Author Topic: Insurance policy investment conundrum  (Read 2555 times)

lclyman

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Insurance policy investment conundrum
« on: February 11, 2014, 07:17:43 AM »
New member here with an investment decision that needs to be made immediately..

My mother took out an insurance policy 8 years ago that pays my brother and I $900,000 upon her death. The annual premium is $26,000, my mother is currently 84 years old and in relatively good health.

We have been told that we could terminate and sell this policy now for $180,000.

My question is whether at this point it's a better investment to keep paying the premium and wait for the unfortunate date of the payout, or take the buyout and use the yearly premium for continued investment opportunities...?

Quite frankly, using 10 and even 15 year calculations, I'm not sure I could find any investments that could match the guaranteed return of the insurance policy.

The immediacy factor is that this years premium is due in March so a decision unfortunately needs to be made quickly...

Any advice would be greatly appreciated..

Thanks on advance,
Larry

soccerluvof4

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Re: Insurance policy investment conundrum
« Reply #1 on: February 11, 2014, 12:40:29 PM »
Well that's a different one. A bit tough when investing against a loved one. I think the math though speaks for itself.

Frankies Girl

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Re: Insurance policy investment conundrum
« Reply #2 on: February 11, 2014, 01:02:53 PM »
I'd read the paperwork VERY carefully. Something sounds off there.

That means she opened the policy when she was 77 and her life expectancy is not expected to be another 20-30 years. I would think for them to make their money back + profit, they'd have to have her live another 30 years at least past the opening of the policy in order to recoup their payout (not counting investing said money).

If it pays out a lump sum of 900K upon death, I can't imagine that deal not being scooped up by every senior out there since the odds of them living long enough for the company to actually make a profit off of money paid in versus what they would actually pay out are not in the company's favor - and that is not how insurance companies do business.

At this point, she's paid in 208K, and you're saying that they'd cash it out for 180K, so right there, you can see they're not going to just give you back what she paid in, despite the fact that they most definitely made some good money off of the funds she paid in already.

Sounds too good to be true, and definitely needs further investigation.

lclyman

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Re: Insurance policy investment conundrum
« Reply #3 on: February 11, 2014, 01:56:13 PM »
The specifics of the policy are as I described....and we have read the fine print...and the current buyout offer of $180,000...though indeed a $26,000 loss... is quite a bit higher than I or anyone else familiarized with the policy anticipated...

And actually, one detail I forgot to mention...the payout will also be tax free...

In terms of doing the rather harsh math...it seems that continuing the policy is hard to argue with as the smartest course of action...

Or am I missing anything here..?

Thanks again for all the feedback..

Larry

skyrefuge

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Re: Insurance policy investment conundrum
« Reply #4 on: February 11, 2014, 03:14:39 PM »
The specifics of the policy are as I described....and we have read the fine print...

Ok, but has that led to any curiosity of why the deal is so generous? Did your mother work for this insurance company? Own it? Receive the policy as an unusual form of payment for something?

You're saying that 8 years ago, the insurance company made a bet that #1) your mother would live at least another 16 years, and #2) they could achieve an annualized 10% return on your money. If either of those things end up being untrue, they lose. Given that the SSA thinks a 77-year-old woman has only 11.5 more years to live, this sounds like a crazy bet on their part.

and the current buyout offer of $180,000...though indeed a $26,000 loss... is quite a bit higher than I or anyone else familiarized with the policy anticipated...

Really? I'd actually say that's quite low compared with the generosity of the original deal. $26,000 invested annually in the S&P500 over the last 8 years would actually be ~$330,000 right now. They're offering to give you a little more than half of that. Not only is the cheapness of their $180,000 offer at odds with the extreme generosity of their $900,000 offer, it's also not a very good incentive for you to take the offer. If anything, I would expect them to say "ok, we totally fucked up with that $900,000 offer. So we'll offer you $300,000 now. We'll still lose a bit of money (because we didn't actually invest your contributions in something as risky as the S&P 500), but that controlled loss is worth it to us to get out of this bad deal since it's a lot less than we're likely to lose if we have to pay out $900,000 instead in the next couple years."

Anyway, yeah, unless you know that your mother has discovered the secret to immortality, taking the current deal doesn't make much sense.

beltim

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Re: Insurance policy investment conundrum
« Reply #5 on: February 11, 2014, 03:49:30 PM »
I have two questions:

1) Is this policy only guaranteed for a certain number of years, or is it valid as long as the premiums continue to be paid?

2) Are the premiums constant, or do they increase over time?


dragoncar

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Re: Insurance policy investment conundrum
« Reply #6 on: February 11, 2014, 04:49:34 PM »
I have two questions:

1) Is this policy only guaranteed for a certain number of years, or is it valid as long as the premiums continue to be paid?

2) Are the premiums constant, or do they increase over time?

These are the important questions to ask/answer.

Another one:

Are the beneficiaries self-sufficient, or do they rely on the policy holder to live?  I'm guessing you don't "need" life insurance even though this looks like a good deal on the surface.