Been lurking here for awhile, but recently my parents have asked me to help understand their financial situation and I need some help.
My father is a first generation immigrant and doesn't speak english well (Chinese). One of his "friends" sold him a Metlife Universal Life insurance plan back in 2001. As a result, he's been making annual payments of $11,220 for about 15 years now.
Yes, you read that right. That's about $1,000 per month. My father is currently 69 years old and is in excellent health (no tobacco, etc), so I imagine he can get a much lower price for a general term insurance.
I'm reading his most recent statement and here are some details:
Face amount: $500k
Death benefit: $500k
Cash value: $98k
- Surrender: $2k
Cash Surrender Value: $96k
A couple of questions from my end:
1. What exactly is my father getting in coverage? Am I reading this right that he only gets $500K in life insurance coverage?
2. Are there any tax implications i should be aware of?
Apologies if I'm leaving out any details. This is all kind of a lot to take in and I'm just trying to ensure my parents get the best advice. I'm completely open to sitting down with a fee for service financial planner who can help us navigate all this. Thanks in advance for any advice from this community.
My question is what
Here's the details:
Post by powermega » Sun Feb 28, 2016 4:03 pm
1. Yes, $500k is the death benefit. That is the amount the beneficiaries get tax free if your father dies.
2. In your case there are no tax implications. Any gain at the time of surrender is taxed as ordinary income. Your father has a loss of about $72k.
The first question your family needs to ask is what is the life insurance need. Most 69 year olds don't have a need for life insurance. Is there someone how depends on his income?
If you do think there is a need, there are probably better alternatives, but that could probably be an entirely new thread.
If you don't think there is a need, one option would be to perform a 1035 exchange into a low cost deferred variable annuity. By doing an exchange, he gets to carry over his original tax basis (11220*15=168300). The annuity would start off with a loss of about $72k. That means his annuity could grow in value by $72k tax free. Another option would be to keep the annuity for over a year, then surrender the annuity. Losses on annuities are tax deductible, but losses on life insurance policies are not.
In any case, if your father is close to a policy anniversary, it might pay to wait until after the next anniversary because the surrender fees usually go down an policy anniversaries.