Accidentally Cancelled Insurance Policy

February 28, 2024 1:23 AM

My grandfather called me last night, distraught. He said that he had had an insurance policy with MassMutual Insurance Company for 50 years, and that he had been paying $1000 a month towards it. He said that he had frequently borrowed against it as well, and that it had a principal of $250,000. Somehow, the policy was accidentally cancelled in October 2023. He received 1099s stating he owed $100,000 in taxes because of the policy, and he's not sure how to procede.

Sorry if the details aren't too clear, but he has some difficulty communicating.

Is there anything that can be done about this? Will he be paid the principal of the policy? Are there any alternative solutions or avenues he should consider in addressing the tax liabilities incurred due to the policy cancellation? Are there any questions I could ask him that would help clarify the situation?

posted by matkline to Work & Money (20 answers total)

Could you get the legal authority to talk to MassMutual directly?
posted by amtho at 1:47 AM on February 28 [1 favorite]

I am hesitant to even say this, so please don't get mad at me, but have you independently contacted your grandfather through a phone number you know to be his? This sounds similar to the beginning of a scam (scammer calls pretending to be a family member in an urgent situation that requires money be sent--this one is a little different as it doesn't sound like he asked for money immediately, but it's still not a 0% chance).

Otherwise, yes, a power of attorney to talk to MassMutual would probably be the best starting point, as you could then find out exactly what the situation is without it filtering through a layperson who, besides just being a layperson in an upsetting situation, also has communication difficulties.
posted by tubedogg at 2:30 AM on February 28 [16 favorites]

Does his policy allow for reinstatement? Many do, sometimes up to two years after cancellation. It should be there in the policy documents.
posted by LizBoBiz at 2:40 AM on February 28 [6 favorites]

Response by poster: @tubedogg I appreciate your concern, but there is almost no chance that it was a scam. We discussed some matters that only my grandfather would know about. I live abroad so that may complicate power of attorney, but it's a good thought.
posted by matkline at 3:15 AM on February 28

This might be a blessing in disguise, in forcing a confrontation of whether paying $1000/mo is a worthwhile thing for an elderly man for a $250k benefit.

If this is a "whole life" policy, you should definitely read up on those, their use cases, the ways in which people get hosed Most savvy investors seem to avoid them like the plague.
posted by Dashy at 3:27 AM on February 28 [7 favorites]

Seconding tubedogg--if at any time you are planning to send money to anyone, either to him or to the IRS, please verify independently by contacting him via known means (you initiate a phone call to a number you know is correct.) Another possibility is that someone is scamming him and that this situation is bogus.

Is your grandfather mobile? Is there some other trusted entity nearby that he can have look at the paperwork he received? For example, at my bank if an older customer came in with paperwork they'd received about something like this we would look at it and help them investigate whether it is legit, because we want to help protect them from financial exploitation.
posted by needs more cowbell at 4:07 AM on February 28 [3 favorites]

In Canada this situation is possible; it has to do with the investments becoming income on top of retirement income (this must be a whole life policy, so part of it over the insured value is investments.) If your grandfather is here I would call, in this order (do a conference call): CRA, insurance company. Tell CRA what happened and how to handle it - can he roll the funds released into an RRIF/RRSP or if he reinstates the policy what happens. Then if they recommend reinstatement, call the insurance company.

CRA helped us with a vaguely similar issue with my MIL and told us exactly how to reduce the tax burden. It will depend on his situation.

The IRS may do similar. It’s worth a try!
posted by warriorqueen at 4:33 AM on February 28 [1 favorite]

PS if this is in Canada the RRSP deadline is right around the corner for this tax year so please call like, right now.
posted by warriorqueen at 4:36 AM on February 28

Has he talked to his insurance agent/investment advisor at MassMutual? That seems like a good place to start. You can probably sit in on a three-way call with the advisor even without power of attorney. Regardless of whether whole-life policies are a good idea in general, you don’t want to just abandon one willy-nilly. It may be possible to pay the premiums back to the cancellation date and reinstate the policy.
posted by mskyle at 5:44 AM on February 28 [6 favorites]

You can absolutely call MassMutual directly, and they WILL talk to you, so long as your grandfather is ALSO on the call and gives them permission to speak with you. This will probably be the fastest and easiest way of getting clarification. If I'm reading your question right, and it had a loan principal of $250k, it sounds like the policy's loan interest may have eaten up any existing cash value, and the policy lapsed due to not enough premiums. When you call, ask if that's what happened, and if the policy is eligible for reinstatement. MassMutual should also have sent numerous letters prior to policy termination to your grandfather, so it's worth clarifying if he got them, and if not, that MM had his correct address/sent them in a timely manner. If they didn't send them, you can ask for an administrative reinstatement - back premiums/loan interest would be due, but with less paperwork than would otherwise be required. It's also probably worth noting that the 1099 likely shows he'll be taxed "on" $100k, not that he "owes" $100k - still not ideal, but hopefully less panic-inducing.
posted by csox at 6:18 AM on February 28 [21 favorites]

