Even though you paid over $3,000 a year in premiums, it is entirely possible that the cash value of the policy is only $800 now that the 85-year-old policyholder has lived past the policy's maturity date. Some life insurance companies pay out a lump sum when a life insurance policy reaches maturity, while others extend the maturity date and pay out when the policyholder passes away. Some companies force the policyholder to surrender the policy at maturity and then pay out a cash value. To understand how the cash value might only be $800, you need to understand some life insurance basics and the differences between whole life and universal insurance policies.
It's likely that the policy you've described is a universal policy. With a whole life policy, many insurance companies typically set up the policy to reach maturity at 100 to 120 years. This is done so that a whole life policy rarely matures before the policyholder passes away. Even if the person lives to 100 years old, the cash value of a whole life policy is usually guaranteed to equal the death benefit amount. In many cases, the policy's coverage extends past the maturity date to provide the full death benefit to survivors when the person passes away.
With a universal life insurance policy, the cash value is typically not as high as the death benefit. Instead, the amount is usually a lot less. Additionally, a policy can mature when the policyholder lives to a younger age. Universal life insurance is also customized to the policyholder's needs. Depending on the custom terms, the frequency and amount of paid premiums and the agreed upon cash value, it's entirely possible that the cash value is only $800. In fact, some universal policies reach maturity and pay out nothing at all.
When a policyholder pays a premium for universal insurance coverage, the cost of insurance at the time of payment is subtracted from the amount and the rest of the premium is then put into an interest-bearing investment account. As the policyholder ages, the cost of insurance goes up. If the premium payment amount stays the same, you put less money into the interest-bearing account with each new payment. The amount of interest applied to the account fluctuates over the years, which can also reduce the accumulated funds. If the policyholder ever misses a payment, the cost of insurance is usually subtracted from the funded account. If a lot of premium payments are missed, the account can actually become underfunded and the policyholder has to pay the difference. All of these factors can reduce the total cash value when the policy reaches maturity.
A policy must have a maturity extension provision written into it for the coverage to continue past the maturity date. I suggest that you read the policy to see if any type of extension exists. If there isn't one, then the insurance company does have the right to force you to surrender the policy and accept the cash value. The cash value is the total amount after the subtraction of any fees. For example, the company might subtract the most recent insurance and administrative costs. Many companies also subtract a surrender fee that is based on the a percentage of the pre-fee total cash value.
Please keep in mind that you should also talk to a tax adviser about this event. When a policyholder or the policyholder's trustee must surrender the life insurance policy, the policyholder stops receiving any tax and credit benefits from paying insurance premiums regularly for many years. Additionally, the cash value is taxable income.