Does anybody know about this life insurance vehicle?

My husband, an otherwise excellent man, has inherited his father's tendencies toward secrecy in money matters. Over time, he has revealed all, but he has not said much about his life insurance, and that has me worried.

His father talked him into buying this particularly weird life insurance vehicle somewhere around 15 or 20 years ago -- in fact, his father talked him into buying it because "the Feds were going to outlaw it soon" and "he had better hurry up and get it while he can". The most he has been able to tell me was that he paid $5000 up front, and no ongoing fees or premiums. It is a million dollar policy, but about 8 years ago when had to list our assets in order to get a business loan, he found out that its value (cash payout? -- I have no idea) was a mere $38,000.

The name of the financial institution backing it escapes my mind, but it's a rather well known name. Starting with a "K" maybe? ARGH! --can't remember, and he's squirreled the documents away in his safe deposit box.

Anyway, I was wondering if this would stir the memories of any of you, and you'd know what it is he has. I'm worried that he's insufficiently covered. A million dollars is one thing -- but if all I get on his death is $38k, that's not enough to pay off the house, and I want to try to convince him to get a more conventional life insurance policy.

Puck,

I'm not exactly sure what you have, but it sounds like it a single premium life policy from the pre-MEC days of life insurance. Unfortunately, I can most assuredly tell you that it not a million dollar policy. Most likely it had an original face amount of about $15-25k or so. It would be actuarily impossible for a $5000 single premium to support any policy much larger than that. It would take about 1 death for an entire risk pool to bankrupt the insurer. Not to mention the fact that 20 years ago, $1 million policies were quite rare even as term life policies. Most policies that I see from that era are smaller permanent polies ranging anywhere from $1000 to $50000 in face amount.

Does the policy state that it has a $1 Mil face amount? If it does, I am thinking that it may be a "death by meteor impact" policy. :D

I think maybe what your FIL may have been referring to when he said the "Feds were going to outlaw them" is the preferred tax treatment of pre-1986 policies. Up to 1986, you could overfund life insurance policies without limits and take advantage of the tax-free growth and tax free distributions. You could literally hide your entire net worth inside one without ever being taxed! These policies are grandfathered up to 1986. After 1986, the IRS got wise and changed the treatment of life insurance policies and limited the amount of cash you could hide inside the policies. If your exceed these limits today, your policy becomes a Modified Endowment Contract, or MEC.

Once your policy becomes a MEC, the cash buildup is treated the same as any deferred annuity and becomes somewhat non-liquid and is treated as income when it is withdrawn, vice liquid and tax-free as with a non-MEC policy. This would explain the rush to purchase one before the Feds changed the laws, which corresponds nicely with the time frame you mentioned.

1MO mentions this law change for overfunding a policy in context here: http://forums.kiplinger.com/showthread.php?t=10043

Not positive, but I would guess that this a $38,000 policy with pre-1986 tax treatments. Probably nothing more than that. I would recommend you address this further with your hubby and if need be, put some more term on his life to cover the mortage and rid you of your (probably) largest expense and drain of income.

I strongly recommend you keep him on a low-fat diet, moderate exercise and no sky diving until you get to the bottom of this.