Basically, insurance companies are betting that we're going to live ... and we're betting that we're gonna die (sooner, rather than later). And the insurance companies have the actuaries, i.e. guys/gals who figure life expectancy.

Does your friend lack the money to pay the annual premium?

As the insurance company is charging 8.25% interest, it seems to me that she might be able to make a loan from her local financial institution at a lower rate, if she has good collateral. She could even use the insurance policy.

As it's true that, if she lives 30 years, she'll have paid only $75,000., her accountant knows that such is only part of the story.

If she invests $2,500. at 5%, and is in 20% income tax rate, she'll have 4% after paying tax, or $100. after one year.

Then she'd have that $2,600. to leave invested, plus another $2,500., for total $5,100. to invest next year, producing $204. in the following year. After 30 years, that fund would grow to quite a lot more than $75,000.

On the other hand, since her beneficiaries are to be the ones to benefit from leaving the insurance policy operational, perhaps they'd be interested to pay the premiums through the intervening years?

Provided, of course, that your friend wouldn't be worried that they might want to poison her ... to stop the outflow, and provide quite a large inflow of funds.

Just some ideas of various paths that she might choose.

ole joyful

Many times, especially if a policy has been in force awhile, the annual dividends exceed the premium. Then one can use the dividends to pay the premium. New York Life calls this "POP" (Premium offset Proposal) .

Drawback would be: Dividends are not guaranteed, and death benefit would stop increasing.

>>If you have enough money saved for retirement and can afford to pay premiums, would you do it?<<

Yes, IF I wanted to leave an sum of money to someone and think if I might use up all my own liquid assets by the time I die. A woman age 62 has a current estimated lifespan of another 27 years. Wait another ten years, and that will grow by another 5 years at least, so her money needs to last a good 30 years, at a minimum.

The question is really, why does she have this insurance? Generally at retirement, insurance has a limited usefulness if your heirs are grown and supporting themselves.

If her estate is sizable, she would be much, much better off establishing a proper living trust with pour-over will. Most attorneys make this a package with power of attorney and healthcare power of attorney (make sure it includes a HIPAA release!) for a reasonable flat fee.
Life insurance is part of estate planning, but it should be done properly, not "I hope this takes care of everything."

However it turns out, you might want to remind your friend that although life insurance is not taxed as income tax to the beneficiaries, there are some gift tax considerations to be considered in the overall value of the estate.

Note that if your friend dies in 2010, and ONLY in 2010, there will be no estate tax due no matter how large her estate is. Obviously since she can’t guarantee that, her estate planning must consider how the insurance proceeds work in conjunction with her individual situation.
However, in 2011, if and only if, Congress does nothing, the estate tax limit plummets back down to $600K. Anything over that will get socked with up to 45% in estate taxes, and in certain situations that may include the insurance.

I’m terrible with numbers, so I’ll let someone else do an analysis of your friend’s options. I just wanted to point out sometimes there are other aspects of the situation to consider rather than just straight numbers-crunching.

BTW, don’t depend on a tax advisor for estate planning advice. Use your tax advisor for tax considerations, but estate planning, especially in the US with the current changing estate tax rules, is not a job for the amateur – and ‘amateurs’ include anyone who isn’t a licensed financial planner (including me!).

That’s just my theory; I have no financial training etc

Good luck

Without knowing more details, it's really not possible to advise one way or another.