New Life for Old Life Insurance


You may have bought a life insurance policy when you had small children and a large mortgage. Now that the children have graduated and you have paid off the mortgage, do you still need the policy? Perhaps you bought a policy to help pay estate taxes on the family business, which has since been sold. Are you tired of paying premiums? Should you keep the policy or cash it in? Here are a few ideas to consider.

Sell it
You may do better selling your insurance policy. While many "life settlement" companies have left the market, there are still buyers, says Kevin Smith of The Coventry Group in Fort Washington, Pa. Kevin reports that he recently bought a $250,000 convertible term life insurance policy on a 74-year-old man for $16,000. "We do our own underwriting and discount the value of the policy to come up with a price," Smith says. Coventry bought just under $6 billion in death benefits last year, mostly policies between $2 million and $5 million. A good candidate for selling a policy would be at least 65 years old, have a cash value or convertible policy with a death benefit over $100,000 and be willing to provide five years of medical records.

With the children graduated and the mortgage paid off, that giant life insurance policy, and its giant premiums, may no longer make sense.

Swap it
You may be able to exchange your existing cash value policy for a new "single premium" policy from the same company or even another. Often the death benefit for the newer policy is larger than the existing one, with no additional premiums. The downside is that you may lose access to cash value you may need one day for an emergency.

If you would like to turn the policy's value into retirement income, consider exchanging it for a variable annuity contract. Trading it for a low-cost annuity may decrease the policy expenses, allow the value to grow more quickly and give you more control over the investments.

Shrink it
Another alternative is to have the insurance company reduce the death benefit. Shrinking the policy will in turn decrease the "mortality charge" so the policy dividends will support the premiums. One of our clients sold his company and wanted to cash in a $2 million ING policy with a $26,000 yearly premium. The policy's $138,000 cash value was subject to a $65,000 surrender charge. Rather than accept only $72,000, we successfully decreased the death benefit to $573,000. At that level the policy is self-supporting with no further premiums.

Donate it
Lastly, giving a life insurance policy to charity now, rather than waiting until you're gone, may offer some added benefit. If you own an insurance policy on your life, the death benefit can be included in your estate. If you name your favorite charity as the beneficiary, the policy will not be counted as a part of your taxable estate. If you give the policy to the charity now, though, you get the benefit of an income tax deduction in the year of the donation. If premiums are still owed on the policy, giving them to the charity will allow for an additional deduction. Some charities will accept only paid-up policies, in which case, you should first consider the "shrink it" or "swap it" options.

There may be a lot of life left in that old life policy if you're willing to do the homework to adapt it to your needs. A word of caution: The tax rules are tricky and there are a lot of traps for the unwary, so be sure to get good advice about any of these transactions before you start.

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