Whole life Settlement/Annuity Commission?

[CRLLS]

I have had a small modified whole life policy for decades. I no longer have the need for life insurance and have been trying for over 2 months to settle it for a monthly income for life, per the policy To make a long story short, MetLife customer service was no help. I ended up finding a sales person at MassMutual who helped me find the right people. we spent a few hours on conference calls with several different locations. I finally received a quote for settling that policy and have sent in the application. As it turns out, the end result is in the form of a SPIA thru Brighthouse. This is not an issue as the monthly amount is exactly as the policy dictated some 44 years ago, higher than today's generic rates.

I filled out the form and could not contact the sales person about filling out the Commission part of the application. She was out of office for a week. I left that section blank and sent it in to the proper people (now Brighthouse). I also left the sale person a voice mail thanking her for her help and saying that things have worked out as I had hoped.

Yesterday, the MassMutual sale person contacted me and asked me about adding her name to my application. She assured me that whether she gets credit for the SPIA or not, the monthly payment to me stays the same. I have no problem doing that as she was helpful in sorting thru the various divisions and new companies that MetLife has now become.

My question is, where would that money go to if she didn't get a commission? Would MetLife/Brighthouse just make their bottom line a bit fatter?

Let me know if I am missing something here.

 

[gcgang]

They helped you make the right contact and spent several hours with you? In the words of Teddy KGB, pay that person their money.

 

[CRLLS]

They helped you make the right contact and spent several hours with you? In the words of Teddy KGB, pay that person their money.

I have every intention to help her get the commission. I have kept her in the loop all along, and she, me. I though I had mentioned that.

Was more curious if there was something in this process that I was missing.

 

[pb4uski]

I guess that I am surprised that there would be commission paid on a policy settlement option.... unless they are somehow characterizing it as a 1031 exchange into a SPIA.

But if it a commission is not paid then I suspect that MetLife/BrightHouse benefits.

 

[CRLLS]

I guess that I am surprised that there would be commission paid on a policy settlement option.... unless they are somehow characterizing it as a 1031 exchange into a SPIA.

But if it a commission is not paid then I suspect that MetLife/BrightHouse benefits.

That's what I thought too. I didn't think twice about not filling in that section to start with. I was wrong, I guess.

With the splitting off various parts of MetLife, I wonder if MetLife had to pay more than the policy's "Cash Value" to Brighthouse to make up for the contracted rate and take over the service to me? Not that it matters so long as I get my monthly money.

 

[CRLLS]

Still in the process. The salesperson has been acknowledged and will get her commission. But there is still a twist.

When I first requested the settlement quote, I received the cash value and the monthly payment. That monthly payment was broken down with how much was considered return of my premium (not taxed) and how much would be taxable. Yesterday I received notification that they paid out the policy, presumably Brighthouse. I'm not sure. They keep it somewhat hidden who exactly I am dealing with. My problem is the letter stated the total taxable and stated it would be reported as paid in 2018 to the IRS!

On another front, they (not sure exactly who, although they say they are MetLife) have acknowledged the payment will start and be mailed to me. Also they sent me a form to fill out if I want to have it Direct Deposited. I have yet to file any 1035 paperwork, nor have an annuity contract.

I spoke to my salesperson to try to clarify exactly what is happening. Will it be treated as a 1035 exchange? Did they just consider it a full payout? Will I pay taxes in full or as I go?

IMO. MetLife is a mere shadow of its prior self.

Any ideas from the great minds?

 

[CRLLS]

HELP!!!

I received a call today from my sales person. This sounds very incorrect. The settlement is not being considered a 1035 exchange. MetLife will report the approx. 70+% of cash value payout as taxable gain to the IRS in a 1099. Further, they will also report about ~75% of the monthly payout as taxable for every year to come.

Does that seem right? I know that Uncle Sam need his piece of the pie. It seems that I will be double taxed.

I think that IF the payout is reported as money taxed in one lump sum, then the basis for the annuitization should be reset to zero and any gains are made in the future, then only that gain should be reported on 1099 annually. This is not being done.

She told me that I might talk to my tax person (literally talking to myself, I'm afraid)about possibly explaining away the lump-sum 1099 on 2018 tax forms in some manner. I think this would raise all sorts of flags at the IRS. Maybe it is normal practice. I have no way of knowing.

I have the option of rejecting the offer and reinstating the policy, then asking for a 1035 exchange. I would not have a lump sum taxable payout in 2018. some percentage of future payouts would, of course, taxable each year. That payout schedule would be based on the cash value of the policy at today's annuity rates, not the guaranteed rate per my contract.

