What to Do With an Old Life Insurance Policy

Should I keep my old life insurance policy

Is my old life insurance policy still good?

I meet with a lot of pre-retirees and retirees.  It’s not uncommon when meeting with these clients to identify an old life insurance policy during an initial financial audit.  When doing so, sometimes we uncover an old life insurance policy with thousands, or even hundreds of thousands of dollars of cash value or millions in death benefits.

In addition to the cash value and the death benefit, we also look at the annual policy premium.  For some pre and post retirees, the simple question becomes can I afford to continue paying this premium?  Can I continue to pay an annual premium, potentially in the thousands of dollars that is adding undue pressure to the new retirement budget?

For all these reasons, a thorough evaluation of old life insurance policies may be warranted.  I am continually surprised by the lack of attention life insurance policies receive by both the owner and the agent after they go to issue (after they are purchased).

If you find yourself with an old life insurance policy and are wondering what to do, here is a 5 step process that you could follow to help evaluate your existing life insurance policy and life insurance need:

Step 1 – Evaluate Your Life Insurance Need

Before you do anything, you may want to evaluate your need for life insurance.  Do you have someone who is financially dependent on you?  Do you have a specific estate planning need?  Are you funding a business agreement such as a buy/sell, debt payoff, or key man insurance?

If the answer is yes, then you should consider how your life insurance policy fits the identified need.    If the answer is no, you may want to reconsider whether you need the policy or not.

These answers to “Do I need life insurance or not?” will dictate the decision to keep, terminate, or replace your policy.

Step 2 – Order an In-Force Illustration

After you evaluate your current insurance need, you should complete a thorough evaluation of your existing life insurance policy.  A good place to start your evaluation is by reviewing the life insurance policy that was provided at issue (when you purchased the policy).  This document details the specifics of the policy such as policy type, annual premium, death benefit, riders, and other options.

A second step can be to order an in-force illustration.  An in-force illustration will illustrate how the policy is expected to perform in the future, using various assumptions.  This illustration will detail, in numbers, how the policy is expected to perform in the future.

In-force illustrations can be illustrated to show the impact of many changes.  What if I continue to pay my premium every year or stop paying my premium immediately?  What if I lower my death benefit?  What if the insurance company pays a higher or lower interest rate?  All these questions could be asked to adequately evaluate your existing policy.

Additionally, an in-force illustration can be used to compare your current coverage against other available options.

Step 3 – Or order an as-issued Illustration

Where an in-force illustration will project the future based on your stated assumptions, an as-issued illustration will illustrate how the policy was projected to perform when you purchased it.

When you purchased your life insurance policy, it is very likely an agent showed you an illustration of what to expect.  Over time, the policy either performed as issued, over-performed, or underperformed.

By comparing an as-issued illustration to your current values and a new in-force illustration, you can evaluate how the insurance policy has performed since issue.

Has it met your expectation as set by the date you purchased it?

Step 4 – Evaluate your Health History

In addition to considering your current life insurance need and your existing policy effectiveness, it is important you assess your current health.  If you are healthy, the pricing for insurance may be better than if you are unhealthy.  To say it bluntly, you could be  less likely to die.

Your health history can impact the decision to purchase a new policy both positively and negatively.  For example, if you were very healthy when you purchased your existing policy, and are no longer as healthy, you may find it difficult to obtain a new policy.  The cost of buying a new policy with an unhealthy rating simply might not be worth it.

On the flip side, it is possible you have become “healthier.”  Were you a smoker on your original policy and no longer smoke?  Did you have a health scare such as cancer that is now many years removed?  Have you lost a significant amount of weight and improved your health substantially?  All these things may lead to a better underwriting decision from the insurer, therefore a more attractive policy.

Step 5 – Make a Decision

At the end of your analysis, the insurance decision may boil down to one of three strategies:

  1. Keep your existing policy in force – The decision to keep your existing policy in force may be the best decision for any numbers of reasons. First, it’s possible your current policy was designed perfectly for your existing and future needs and requires no change.  Second, you may want a new policy but your health history has changed significantly and you are no longer insurable (or a new policy may be prohibitively expensive).  A third reason could be for cash value growth.  Admittedly, I am not a huge fan of most permanent life insurance policies.  That said, I have recently seen a few 20-plus year old permanent life insurance policies that have accumulated cash value and are paying a solid rate of return.  It’s possible that your best decision is to keep these policies in force as part of your conservative investment allocation.
  2. Close your policy – You may not need your insurance policy anymore. If this is the case, you might want to consider terminating your insurance policy.  If you have a term insurance policy, it may be as simple as no longer paying the premium.  This could lead to thousands of dollars of premiums payments saved.  If you have a permanent policy that builds cash value, you may be able to cancel your policy and take the distribution as cash (please be advised if you plan on closing your policy, there could be tax implications if your cash value exceeds your basis*.  If you are considering this option, please reach out to an insurance expert).  The cash value may then be used to supplement your retirement or other financial commitments.
  3. Replace your policy with a new policy – A third option may be to replace your insurance policy. As your needs change, the objective for your life insurance policy may change.   As I have mentioned previously, not all insurance policies are created equal; and insurance policies can be designed to meet specific needs.  A policy can be designed to maximize the death benefit with the smallest premium (often an estate planning need) or to maximize cash value with the smallest death benefit (often an asset accumulation goal).  As your needs change, it may make sense to evaluate your current policy for its effectiveness.  You may have a policy designed for asset accumulation as a retiree.  In this scenario, your goal may have changed to estate planning, in which case a death benefit takes precedence over a large cash value.

What Impact Can This Have?

A big impact.  Maybe even really big!

While evaluating, updating, and/or changing your life insurance policy may not be the best answer for everyone, I have seen a few remarkable outcomes.   I have seen clients save thousands of dollars in annual premiums.  I’ve seen clients double the amount of death benefit (?) with no increase in expense.  And I’ve seen clients withdrawal thousands of tax free dollars that funded retirement, college, and other vacation homes.

What Now?

The first steps are to pull those old insurance policies from the safety deposit box.  Once you have them in hand, call and obtain the required information.  If you don’t have the time or desire to do this on your own, you may want to call and work with an expert.  To be fair, I always think it’s best to work with an expert on these evaluations.

Changing, altering, or replacing an insurance policy appropriately may require the avoidance of more than a few landmines.  It takes a qualified expert to help you avoid stepping on one.

* Tax 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 advice.  You should consult your tax advisor for information concerning your individual situation.

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One Response to What to Do With an Old Life Insurance Policy

  1. Augustus August 10, 2015 at 11:18 pm #

    This is very informative. You really did a great job on this post! Good points. You will help a lot of people with this post. Many of us do not know what to do with their old life insurance policy. You got these steps that are easily understood.

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