Whole Life Insurance Policy - what to do?

[tcu2003]

My mom just found out the other day that my dad had a whole life insurance policy she wasn't aware of (dad died in December 2011, and she just got something in the mail this weekend about dividends being added to this account she didn't know about).  She thought it was all a mistake as dad did have 2 other policies that she was the beneficiary, but no, this one also existed.  There's not a ton of money, but my mom also doesn't have a ton of money (or high expenses).  I don't know the monetary breakdown of everything (they wouldn't tell me any info when I called, outside of generalities, even after my mom had called earlier and given them permission to speak to me/tell me anything).

Option 1: lump sum of the full death benefit settlement option (which I believe my mom said was $12k)
Option 2a: Monthly payment for life
Option 2b: monthly payment for 5, 10, or 20 years
Option 2c: Payment for 1-25 years, with the right to withdraw the current value of the unpaid payments
Option 2d: Any payment amount she chooses to be dispensed until the money is gone
Option 2e: I didn't catch all of this one, but something about proceeds w/ adding interest/dividends to the account, and she has the right to withdraw the unpaid balance

Background on my mom: she's 63, planning to work until she's 67 when she's eligible for full SS benefits (she works in a factory, so somewhat demanding on her body, and is in okay health, but probably looking at knee replacements before she retires).  She gets a survivor's pension from my dad (but less than $100/month), and has a small annuity (I think?) from my grandma's estate that is maybe $50/month.  The house and car are paid off.  She makes around $29k-ish (pretty sure) and maybe has $50k saved for retirement - maybe.  On the bright side, if she chooses to stay where she lives (my hometown, where she's lived since getting married, so 30+ years), she'll be okay with SS.  If she doesn't want to stay there, she'll most likely end up living with sis/BIL or DH and me, so income-wise, she should be okay regardless. 

I'm leaning towards option 1, but is there any reason I should consider any of the other options.  Note I have no idea what the payment amounts are for any of the option 2 choices as they told me nothing, and mom didn't remember - I'm planning to call back later and just say I'm my mom to get the choices, but I don't have them right now.

Also, mom mentioned wanting to prepay for her funeral - good idea or no?  I was thinking she could put the money in a Roth IRA that I could help her open, and just invest it in the S&P or something similar.

[Deleted]

I don't think you can make that determination unless you know how much the exact full payout and payments for life/etc. are...

[tskeeter]

The advantage of a lump sum payment is Mom will have a stash of cash if she should need it (like, for a new roof on the house).  The down side is that Mom may feel rich and spent her stash of cash unwisely, or another person may convince her to do so.

The advantage of lifetime payments is it will provide an annuity style lifetime stream of income for Mom.  Given her limited resources, if Mom's family lives forever, a gauranteed income stream, however small, can be nice.  If Mom's family have all passed away be age 70, a gauranteed lifetime income may not be that great a deal.

This is a complicated decision, where there is no clear best answer.  You're going to have to make some assumptions and guesses and, to some extent, hope for the best.

[8 Bit WWBG]

At 61, Mom definitely has some time left.  The lump sum does seem to be the most attractive.

According to my Phil Script, a lump sum investment of $12,000.00 bearing an annual return of 11% could grow to $274,707.56 in 30 years!

But yeah, you need the exact numbers.  That "monthly payment for life" seems interesting.  I guess the company would be gambling that they would pay out less than the value of the policy.  And since the company keeps use of the capital, IT is the one reaping the benefits of the investment.  If the policy is only worth $12k, then a 10 year plan would have her getting $100/month?  10 years into that, the value of $100 would be so much lower.

[alabamagal]

My MIL is in a similar situation but 20 years older.  She lives of SS and has very low COL and is content with that.

If it is important to her to pre-pay her funeral, I would take the money and do that.  It will give her peace of mind that her death will not be a burden (assuming she does not have life insurance to pay for it). It may not be the best financial move to make, but it could make her feel good about this.

The problem with putting the money in a Roth or other investment is that if she has high medical bills or other high expenses, that money will be used to pay that.

[bean29]

We just went through something similar for my Mom.  As someone else said they really need to give you firmer details.

My Dad passed away Jan 15th, there were several (small) life policies an annuities.  My brother an I were thinking about some kind of annuitiy that paid for life but if she died before 10 years we would have lost some of the principal.  I thought about it and thought about the phil script and Mom's limited income, and I said DB, if we are willing to risk some of the principal why wouldn't we be willing to invest in the stock market.