Does anyone have advice as to whom I can verify this with? IRS? TurboTax Help Line, Tax accountant? I am afraid that, with all the changes at Met Life, the termination of my policy and the transfer of my funds between depts/companies has lost an important link of some kind. It is also entirely possible that maybe I'm way off base.

 

[pb4uski]

You are correct... that sounds all screwed up. If that is the case then you would be better off to surrender, pay the tax on any inside buildup and invest the proceeds or buy a SPIA.

Do you know the CSV? The cumulative premiums paid? Did they previously tell you the gain on the policy if you surrendered?

And I agree... if they are considering the transaction to be a surrender and therefore a taxable event then your taxable income from the new SPIA shouldn't be 75% of the benefit payments... that is lunacy.

 

[pb4uski]

As a benchmark, I just looked at my 40 year old whole life policy. If I had surrendered as of my last policy anniversary, the taxable gain would have been 67% of the CSV.

I guess you might call your insurance commissioner's office and make a complaint that you are having trouble getting sensible information from Brighthouse and see if they can help.

 

[mickeyd]

My question is, where would that money go to if she didn't get a commission?

This sounds fishy. What you are doing is strictly an administrative action. This is not a sales event. No commission is due anyone. Perhaps the agent is trying to wrangle some sort of an inside deal. Oh, you don't think a life insurance agent would do such a thing w/o your complete knowledge? maybe so, maybe not.


Refer to your state insurance commish.

 

[CRLLS]

Thanks for the confirmation. I'm not crazy after all. Well, maybe not about this....

I've had this policy for 45 years so it is reasonable that my taxable portion is a bit higher for than yours.

For the past 10-15 years, I had my eyes set on having that monthly payout from MetLife. One reason is the principle, it is in my contract and I want them to abide by it. If, for some reason, they cannot because they sold off "this" or spun off that", so be it. Just make me financially whole in whatever they need to do so, even if it costs them more. So I guess I am a bit crazy in that aspect. So mixing this in with my other investments is not in my future. I'll consider filing a complaint with the Illinois Department of Insurance once I get the annuity contract in writing and see what it says in writing.

Thanks again.

 

[CRLLS]

mickeyd, tell me more....... That is what I had thought before. I have no non-partial party that would get me even this far. Everyone else told me I was reading my policy wrong. While not a lawyer, I have read and written my share of contracts and I know how to read them. Perhaps you are right. I need to investigate further if the annuity contract says what the agent tells me.

Stay tuned.....

 

[meierlde]

One way to check is to take all the premiums you paid and do an inverse check given the amount on the immediate annuity calculator to see what the NPV of the income stream from the annuity is. The difference in value can then be used by taking the amount you paid divided by the NPV and using the percentage on the month payment (might not be exact but should be close). This is why one way of doing a burial insurance policy if you have old paid up policies is to leave them to the beneficiary where currently no income tax is due on payment to the beneficiary, where as if you just took the cash value the difference between the payment and the amount you paid in premiums would be taxable. (Was this a participating policy i.e. paid dividends and the dividends were used to purchase paid up insurance, if so the difference could be far more than the amount of premiums paid)

 

[pb4uski]

Thanks for the confirmation. I'm not crazy after all. Well, maybe not about this....

I've had this policy for 45 years so it is reasonable that my taxable portion is a bit higher for than yours.

For the past 10-15 years, I had my eyes set on having that monthly payout from MetLife. One reason is the principle, it is in my contract and I want them to abide by it. If, for some reason, they cannot because they sold off "this" or spun off that", so be it. Just make me financially whole in whatever they need to do so, even if it costs them more. So I guess I am a bit crazy in that aspect. So mixing this in with my other investments is not in my future. I'll consider filing a complaint with the Illinois Department of Insurance once I get the annuity contract in writing and see what it says in writing.

Thanks again.

If there is a lifetime payments settlement option in your contract then you are entitled to it and nothing less.... the legal entity that originally issued your policy likely is the same since they can't transfer contracts from one insurer to another without your permission... the legal entity that issued your contract might have a different name or a different parent but that would be it.

The name and parent changes should have no impact on your policy or even the administration of your policy. I would just make a complaint to the Illinois Department.... explain what happened and provide them with a copy of your contract and a couple recent annual statements.

If you don't want to deal with the Illinois Department at this point you might write a letter complaining to the CEO of Brighthouse.... I'm not sure of what happens there but where I worked any complaint addressed to the CEO or President got special handling by more senior personnel.

 

[CRLLS]

Update Feb 26, 2018

I received my annuity contract today. It is issued under the name Metropolitan Life Insurance Company. I wanted to know more about who reports what from a taxation standpoint so I called one of the numbers in my paperwork. The person there was from the life ins side. He confirmed that this will be reported to the IRS with a cost basis and taxable side. But he couldn't see the annuitization side. He transferred me to someone else.

