Stop! Before You Surrender

This is not an article about why people need permanent life insurance. That topic has been discussed many times before. (Not to say we don’t reserve the right to discuss it again in the near future!) This article is about what the options are and what to consider before cashing in an old policy.

The key questions advisors need to ask their clients:

• Do you need life insurance?
• Do you want life insurance?
• Are you healthy?

Their financial plan may say they do not need the insurance but your client, who has owned insurance most of his or her life, simply likes the idea of having life insurance. So, sometimes they want insurance even if they do not need insurance. This occurs most often with people over the age of 60. They may have had a parent die with a policy from which death benefits were used to pay final expenses and fly in four grandchildren for the funeral.

But if they do need insurance and they are healthy, then the next questions to ask:

• Is cash value life insurance the best choice?
• Does it best match your client’s need?
• If it does, then is there a more efficient policy than the one they have now?

If term would be more appropriate and fit your client’s current budget, then they need to put the term in place before getting rid of the current coverage. And if they need the coverage but are not healthy, there may be ways to restructure the old policy to better match the current need.

If your client simply has an unwanted and unneeded cash value policy, what should you consider before simply surrendering it for its remaining cash values?

• One major consideration would be the taxation of the surrender values. Any part of the total value received over the cost basis (the premiums paid just for the life insurance – not premiums for riders such as waiver of premiums, etc.) is taxed as ordinary income. Please note that forgiving of a policy loan is the same as receiving cash for income tax purposes.
• If the policy is in a gain position, you may want to consider doing a tax-free 1035 exchange into an annuity (either deferred or immediate). This would continue to have all the cash values grow on a tax deferred basis, rather than have only the net after tax values to invest.
• And if the policy is in a loss position (the cost basis is greater than the current cash surrender values), you may also want to consider doing a 1035 exchange into a deferred annuity at least until the values have grown to at least the original cost basis so you can still “use” the loss in the life policy to protect some of the gains in the annuity.

While your clients may or may not want or need the life insurance they own, as one advisor told me, “I’ve never had a beneficiary refuse the check for the death benefit!” And today there are new Long Term Care insurance (LTCi) hybrid policies that combine LTCi with life or annuities (again on a tax-free 1035 exchange).

Finally, if you have clients who are older and not in good health with old policies of $250,000 or larger, you may want to consider looking into a life settlement option to see if they could get more out of the policy than just its cash values.

Before your clients surrender a policy, give us a call. We are happy to do a complimentary policy review to be sure they are on the right track.

You can find more helpful information in the Advisor Tools section of our website: http://www.LLIS.com/advisor_tools.shtml. See the E-Brochures called “Low Load Life Insurance,” “Policy Review Services,” and “Life Settlements.” And, as always, feel free to contact me by e-mail or at 877-254-4429.

— Mark Maurer, CFP®, MBA, President

2907 W. Bay to Bay Blvd. | Suite 102 | Tampa, FL 33629-1706 | Toll Free: 877-254-4429
Local: 813-902-0002 | Fax: 813-902-0007 | www.LLIS.com

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