We have not yet done any investments, Mom is collecting the life payouts and then will pay off the mortgage...they we will have to make some investments.  She knew about laddered CD's type of investing, and I know that they stress taking a year to grieve before you make big decisions so I pretty much told her to ladder amounts of $10-20,000 so she always have some money availalbe.  When we get a little down the road DB and I will look at a stable investment for her.

My Mom has about $35,000/yr income between pension/SS.  She figures she needs 40+ to maintain her lifestyle.  She has adequate savings if inflation does not get out of control.  Then she might have to sell the house, but she will not be happy then.

I told my Mom to give my DB a financial power of attorney so he could ask questions and get answers.  She then told me their wills already designated that power to us(Financial Power of Attorney), but she was not sure if she had given the document to any of us.  I told her to make sure he had a copy.

[Deleted]

20 years ago you could have used the Phil script, but 30 years from now, its unlikely mom will be putting 200k to good use, chances are she will need it before then. 

Lump sum might be the right option. However, without firm numbers, you really can't make a determination. Yes, in 10 years 100$ will be worth less... in 30 years 200k will be worth less too... the factors at this point with a whole life policy already bought are 1) how long is she likely to live 2) what is the payout of lump sum versus annuity if she lives that long 3) how good is she with money/how likely to spend through what she has.. 

12K is 24%  of what she already has saved for retirement. That isn't small change. And it seems like she has managed to live on a minimum income and still save. But i think you need to answer the above questions before you make a definitive decision. 

[bean29]

My Mom had one annuity that had guaranteed 3% return + inflation protection that would add value to her heirs inheritance if she dosn't need that money before she dies.  For now we rolled that one over from Dad's name to hers and are not going to do anything with it for the time being.  She probably will end up dipping ito it at some point, but she is 74 right now so we will just hold tight for now.

Nursing home stuff:  What georgia gal is alluding to is i your Mom would go into a nursing home, Medicare would take the cash value of life policies, any cash that they did not force her to spend down and any house she owns.  So prepaying funeral expenses may be to your advantage if she would not need those $$ to live on before her death.  Mom figured out that they bought a smallish policy on her life that will be enough to pay for her funeral.  I don't know if they can grab it and make us cash it in if she goes to a nursing home though.

[Ombud]

Lump sum with a split:

6500 to 2013 Roth (backup EF & growth)
5500 to 2014 Roth (see above)

Easy peasy

[tcu2003]

Okay, just called them back to get more info. Stay tuned, as apparently they're not fast...I'd say inept based on my earlier conversation with them, but that would be rude.

They're going to process the monthly payment for life option, and send that info. However, they're slow and it'll take them 3-5 days to process and then they'll mail it out. Once mom gets it and gives me the numbers next week (I'm assuming it'll take that long), I'll come back and update the thread.

[tskeeter]

Mar 25, 2014 13:35:05 GMT -5 alabamagal said:

My MIL is in a similar situation but 20 years older.  She lives of SS and has very low COL and is content with that.

If it is important to her to pre-pay her funeral, I would take the money and do that.  It will give her peace of mind that her death will not be a burden (assuming she does not have life insurance to pay for it). It may not be the best financial move to make, but it could make her feel good about this.

The problem with putting the money in a Roth or other investment is that if she has high medical bills or other high expenses, that money will be used to pay that.

I'm not a big fan of prepaying funeral expenses.

First of all, who is to say that the money will even be there when Mom needs the services?  Too many funeral directors have raided prepaid funeral fund escrow accounts and spent the money.  

Second, will the funeral home even be in business in 20 or 30 years when Mom needs funeral services?  What will have happened to the money if the funeral home goes out of business?  Even if the prepayment still exists, how will the family figure out where the money ended up?

Third, what if Mom prepaid for a gold plated full boat funeral, but later in life decides that many friends and family are gone, so she only wants a simple cremation and a short memorial service?  What happens to all the money Mom paid for the elaborate funeral?  Is any excess returned to Mom's estate?  What about any interest that should have been earned on the excess prepayment?  Will that go to the estate? 

If a person wants to set aside some money for anticipated funeral expenses in an account at a financial institution, I think that's a great idea.  But to pay a funeral home for services that won't be required for decades seems foolish, to me.

[Ombud]

tcu2003 said:

They're going to process the monthly payment for life option, and send that info.