There, she could see the Annuity side but not the Insurance policy side. She said that my account was a non-qualified account and has a cost basis assigned to within a couple of dollars of what the other side said. So far, so good. Further, she agreed that, come tax time, this should offset the dollars reported from the insurance side. Good there too.

I asked for some documentation from the annuity side of what they consider the cost basis and what will be taxable. They will be sending me a letter explaining it all. When I get that letter, I will look into how 1035 exchanges get reported on 1040's. They suggested that I contact a tax person ensure that whatever documentation I may need, I get to make this a non taxable event. I do my own taxes so that may be a bit of a chore.

Of interest is that, in spite of the cost basis' being nearly identical, the amount sent and the amount received between the 2 MetLife groups do not match by ~ $8K. What I suspect is that the ins side needed to pay more than my policy cashed out to the other side to a) meet my policy's guaranteed rate, and/or b) cover the salesperson's commission. This is pure speculation on my part. If I enter the amount the MetLife Annuity side received into Immediateannuities.com, I get about 12 dollars more of what I will be receiving monthly. I consider that a wash as there can be that much difference between different Annuity companies.

Thanks for all the help here. It sets my mind mostly at rest. I'll not be fully at rest until I do 2018 taxes next year.

 

[gauss]

FWIW - My understanding is that distributions on non-qualified annuities and life insurance contract (ie those purchased with after tax funds-aka 'code D' 1099-R), are fully taxable until all the growth has been paid out. After that, the original basis is recovered tax free. Kind of the opposite of the ordering rules for nonqualified Roth distributions. edit: Actually - I think only applies to distributions before you annuitize.

So are you getting a cash distribution and a lifetime annuity in exchange for the cash value in your life insurance policy?

If so, I wonder if it would be possible to rollover the cash distribution to a traditional IRA to avoid immediate taxation. EDIT: A brief Internet search suggests that his is NOT allowed.



-gauss

 

[CRLLS]

gauss,

Without using legal insurance terms, I am surrendering the cash value of my MetLife Insurance policy to MetLife in exchange for a monthly check for the rest of my life. I think it may be handled as a 1035 exchange or perhaps there are some other "insurance" mechanisms for this conversion/transaction. I hope that I will receive a 1099-R Type 6 for that transaction.

In actuality, my Ins Policy has been terminated and a non-qualified annuity has been issued. I am trying to determine if I will be double taxed, as it seemed earlier that that was the case, and/or if I need to make quarterly payments to the IRS in preparation for the large "income" as the ML insurance group has told me will be reported.

I am not sure if I will be taxed solely on the gains and then on the cash basis, or each will be a ratio of taxable vs non-taxable as I receive monthly benefits. I have arranged for MetLife to take out a certain percent out of each check for withholding. Maybe I will find out when I receive the first check in a few days. The with Further, it seems that there is nobody at MetLife (that I have found so far) knows either. Maybe the monthly income will be reported annually on a 1099-D?

I do have a pre-final quote from the annuity side that the monthly payout will be ~$223 "Income Payout Amount", with $167 being "Taxable Amount" and $56 being "Excludable Amount (not taxable)". Maybe I shouldn't ass-u-me, but I think it indicates that every monthly check will contain a bit of both.

I'm guessing on a lot of this and learning more as I go.

 

[pb4uski]

What doesn't make sense to me is why it's taxable event if you're just exercising a policy option. I would have thought the selecting a policy option would be a non event, and then you might be taxed as the annuity payments are being made.

 

[meierlde]

It sounds like what is happening is because of tax rules described on this site: https://www.investopedia.com/terms/m/modified-endowment-contract.asp the policy is becoming a modifed endowment contract because it is being bought with one payment, I know this also happend when I took a whole life policy that was not paid up and converted it to a paid up contract. Essentially in that case the new policy was a 1 pay policy which falls under a different set of tax rules. This web site: https://www.whitecoatinvestor.com/modified-endowment-contract-a-term-you-shouldnt-have-to-know/
"
Material Changes
Any material change to a policy, restarts the 7 year pay rule, or, automatically reclassifies a policy as an MEC. Material changes include a change in death benefit, addition of a rider or a change in its amount, section 1035 exchange, a change in smoker status or reduction in rating.
"

Thesite above describes why the rules were changed due to some folks abusing policies for tax shelters (in the opinion of Congress).

 

[pb4uski]

I don't think that MEC would be an issue.. MEC is generally where there is insufficient mortality risk for the contract to qualify to be tax-deferred, but an annuity would have plenty of mortality risk.... as would a contractual option.

