Man using phone while on computer © iStock

Dear Insurance Adviser,
In 1960, unbeknownst to me, my adoptive stepmother took out a life insurance policy on me when I entered the military, no doubt hoping that I would be killed in action. I am now an elderly man and just learned about this policy when I received notification from the insurance company that I was “now the owner” of the policy, due to my stepmother being deceased. Along with the notice came several thousands of dollars in unpaid principal and interest on loans that my stepmother had taken out in 2003 and 2004.

I did not know about this policy until 2008. The insurance company has forwarded a 1099-R form to the IRS insisting that I was the recipient of taxable income, thereby making it appear that I failed to report it. I never received any money, nor do I wish to! This policy is “upside down,” and I fail to understand how I became “the policy owner” simply by checking the mail and opening the insurance company’s letter in 2008. I further fail to understand why I am being held accountable for loans and unpaid interest. I did not take out the loans and had no knowledge of them whatsoever. How do I resolve this?
— Larry

Dear Larry,
Fact: You don’t have to worry about life insurance policy loans and interest because an insurance company will never loan more than the policy’s cash value. This means that if you decide to liquidate the policy, the cash value will be greater than or equal to your outstanding policy loans and interest.

Call the life insurance company’s customer service department and ask why you received the 1099. You shouldn’t have received that unless you canceled the policy, pulled out the cash value and realized a gain. In other words, the cash value — after the policy loans and interest — exceeded the premiums paid.

If you do absolutely nothing and let the policy continue on its merry way, when you die your beneficiary will receive the death benefit less any policy loans and interest. (By the way, if you haven’t yet done so, be sure to name both a primary and a contingent beneficiary in the event of your death.)

You haven’t mentioned paying the premiums. Since this policy is 55 years old, it may be “paid up,” which means the coverage continues without any further premium payments for the rest of your life. It’s also very possible that your stepmom never actually took out a loan but instead had chosen the “automatic premium loan” feature of the policy. That means that if the premiums were ever missed, the policy would automatically borrow money from the cash value to pay those premiums so the policy wouldn’t inadvertently cancel for nonpayment.

I recommend that you get a copy of the policy and the most recent annual statement and bring them to your financial planner to help you look at the various choices available to you.

Good luck!

Ask the adviser

To ask a question of the Insurance Adviser, go to the”Ask the Experts” page and select “Insurance” from the drop-down box. Read more Insurance Adviser columns.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.