You could have grown out over the years. Maybe your life insurance policy didn’t perform as you expected. You have options in any situation. Here’s how you can make the most out of this valuable asset.
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Most people file away life insurance policies they don’t need. You bought more than insurance coverage if you have a cash value life insurance policy. This includes whole life, universal, or variable life. Your policy is an investment. Some of the premiums you paid over the years went towards building cash value.
Ask yourself this question: What have my goals changed?
Most likely, you purchased your policy with specific goals in mind. These could include saving for retirement and funding an inheritance for your kids. Your goals might be different if your policy was purchased many years ago. Your first step should be to review why you bought the policy and examine if there have been any changes. Perhaps your family or financial situation has changed from what you anticipated several years ago. Perhaps your retirement goals have changed over time.
One client, for example, purchased a whole-life policy in his 40s but no longer felt capable of paying the monthly premium.
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Was your policy as successful as you expected?
It is also important to evaluate how your policy has performed. The illustration that was shown to you when you bought the policy showed how the cash value and the death benefit would grow as a result of investment performance and/or insurance dividends. Consider the difference between what you have today and what you projected.
Consider a 1035 Transfer if you are ready to make a shift.
Permanent life policies should be held for a long time and not be terminated or replaced often. You’ll do well to keep your policy if it is performing well and still meets your goals. If your policy isn’t performing well or you feel it’s not a good fit, you can make changes or replace it with another one. This is especially true if you have substantial cash assets. You could, for example, exchange a 1035 into an income annuity policy or long-term care insurance plan that will better suit your future retirement needs.
If you do a 1035 transfer correctly, it is exempt from tax upfront. You can also continue to defer taxes on untaxed gains in your cash value insurance.
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The possibilities are endless in the story of one client
We recently worked with a client aged 60 who had three whole-life insurance policies that he had purchased over the years. These policies were not performing well and the results weren’t expected to improve. The policies also required additional premiums in excess of tens to thousands of dollars during his retirement years.
He could have easily afforded the premiums but it wasn’t the best way to use his retirement income. So we combined his policies into one hybrid long-term policy that didn’t require future premiums. He received a significant amount of long-term coverage in the event he required it, as well as a return of his premium to his loved ones if he died without needing it. Our client was able get insurance that was more suitable for his current needs and simplified his financial life by completing this transaction.
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Next step
You should consult your tax and insurance advisers before you go down the 1035 route. An improperly executed transaction can invalidate important tax benefits. If you are replacing your existing policy with a new one and want to cancel the old one, ensure that your new coverage is in effect. It is not a good idea to have no coverage if you apply to a new insurer.