Worst option for her, best option for them. Too bad that was her decision. Can she still change or is it a done deal?

[Deleted]

I think they are just going to send the info on how much it would be, I don't think the decision is made...

Did they also confirm what the lump sum amount would be?

[NoNamePerson]

I'm not a big fan of prepaying funeral expenses.

First of all, who is to say that the money will even be there when Mom needs the services? Too many funeral directors have raided prepaid funeral fund escrow accounts and spent the money.

Second, will the funeral home even be in business in 20 or 30 years when Mom needs funeral services? What will have happened to the money if the funeral home goes out of business? Even if the prepayment still exists, how will the family figure out where the money ended up?

So true. Does she already have a plot? If not and she wants to prepay then just get a plot paid for. Most cemetaries are still in business even if funeral homes go out of business. Here if you get a plot you also have to have the headstone in place so that may also be paid for up front. Just add DOD later!!

She can have money set aside to pay for the rest and have written instructions on what she wants. This is sorta a "make her feel better about prepaying" but not risking all of the above.  Just a thought~~ 

[tcu2003]

Mar 25, 2014 20:04:34 GMT -5 oped said:

I think they are just going to send the info on how much it would be, I don't think the decision is made...

Did they also confirm what the lump sum amount would be?

Yes, they're just sending info on how much it would be. No decision has been made - and if it's as crappy as I'm expecting it to be, mom will go with the lump sum.

The lady told me it was around $4996, but mom swears then told her $12k the other day - obviously a huge difference. I'm going to just wait for the letter, and then call again to confirm the lump sum amount.

[tcu2003]

Regarding burial expenses, yes, she already has the plot next to my dad, and already has the headstone (big one for her and my dad), so it will just need to be engraved for her info when the time comes.

I'm fairly confident the funeral home will still be there, but obviously you never know. It's been around awhile - my paternal grandparents were buried with them, as well as my dad. Maybe 10 years ago or so, they were bought by a small regional chain, and based on the obits in my hometown paper, still get a lot of business.

At this point, I think the Roth is the best idea, if I can make mom comfortable with that. If she needs to go in a nursing home at some point, she can always choose to prepay her funeral expenses then as they'd likely be more imminent than now...but who knows.

[bean29]

Life insurance proceeds are not taxable to the beneficiary.  I am not sure why you are talking about putting it in a Roth?  Just make sure you don't create a situation where you make untaxed $ taxed (don't rollover to an IRA rollover acct).

[tcu2003]

Just popping back for a quick update. After several phone calls, a letter with the payout amount (but no monthly payment amounts as requested), more phone calls, etc., we just went with the lump sum. This whole process reinforced why I won't choose whole life insurance for myself, but at least it's over and done with now.

[DVM gone riding]

If she would truly invest I would go with option one otherwise choose an annuity term. It decreases the money being wasted

[phil5185]

I'm leaning towards option 1, but is there any reason I should consider any of the other options.

None. We just went thru this, all other options involve leaving the money with the company (for their internal investing). So they will push you toward any/all possible annuity options, as opposed to sending the cash payout.  As you suggest - tough to drag out the info. Each phone call involved a full & formal executor identification procedure (as it should), that call most often got transfered requiring a full repeat (it should NOT). Then a mailer full of forms (4 weeks). Enclose all info, notorize, death cert, return (4 more weeks) and so on. Eventually they sent a check to the estate. But then came the stocks in the insurance company that the dividends had procured for a bout 40 yrs. That required a repeat of the same process only to a different dept in a different city in a different state (who acted as if they had never head of the parent co, lol).

So we just chugged along (it wasn't a lot of money and none of the heirs were hurried) - eventually after 2 or 3 death certs, dozens of forms (did you know that there is 'notarized' and there is a 'medalian stamp, green' that only a few banks do?)  they eventually sent the check (it was actually more than we expected).

[morrisr2d2]

For such a small amount of money the lump sum option sounded like it was the easiest option.

But as an FYI, for those of you out there with old annuity and life policies, don't dismiss the income annuity options guaranteed in the contract. The income amounts offered are most likely more favorable than buying an income annuity in today's market, given the current low interest rate environment. That's of course assuming you're in the market for an income annuity.

If your mom wanted an income annuity to supplement other income, it may have been attractive. But give the small amount of the life insurance the income annuity would have provided I definitely see the appeal to just taking the cash.