Q&A: "My 77 Year Old Mother Got Talked Into A $224,000 Life Insurance Policy...Should She Drop It?"

Question and background:

My 77 year old mother got shafted by her current adviser. She has $280,000 in investments and was talked into a $224,000 life insurance policy with $600 a month premiums. She is in good health and I expect her to be around for 15-20 years. Should she drop this whole life policy that currently has no cash value?

Answer:

It's good of you to be looking out for your mother. From the information you provided, it's not a foregone conclusion that this is a bad deal for her. The key questions are:

Does your mother need that $600 per month for other expenses?
What's the purpose of the life insurance policy? and
Who are the intended beneficiaries?

Did your mother want her money to do "double-duty" in providing both a death benefit and some long term care coverage should she need it? Did she want to leave a sizable nest egg for her children if she only lived, say, five more years, but which would still be a reasonable nest egg if she lived another 20 years? Did she name a charity as the beneficiary? Other purpose?

For example, if your mother doesn't have traditional long term care insurance and wouldn't want to "throw away" all those premiums in the event she never needed it, a permanent life insurance policy can be a useful alternative.

Some such policies have separate long term care coverage built on top of the life insurance policy's chassis. Others will advance part of the death benefit (50%, for example) if your mother qualifies for long term care. But one way or the other, someone besides the insurance company will benefit--either your mother will receive long term care coverage (up to limits) or the beneficiaries will receive the death benefit, or some of both.

Long term care aside, let's assume your mother lives another 20 years...if the $224,000 is a guaranteed death benefit (rather than just an illustration based on present rates), then she'll be giving her beneficiaries a "return" of ~4.16% on the monthly premiums she paid. Perish the thought, but if she lives only five more years, she'll have paid only $36,000 in premiums for a $224,000 death benefit to beneficiaries.

If this is a freshly-issued policy, it may still be within the "free-look" period (usually 10 to 30 days, check the policy) where your mother can refuse it and receive back all premiums paid.

After evaluating the broader reasons and factors for having the policy, if your mother still feels unsure about it, she may want to hire an insurance consultant on a fee-basis for advice specific to her situation. Or possibly hire a fee-only financial planner, but find one who has a strong insurance background.

Hope that helps. All the best.