A Whole Life Policy Owner Passed Away With Cash Surrender Value Higher Than The Death Benefit. Which Amount Will The Beneficiary Get?

There are no loans on the policy.

  1. 3998 POINTS
    Matt Benore
    Founder, DenverWest Insurance Professionals, Inc.,
    I would be interested in seeing this policy as something does not make sense. You see, the cash value cannot be higher than the death benefit. With these type of policies, the death benefit would start to increase staying ahead or higher than what the cash value is. By contract, the death benefit is what will get paid out.

    I encourage you to have a local agent look at the policy to review it so you understand exactly what will be paid out as the benefit. Or you are welcome to contact me. I am sorry for your loss.
    Answered on July 21, 2015
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  2. 123 POINTS
    Everett Young
    Everett Young, CLU, Delaware Valley, Pennsylvania
    The cash value on an old Whole Life policy may well be higher than the face amount as written on the original policy pages.

    Over the years, the issuer of the whole life policy may well have deposited annual dividends into the policy. As the ash value of the dividends increased, the cash value of the policy may well have grown to be higher than the initial face amount.

    The dividends paid into the policy will increase the death benefit as well. The original policy won't reflect the payment of those dividends. The policy owner would normally get an annual statement indicating the actual CURRENT death benefit of the policy.

    Nothing will be lost, as the actual death benefit will always be higher than the cash value.
    Answered on July 21, 2015
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  3. 21750 POINTS
    Jim Winkler
    CEO/Owner, Winkler Financial Group, Houston, Texas
    I am sorry for your loss, and pray that you find comfort during this time. You have asked a great question.
    I'm going to hazard a guess and say that the policy has been in force for many years. Over that time, the amount paid into the policy has exceeded whatever the face value of the policy is, the company pays the occasional dividend, or both. In any case, the cash value has grown to exceed the stated benefit value of the policy. I have policies that are the same way; my Dad was wise and loved us enough to buy policies for us with what at the time were adequate face values. Over the years, what I've paid on the policy has been supplemented by dividends paid by the insurance company. The cash value is about triple the face value. But if you look at the monthly statement, I will bet you will see what I see on mine - the death benefit is equal to the face value + the excess cash value, minus any unpaid loans or owed premium. My bet is the policy is written with a company that has been fiscally prosperous, and paid steady dividends to the policy.
    Your loved one made a wise decision purchasing this policy. May God bless and keep you in your time of sorrow, and thank you for asking.
    Answered on July 22, 2015
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  4. 5877 POINTS
    Stan Cox II
    Insurance Adviser - Broker, SC Insurance Services, Oahu, Hawaii
    I have to wonder if you are understanding the current values correctly. I don't know of an instance where the cash surrender value of a whole life policy could possibly grow to be more than the death benefit. It just doesn't make sense. But that said, if that actually is the case the insurance company SHOULD pay the higher benefit.
    Answered on August 5, 2015
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  5. 37376 POINTS
    David G. Pipes, CLU®, RICP®
    Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
    If an insured allowed dividends to accumulate at interest the combination of cash value and accumulated dividends could exceed the face amount of the policy. The company always pays the face amount written on the policy plus the value of any accumulated dividends. In your case the combination could result in a significant payout.
    Answered on August 12, 2015
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  6. 2777 POINTS
    Terry A. McCarthy, CLU, ChFC
    President, Insurance Associates Agency Inc., West Chester, OH
    Another possibility is life insurance that has violated the corridors of risk and has been allowed to become, or was originally intended to be, a Modified Endowment Contract (MEC). The corridor of risk applies usually to universal life insurance type policies and it is the established maximum cash surrender value of the contract as it pertains to the amount of coverage and the age of the insured. The tests prescribed by the IRS limits what remains life insurance and what gets treated as a MEC. Regulations established in the 1980's limited this risk of abusing life insurance in this way because people discovered that universal life policies could be a great place to stash cash through the payment of excess premium in the flexible universal life policy, of which the IRS didn't like much When a life insurance policy becomes a MEC it is still a life insurance policy for death. Any pre-death distributions, however, cause the policy to be treated more like an annuity and distributions are treated as income first. That limits the use of the funds during the life of the insured. Life insurance treats policy loans as the payment of the basis (premiums paid in) first, and this feature is lost when a policy becomes a MEC. In fact, a number of tax-favorable benefits of life insurance are lost. To determine if a life policy has become a MEC, premiums are compared on a 7-pay test that helps establish the amount of premium, after paying 7 level annual premium amounts, that would pay up the policy in the first seven years after the life policy was issued. Being subjected to the 7-pay test or MEC test can occur well after the first seven years if there has been a material change in the policy. However, despite all of the latter, a life insurance policy that is stuffed with cash and violates the 7-pay MEC test down the road, has specific advantages even considering the disadvantages. One of those advantages is having more cash value than the face amount of coverage at death so you should also consider whether this life insurance became a MEC due to some specific financial or estate planning course of action taken by the decedent. Money at death under life insurance made to be a MEC are usually deliberate planning moves to pass cash or benefits of cash beyond the next immediate generation. For example, Grandpa wants to give each grandchild a sizable sum of money but wants to avoid generation skipping taxation. A MEC that pays as a death benefit is a contract paid, rather than money given. Check it out but this is another possibility for life insurance with too much cash value!
    Answered on September 3, 2015
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  7. 1976 POINTS
    Ronald Hinch
    Regional Marketing Director, Capital Choice Financial Group,
    Assuming that you are talking about a traditional whole life policy and not UL or VUL, the cash value can never be higher than the face amount of the policy. The cash values become part of the value of the policy and as they build over the years decrease the liability of the insurance company to the beneficiary. What I mean by that is that, for example, say you had a $100,000 whole life policy and it had a cash value of $10,000 accumulated and you died. Well, the policy would pay the face amount of $100,000 to the beneficiary and the company keeps the $10,000. Here the company's liability to the beneficiary is $90,000 because you have funded $10.000 in the cash values. This continues to age 100 where the cash value will equal the face amount and at that time a check will go to the owner of the policy for $100,000. Some call this "funny banking" I call it criminal! There are many better places for your money than the cash values of a life insurance policy!
    Answered on August 18, 2016
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