I recently started the surrender process for my Whole Life Insurance Policy ($500,000) through MassMutual. I’m 22 years old and live in Kansas. I plan to switch to a term life policy through BannerLife. My parents helped me set up this policy. Although the policy is in my name, they have made all the payments. I’ve had this policy for 2.5 years, and the premiums aren’t in our best interest. I have never withdrawn cash, taken a loan, or received dividends. We have only paid monthly premiums.
When I called to surrender the policy, I learned I have about $2,400 in cash value. I received a few documents over the last couple of days:
Tax Quote:
Cost Basis: $14,000
Taxable Gain: $0
Surrender Information: This document warned that I might face taxable income, including a 10% tax penalty.
Surrender Form: This form requires details about the policy termination, taxpayer information, tax withholding, and disbursement.
I need help understanding this information.
What is the cost basis? Do I owe that amount, or does it represent the total premiums paid so far?
Will I receive the $2,400 in cash value as a disbursement once I surrender the policy?
Will I incur any tax penalties or owe money for surrendering?
Will the 1099 form be under my name? Can it be under my parents’ names since they made the payments and will receive the disbursement?
Since there is no taxable gain and my cash value is less than my cost basis, will there even be a 1099 form? Will I simply receive the cash value, and that’s it?
Your cost basis is the total premiums you paid. Since this amount is less than the proceeds, whether this policy is a MEC or not doesn’t matter. Withdrawals before age 59½ may face a 10% penalty, but that’s not the main concern here.
Cash value and net surrender value are different. You might not receive the full $2,400.
I’m curious what the agent was thinking when they suggested a $500,000 whole life policy for a 19-year-old. Unless you’re a secret movie star, professional athlete, or tech millionaire, there’s no reason for that sale. It’s frustrating to see situations like this because they make it harder for ethical agents like me to do our jobs.
Thank you for the help. I went to their website and it says the cash value is the value i would receive if i were to surrender or cancel policy. So i think that answers that portion.
This would be a combination of parents and financial advisor. I was diagnosed with Congenital hypertrophy of the retinal pigment epithelium (CHRPES for short). It’s potentially linked to colon cancer. We felt getting a whole life plan would be a good idea. Once i got the policy, I did a full genomic test panel to test for potential bad genes. This way if the test came back positive, I have a plan in place. Thankfully, the tests were negative and now it’s time to move on. I apologize, I should have included that earlier.
As a financial advisor who follows a fiduciary standard, I believe that advice is still terrible. You could have bought a much cheaper term policy with a full convertibility privilege. You could have done the genetic testing and, in the worst-case scenario, switched to permanent coverage later when you were more financially secure. I suggest you seriously consider whether to keep working with that advisor.
I would love to see an in-force illustration to find out when you break even. If the policy was designed well, it could potentially be sold for more.
You’re at the point where the guaranteed cash value starts to grow.
If you’re committing to buying a whole life policy for cash value at your age, you should think long-term. It really pains me to see you considering bailing at this point.
You will only receive the surrender amount. Since your basis (what you’ve paid in) is higher than the surrender value, you won’t owe any taxes.
But wow, that’s a big hit. I really dislike seeing people cancel whole life policies after just 2-3 years. That’s the worst time to make that decision.
Yes, it’s a big hit, unfortunately. My parents have been covering all the payments, but this is the last step before I’m fully on my own financially. I can’t afford the $400 premiums on top of my master’s tuition. My parents faced an unexpected financial situation, and I’m not in a good position to handle it myself. My term policy is a 30-year, $500K policy with a $900 annual premium.
Keep the policy in force and pay the premiums. It might be tough for a while, but it will be worth it. Even if you want to surrender it later when you’re in a better position, playing the long game with this policy will really pay off.
I can’t afford the monthly premiums with my current income. I’m not sure what my options are besides surrendering the policy and switching to my new term policy.
