the cash value is enough. If it gets too low, I will make payments.
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