 

[Ready]

CRLLS,

I'm curious, if you had to do it over again knowing what you know now, would you still have purchased this policy years ago?

 

[CRLLS]

What doesn't make sense to me is why it's taxable event if you're just exercising a policy option. I would have thought the selecting a policy option would be a non event, and then you might be taxed as the annuity payments are being made.

That was how I expected it to work. The application I sent in clearly said I was selecting option #3. They terminated the LI policy and opened an annuity. They are, in fact, different policy numbers.

Material Changes
Any material change to a policy, restarts the 7 year pay rule, or, automatically reclassifies a policy as an MEC. Material changes include a change in death benefit, addition of a rider or a change in its amount, section 1035 exchange, a change in smoker status or reduction in rating.
"

Way too complicated stuff for me to wrap my head around. BTW my policy was taken out in 1973. I don't want to have to become an insurance expert for this one situation. I did follow your links but sadly, I got lost in the "insurance speak". I do appreciate your help.

Too many times I have tried having things done by customer service people, only to find out that it got screwed up. When I called back to straighten it out, the next representative says "That's not the correct way too do that. Let me fix it for you". then I call back ad get the same response. For one recent example, when DW went on Medicare, I tried too cancel her ACA coverage as of the end of Jan '17. I ended talking to 4 different representatives over 2-3 months, trying to get the dates coordinated properly. I eventually just stopped trying! As a result, our 2017 1095-A form shows an extra month of subsidies. I just used their numbers on my tax filing to avoid any further frustration.

Perhaps I am too naïve to think that any insurance company would be organized/structured the same 44 years later, and in 2018, there would actually be someone that could coordinate the change process for a paying client of 44 years. I wonder if anyone else here has exercised a similar settlement under an old MetLife policy and can share their experience...... It would set my mind at ease.

 

[CRLLS]

Ready, I know now that a term life policy is what I should have purchased. Keep insurance products and investment products separate. But that is hindsight. The policy wasn't originally bought as a investment. I liked the way the MetLife Economatic policy was structured. if I were to have fallen on hard times along the way. The cash value paid the premiums. My BIL was a ML agent at the time and sold me the policy.

For the smart alec answer, what I know now is that I wasn't going to die so I didn't need any kind of LI policy. Sorry for that one.

We all make some mistakes along the way. Fortunately, this one wasn't a big one for us.

 

[pb4uski]

What doesn't make sense to me is why it's taxable event if you're just exercising a policy option. I would have thought the selecting a policy option would be a non event, and then you might be taxed as the annuity payments are being made.

That was how I expected it to work. The application I sent in clearly said I was selecting option #3. They terminated the LI policy and opened an annuity. They are, in fact, different policy numbers.

But didn't you say early on, perhaps in another thread.... that you had an attractive annuitization policy option? You sort of infer it in post #11 in this thread. If so, what happened to that?

If they were going to require you to surrender/cash out the contract as a taxable event, why didn't you just take the proceeds and buy a SPIA from someone else?

 

[CRLLS]

But didn't you say early on, perhaps in another thread.... that you had an attractive annuitization policy option? You sort of infer it in post #11 in this thread. If so, what happened to that?

If they were going to require you to surrender/cash out the contract as a taxable event, why didn't you just take the proceeds and buy a SPIA from someone else?

If I did imply that, I didn't mean to. The MetLfe policy's guaranteed rate was always slightly higher than I could get elsewhere for an SPIA on the open market,. That is why I have been so persistent about "converting" (I'm not sure what wording I should use that does not imply cashing it out directly.) the Ins Policy to an income stream according to the terms of the 44 year old policy. I was wrong about the Brighthouse deal (I think) I know they were spun off and it appears that while I may have been talking to some of those people along the way, they may have been "servicing" the MetLife obligation for MetLife.

Another interesting settlement option of my policy not chosen was to cash it in and get an annuity from MetLife. In that case, policy holders are promised 103% of whatever current rates might be. Even so, the guaranteed rate that I took is higher than the "annuity conversion". Even if the end result is, in today's business, the same end result, a new annuity contract.

I did receive my first check today. The gross anount was per the policy. The check is written on a MetLife account. The check stub shows the federal withholding per my request. I asked them to withhold 10%. What they withheld was less than 10% of the gross amount. It is based on the gross amount minus the return of my premiums.

I think this is a done deal at the moment. While MetLife had told me that the non-premium share of the cash value of my policy would be reported as a income, they did not say exactly HOW it would be reported. If it comes in the form of a 1099-R "type 6", then all will be clean.