Ask Terry Questions Survivorship Life Policy, payable on second death

Survivorship Life Policy, payable on second death

By Terry Savage on October 01, 2018 | Insurance & Annuities

My sister and I own a $500,000.00 life insurance policy that our parents purchased in 1989…of which my 88 year old mother is the last survivor of the two. Our agent has just told us that we don’t have to pay the $7000.00 annual premium from this point on and the policy will still be in effect until my mother reaches 98 then the premium would be $35,000.00. This makes me nervous along with the age that the policy will pay out. This is a gamble as people are living past 100 now and all of our premiums put in to the policy will not be available. Any suggestions?

Terry Says

OK, you are caught in a question that most insurance buyers never anticipated: the possibility that the insured will live longer than the policy! It’s called “endowment” — the point at which a whole life policy is fully paid up — or endowed.

Now, what happens next depends on the actual policy. In some cases, it means the cash value equals the death benefit, and you may be able to withdraw that cash –but WITH a tax consequence on the internal gains.
In some cases, the annual premiums have been paid subject to loans from the cash inside the policy, and if you cash it in you could owe more than the actual cash value in taxes!
Again, it all depends on the terms of the policy itself, and you should ask the insurance company about the tax consequences of any money you receive by “cashing it in.”

Of course, if the insured dies within the maturity of the policy the beneficiaries receive the proceeds tax-free. And thus taxes are not an issue if the insured dies before the policy “matures” .

Now, from what you have written, it appears you do not have to pay any more premiums since the policy is “paid up”. And it will pay the promised benefits if death occurs within the next ten years. BUT it “expires” at age 98. So let’s wish your mother good health for at least ten more years. And you can confront this issue of a very expensive extension of the policy as she approaches age 98.

BUT, this is a reminder to those who purchase life insurance now that we are all (hopefully) living longer — and you might want to pay/structure the premiums now to keep a policy going until age 105 or even 115 if longevity runs in your family. In fact, most newer policies based on current actuarial tables will run until age 121. But be sure to check on that when you buy a policy, or if you own one now.



a personal
finance question