Variable Appreciable Life

[yesbobber]

The family of my 89 year old mother-in-law asked me to look into the above named life insurance policy my mother-in-law bought from Prudential in 1990. She now lives in the Twin Cities area in an Assisted Living Facility with declining cognitive abilities. Collectively at this point we knew nothing about this type of life insurance, what she was paying in premiums, and any benefits derived. It's been an eye opener and not in a good way in my opinion. The round numbers as of Feb. 3rd:

Policy start date: 06/07/1990
Initial premium deposit: $26,000
Yearly premium payment since 1990: $4,000
face Value: $100,000
Total Death Benefit: $163,000 (face value plus (Contract Fund -tabular contract fund))
Cash Value: $135,000
Contract Fund: $132,000...invested in a Conservative Balanced Fund, a stock index portfolio, a Jennison portfolio, and a fixed rate option at 4%.

Tabular Contract Fund: $69,000
Accumulated Net Premium Payments: $145,000
Accumulated Premiums Due: $134,000
No outstanding loans against the contract fund and none will be necessarily needed for living expenses present and future.
No additional Riders:

What caught my eye was the accumulated premiums vs. the death benefit. ($134k vs $163k. Doesn't seem like a very good choice of product and terms to me. I get it that life insurance companies take a risk when the insured dies early in the policy but that risk to me is spread throughout all the premiums Prudential collects from all its life insurance. A back of the envelope calculations reveal that if my mother-in-law had invested her initial deposit premium payments over the last 26 years in a fixed rate fund at 4% compounded yearly, the value yielded would be around $256,000. On the other hand if premiums were in a low cost S&P 500 index fund averaging 11% growth compounded yearly over the years, the value accumulated would be around $790,000. Quite a difference between those figures and the current death benefit. I know its not near an apples to apples comparison: life insurance + investments vs. just investments but still!

I am not sure want to advise the family to do, if anything, with this policy at this point. The options stated in the actual policy for use of funds in the contract fund or the cash value look to be the pretty standard verbiage in these type of contracts as I have discovered. BTW the reading of the contract appeared to me to be very complex and convoluted.

Any advice or suggestions on how to proceed with policy?

Thanks

 

[DHK]

First, it is GOOD that the policy is still afloat and not requiring large premiums at this point!

Any variable insurance contract has variable cash values. Remember that this policy has seen declines in 2000-2002 and especially in 2008. When values drop, the costs of insurance still keep to the schedule and usually increase over time.

Most variable life policies are illustrated with a level return year over year - and especially from the 80's and 90's - a HIGH assumed rate of return year over year. This was the standard at the time, but there is NO investment that can guarantee 8% every year for 40 years (or whatever it is).

So, that explains the cash values and the expenses.

Now, the $132k cash values vs $163k death benefit issue. This is the formula to keep in mind with life insurance:

Net death benefit = cash value + net amount at risk - any outstanding loans.

It is doing exactly what it is meant to do. At least you had an increasing death benefit since it was originally at $100,000 and it has increased by 63% over all this time.

I don't know what you're trying to really ask, but I can tell that you needed to understand the contract and some insurance provisions.

You could withdraw all the funds and cancel the policy. By doing that, any gains in the contract (and I'm sure there are gains) would be taxable in the year you cancel it. However, since the insured is also in an assisted living facility, the medical costs that are deductible for that can help offset any taxable gains in the policy. But you'd also give up the additional $31,000 of income tax-free death benefit.

If you need the money to help pay for her care, you do what you have to do, but I'd try to keep the policy inforce so you can receive the tax-free benefits.

 

[yesbobber]

Thanks for the reply DHK,

How did you come up with that $19,000 figure?

 

[DHK]

Mistyped it.

$163,000 Death benefit for the future is $31,000 higher (not $19k) than the $132,000 current cash values.