Financial Planning For the Old Life Insurance Policy

financial advisor discusses existing life insurance

Options for an old life insurance policy

Before you go and cash out your old life insurance policy, it’s important that you know your options.  Believe it or not, there are a lot of options.

Some of the alternatives you should consider prior to cashing out your life insurance policy are listed in my previous article titled – “What to do with an Old Life Insurance Policy.”  This article focuses on the decision to keep, cancel, or transfer one life insurance policy for another life insurance policy.  Admittedly, the scope of the article narrowly focuses on maximizing value within the life insurance sphere.

While these are all viable options that could be evaluated, it is equally important to recognize and consider the suitability of other gifting and exchange options that may be valuable to you.

Below, you will find a list of additional options to consider when evaluating how your life insurance fits into your financial plan.  It’s important to remember that while this article does highlight a few of the options, a thorough analysis of each option is beyond the scope of this post.

Happy reading!

Option 1 – Gift the Policy to Charity

For those who are charitably inclined, the gift of a life insurance policy can be an efficient strategy to achieve a charitable intent and possibly lower a taxable estate.   The charity can choose to keep the policy in force and continue paying premiums (if necessary), or terminate the policy and immediately access the cash value.  If the charity intends to keep the policy, the donor can (if they so choose) continue to pay the annual premiums (and receive a tax deduction).

It’s important to remember that once a policy has been gifted to a charity, it’s gone.  It cannot be undone.  The reasons you gift the policy is to lower your taxable estate and perform a charitable act.

The value of the tax deduction for the gift is equal to the lesser of the fair market value of the insurance policy or the adjusted basis.

This option is a good option for those who are certain they will not need the life insurance benefit and for those who want to see the impact of their gift while they are still alive.

Option 2 – Change the Policy Beneficiary to a Charity

For many, gifting a policy while alive is a concern due to the loss of control.  As mentioned above, once a gift is made, it cannot be undone.

In lieu of gifting a policy, you can elect to change the beneficiary of your insurance policy to a charity.  One benefit to this option is the continued control for the owner of the policy.  The owner never changes.  Therefore, the owner can undo this decision at any time.  The owner can also access the cash value for their personal requirements.

Since the owner never changes and the owner continues to retain control, there is no immediate tax benefit for naming a charity as the beneficiary.  However, the life insurance benefit will be excluded from the owner’s estate if paid directly to a designated beneficiary.

A potential drawback of naming a charity beneficiary is the lack of satisfaction received by the donor.  The benefit is not paid until after the donor dies.  Therefore, they are unable to see the impact of their gift.

Option 3 – Exchange to a Hybrid Long-Term Care Product

An increasingly common concern for retirees may be the expense associated with an extended stay in a nursing home or assisted living facility.  Long-term care expenses can often wreak havoc on even the most sound retirement plan.  Fortunately, long-term care insurance is becoming increasingly popular as a means to shift the risk of this expense.

One such strategy for shifting long-term care risk is to buy a stand-alone long-term care policy.  A stand-alone long-term care policy works just like your auto insurance – you use it or lose it.  In other words, you pay a premium every year for the coverage.  If you get into an accident (or in terms of long-term care, cannot perform 2 of the 6 activities of daily living), you receive a benefit.  If you don’t get into an accident, then you don’t get anything (but it was nice to know you had the coverage, right?).

Paying for something without the certainty that you will get something in return is one reason many people avoid stand-alone long-term care coverage.

Enter hybrid long-term care products…

I can say for certain that one (if not both) of these two things will happen: you will need long-term care or you will die. Sorry!

For this reason, a product that covers both long-term care and life insurance may be a suitable option for those looking to address more than one risk.  It’s possible for you to redesign your existing life insurance coverage to incorporate a long-term care benefit.  Often, this includes an exchange of your existing policy for a new policy that includes a long-term care provision.

Option 4 – Exchange your Life Insurance for an Annuity

Life insurance can be an efficient and effective way to transfer wealth.  When used appropriately, it can be designed to help achieve many estate and beneficiary planning objectives.

However, before you meet those estate and wealth transfer goals, it’s crucial that you take care of yourself. This means ensuring you have enough wealth to cover your personal needs.

In planning for your retirement income needs, one strategy is to evaluate the income-producing potential of your existing life insurance policy. If your policy isn’t designed to efficiently generate the income you need, you may want to consider exchanging your life insurance policy to an annuity.

An annuity can be designed to generate income immediately or in the future.  The income generated may be higher than the income produced by the life insurance policy (keep in mind, there are also tax differences that need to be evaluated in the process.  For example, you may be able to access income from the life policy tax-free, whereas the annuity income may be taxable).

It’s important to process this transfer appropriately to avoid taxation.  It’s equally important to remember that if you do exchange your life insurance for an annuity, you will be giving up a death benefit.

Option 5 – Sell Your Life Insurance Policy in the Secondary Market

Believe it or not, there is a market for existing life insurance policies.  Certain companies will buy your life insurance policy and continue to make the premium payments with the economic intention of making a profit on your life.  Creepy? Yes!  But valuable to you? Potentially.

Let’s assume that you no longer want or need an existing life insurance policy.  Let’s further assume that your existing policy has a cash value of $250,000 and a death benefit of $1,000,000.

If you are to simply terminate the policy, you will receive $250,000 in cash value (less the surrender charges, if any).  Before you do so, it’s important to consider what someone in the secondary market would pay for this policy.

What if, for example, you were 75 years old and only had a life expectancy of 10 more years.  In an overly simplistic assumption, this means that someone will receive $1,000,000 in ten years if the policy stays in force.  Would someone be willing to pay you more than the $250,000 you would receive to cancel the policy if they knew that they could potentially  receive $1,000,000 in 10 years?  It may certainly be a possibility!

How Can I Choose Wisely?

The right answer to this question is never easy.  Finding the right answer takes a detailed analysis of your goals, objectives, income, longevity, and lifestyle expectations.  The right answer also needs to account for individual health, estate, and tax planning.

Tax and legal services are not offered through, or supervised by, Capital Analysts or Lincoln Investment.

None of the information in this document should be considered as tax or legal advice.  You should consult your tax or legal advisor for information concerning your individual situation

In reference to general account obligations and guarantees, such as is present with fixed annuities, the ability for the insurance company to meet these obligations to policyholders are subject to sufficient capital, liquidity, cash flow and other resources of the insurance company.


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