When diagnosing issues for my elderly parents, I often resorted to either impersonating my parent (with their permission of course) or more commonly having them be on a conference call so they could give permission to talk to me and answer questions and I could interpret or explain. Might be expensive from abroad so you might want to try Google Voice or some other tool like that. Good luck!
posted by Philbo at 6:22 AM on February 28 [2 favorites]

Also: afaik a 1099 isn’t going to show how much is OWED, it’s going to show the amount of money he RECEIVED—whether one owes money as a result of some money one received depends on many other things and is calculated while doing your taxes. He may be reading it wrong, or it may be a scam that is utilizing names of real IRS forms to seem official. In particular if anything he’s getting is trying to create a sense of urgency about money owed and a need to act quickly, that is a red flag.
posted by needs more cowbell at 6:31 AM on February 28 [12 favorites]

So I had this or something similar happen to me, but I don't have good news. My policy was cancelled because the interest on a loan against it put the principal underwater. For me, my mom took the loan out against a policy my grandfather bought for me when I born. It was ages ago and I didn't know it existed. The insurance company would have had to pull out microfishe to see who actually signed it, but I didn't really want to do anything against my then-dead mom even if she forged my signature because she needed the money without regard to what happens later. When I was 18 I probably would have signed anything she asked me to anyways. This all happened to me when I was probably 42 and I didn't remember anything about it.

Anyways, I tried to find a way out without either paying the tax burden or paying down the loan, but I didn't find anything that didn't involve legal things impugning my dead mother. I gave up and paid the tax burden and tried to forget it ever happened. I was fortunate that this was an available option for me that didn't cause crippling financial hardship.
posted by cmm at 10:29 AM on February 28

Reinstatement should be possible, but you need more information from the company.

afaik a 1099 isn’t going to show how much is OWED, it’s going to show the amount of money he RECEIVED

Correct, so you should also be planning to involve a CPA to help sort this out if you can't reinstate for whatever reason.

And, frankly, even if you can, this situation needs attention. Unless your grandfather is wealthy and trying to shelter income for his estate, there is no reason for him to have a whole life policy. They've been bleeding him this whole time. Having outstanding loans may complicate it, but you should be trying to get him to spend that money on himself rather than on a high-fee investment vehicle. Surrenders aren't that complicated in terms of paperwork, but whoever his sales rep is will fight tooth and nail.

(Don't get whole life policies, people.)
posted by praemunire at 10:37 AM on February 28 [6 favorites]

BTW, I am not an expert on this, so I don't want to give reassurances that turn out to be false, but if your grandfather has been paying into the policy for so long, much of the "distribution" on the 1099 should actually be return of principal/original basis, i.e., the money he himself put in, which wouldn't be taxable. All that would be taxable would be the gains--over fifty years, a significant amount, but far from the whole thing. Again, though, the last time I dealt with this was several years ago, and I don't have the form anymore to check how it was denoted.
posted by praemunire at 11:18 AM on February 28

I'm sorry you have to deal with this. Having been through a similar whole life SNAFU not too long ago, I would be grateful for an eventual followup as to what happens next.
posted by JimN2TAW at 1:43 PM on February 28

I don't have any answers here, but want to point out that no one's yet addressed this question:

Will he be paid the principal of the policy?

This is a little disturbing, because if the policy was cancelled in October, and if he received a 1099 now, then if there was a payout that payout happened last year already, no? It's a year-2023 1099 form, right?

So did he lose track of that check? (Or could there have been a taxable payout that was entirely eaten up by what he still owed on the loan?)
posted by nobody at 9:22 AM on February 29 [1 favorite]

> Or could there have been a taxable payout that was entirely eaten up by what he still owed on the loan?

I really think that is the most likely thing here. There was a loan against the policy a long time ago and no payment against the loan. Eventually the loan + interest overtook the principle + interest on the policy and the company cancelled the policy and will issue a 1099 for the "income" that was used to cancel out the loan.
posted by cmm at 3:38 PM on February 29 [2 favorites]

You would hope that there'd be a string of notices in advance for that, but there are various ways that can go wrong, especially since he was still making payments so had not, from the company's POV, dropped off the face of the earth.
posted by praemunire at 3:44 PM on February 29

I do taxes in the TaxAide program and am certified by AARP. Thirding that a 1099 generally only shows income, not taxes owed. There are a few different kinds of 1099 forms, in fact Wikipedia lists like 21 of them. So it will be helpful for you to find out which kind it is and how the other fields are filled out. Where does he usually get his taxes done? I would encourage him to get those done as normal, or if he does not, to find a location that does taxes under the VITA or TCE programs. You can do your taxes and still wait until April 15th to pay.
posted by soelo at 8:41 PM on February 29 [1 favorite]