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Personal Finance

Is Your Cash Value Life Insurance Policy Still Right For You?

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When most people buy a life insurance policy, they put it away in the hope that they will never need it. But, if you have a cash value life insurance policy, such as whole life insurance, universal life insurance, or variable life insurance, you have purchased more than just insurance coverage. . Your policy is also an investment, and some of your premiums over the years have been used to create cash value.

As with the other assets in your portfolio, it’s important to review your policy regularly to make sure that it still meets your goals and that it is working as intended.

You probably bought your policy with some goals in mind, like saving for retirement or financing an inheritance for your children. But if you bought your policy many years or even decades ago, your goals may be different today than when you paid your first premium. The first step in your review should be to review why you bought the policy in the first place and determine if anything has changed. Maybe your financial or family situation is different from what you expected several years ago. Or maybe your retirement goals have changed over the years.

For example, we worked with a client who purchased a whole life policy in his 40s, but at age 63 no longer felt comfortable paying the ongoing monthly premium the policy demanded.

Another important thing to look at is the performance of your policy. When you purchased the policy, you were shown how the cash value and death benefit is expected to increase over time as investment returns and / or insurer dividends are earned. Take stock of the current value of your cash surrender balance and death benefit compared to what was expected.

If your policy balances are significantly lower than expected, this could indicate that your insurer has significantly reduced dividends or increased fees. For variable universal life insurance policies, lower balances can also mean that the funds you invest in have performed poorly. Poor performance doesn’t just mean a lower cash value today, it could mean trouble down the road. If you intended to use your policy for retirement income, poor performance could mean that your future income will be less than you expect. In some extreme cases, poor performance could also result in additional bonuses in the future.

In general, permanent life insurance policies are meant to be long-term holdings and should not be replaced or terminated frequently, if at all. If it is performing well and still meets your goals, you are probably better off sticking with your policy. However, if your policy has underperformed or is no longer suitable for you, changing it or replacing it with something else might be the best option, especially if you have accumulated substantial cash values. For example, you might consider swapping out $ 1035 for an income annuity or long-term care insurance policy that might better meet your retirement needs in the future.

A 1035 transfer, if executed correctly, is tax-free upfront and allows you to continue to defer tax on any untaxed gains you currently have in your cash value policy.

In a recent case, we worked with a 60-year-old client who had purchased three whole life policies over the years. The policies had not worked well and the results are not expected to improve in the future. In addition, the policies required tens of thousands of dollars in additional premiums during his retirement years.

While he could easily have afforded the extra premiums, it wasn’t the best use of his retirement income, so we bundled his policies into one hybrid long-term care policy that didn’t require any future premiums. The policy offered him significant long-term care coverage if he needed it and a refund of his premium to his family if he died without needing care. Thanks to this transaction, our client was able to obtain an insurance policy better suited to his future needs and to simplify his financial life.

If you decide to go the 1035 route, be sure to consult your insurance and tax advisors first, as a poorly executed transaction could invalidate some of the important tax benefits of the transaction. Also, if you decide to replace your current policy with a new one, make sure your new coverage is in place before you terminate the old one. The last thing you want is to find yourself without coverage if your new insurer doesn’t approve your request.

For more information or for help reviewing your current policies, you can visit

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