Dear Quentin,
I am an old man in my 80s. When I was 50, I retired from a civil-service job after 30 years. When I retired, I took some bad financial advice from a trusted friend who was already retired. This man told me to take my full pension and leave no survivor’s benefits for my wife when I die. He advised me to take out a large term life policy for her instead.
My job was stressful and retirees only lived an average of 10 years after retirement, so I thought that this was good advice. I took out a $250,000 policy for a 10-year term. At the time, the payments were $200 per month. I lived more than 10 years, but decided to keep the policy even though the payments would increase each year on the anniversary of the policy. My health has started to fail. The doctors kept me alive and now I am past 80 and paying over $2,000 per month for this policy.
Paid $220K into the policy
The last time I checked, I had paid over $220,000 into this policy. I have tried several times to get an answer as to what happens when I have paid in the entire $250,000. The insurance company has off-shore call centers and I have yet to get a straight answer. I get automatic notifications from the insurer: One letter from the company suggested if I wanted to cut my payments, it would reduce the value of the policy to $100,000. That’s not a good option since I have invested more than that in the policy.
The selling agent is long dead so I finally found another agent who got on a three-way call with me and the call center, and neither I nor he could understand what the solution would be. The bottom line is that if I live another year or so, I will have paid in the whole amount and, as I see it, I should have a paid-up policy until I am 100, when they will no longer insure me should I make it to that age.
Total assets worth $760K
My wife and I have about $5,500 in monthly income. Our house is paid for, but we have credit-card debt of $18,000, which we pay $1,000 towards every month. Food and utilities cost $1,000 so we have about $3,000 per month in expenses along with the $2,200 we pay on this life-insurance policy. We are making it … but barely. I have been approved for a HELOC to pay off the credit-card debt. My wife and I have been married 50 years. We were in business after I retired and we have made excellent money over our lifetime but never saved a dime.
We were both raised poor so when we started making money we just spent it like drunk sailors. We just had our home appraised for $590,000, two vehicles paid off that are worth $20,000, and other assets of around $150,000. We are not good with money. My main objective is to make sure that this woman is taken care of after I’m gone. We are in the process of selling a bunch of antiques and coins that we have accumulated over the years, but selling our home at this point is not going to happen quickly.
Should I continue to pay off this policy or ditch it?
Confused Old Man
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Dear Confused,
Welcome to the term life-insurance-policy trap.
You took a gamble. The life-insurance company’s mission is to gradually raise your premiums so it can maximize the amount of money it gets from you until you reach breaking point. To put your dilemma in context: If you were to start a policy with a $2,000-a-month premium, you should expect a payout of at least $10 million per year. That shows you how out of whack your premiums are with this current $250,000 policy. It must be painful at your age to pay this kind of money toward the policy. If you live another five years, you would pay another $120,000.
I wonder whether the selling agent had a term life or whole-life policy. For those who are not familiar with life-insurance policies and how they work: Term life-insurance policies usually last from 10 to 30 years, and they pay out if you die during that period. Your heirs receive the payment. If you outlive the term of the policy, you can continue with the policy, if the terms allow, but the premium will go up, and up, and up. Whole-life insurance is more expensive, typically comes with fixed premiums and offers both a death penalty and cash value.
Quality of life
The answer depends on your circumstances and your income, and whether you could make peace with throwing more money at this policy, knowing that the insurance company will continue to increase the premiums. My hope is that you live another 10 years and, for that reason, I don’t believe continuing this policy is a good idea. You have credit-card debt to pay off and your finances are already on a knife edge. If you lived in a large enough home, you could — for example — consider taking in a tenant to help offset the premiums (or even pay for them if you were living in a desirable neighborhood in a metropolitan area).
In 12 months’ time, you will effectively break even on this policy, so you need to do five things: 1) Consult your doctor and ask him to give you guidance on your life expectancy. 2) Ask the insurance company to give you your options in writing. 3) Hire an adviser who specializes in insurance policies — a fee-only fiduciary and not someone who works on commission — to review your policy. 4) Ask yourself how you would feel and how your quality of life would improve if you were free of these $2,000-a-month payments. 5) Consult your wife and/or heirs.
When you make your decision, don’t look back.
Related: My daughter has $500K in med-school expenses. Can my wife and I afford to pay it off?
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My daughter has $500K in med-school expenses. Can my wife and I afford to pay it off?
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