Should I keep my life insurance policy or take the cash value?
I have a $1,000,000 face value flexible premium adjustable life insurance policy that I received when I left my job. I do not need the coverage for my retirement or family. The annual premium is now $25,600 per year and the policy pays 3% interest. Monthly, this is about $570, but the insurance and admin cost is $1,700. The cash surrender value is $213,000 (net of a surrender charge of about $10,000). If I pay no further premiums (I have not paid any in the last 3 years) the policy will be worthless in April 2024. I am 80 years old and expect to live at least 5 more years. Should I keep the policy or take the cash value and invest it in a balanced portfolio?
A few things you want want to consider that will help you find the right Life Insurance Decisions for you. Sounds like for your question here, that the goal is to not just let this policy lapse, wasting the cash value, and getting no benefit out if the policy does lapse, if you live longer than expected.
1) Look at reducing the Face Value (Death Benefit on this policy). This will lower the insurance cost, and will help extend the coverage out further. You generally can drop the face amount a certain percentage each calendar year.
2) If you are able to get new insurance, you may want to consider looking into a 1035 exchange to a policy that has living benefits to help coverage for things like Terminal Illnesses or Long Term Care. You could get a new policy with a much smaller death benefit (to lower the cost) and hopefully earn a bit more interest from a newer policy.
3) Consider what you would be doing with the cash value if you pulled it out (and if taxes would be due). If you are just pulling it out, and then investing it in to some account, you also need to consider things like probate etc, if you aren't expected to spend most of all of the account when you are alive.
Hopefully this helps just a bit. There a wide variety of options depending your specific goals and needs.
I’d like to add the following considerations to the thoughtful answers already provided. To answer your question, I'd consider what return is needed on your investment in a balanced portfolio to equal the potential life insurance benefit that you already have. For example, if you die at age 90 then your balanced portfolio beginning with $213,000 would need to earn a 16.72% after tax annual return to replace the $1mm. (Present Value = $213,000, Future Value = $1,000,000, Years = 10, Payments = None) That high of a return is very unlikely for a balanced portfolio. So if this decision is based upon which option makes more economic sense from a return on investment standpoint, then this analysis suggests keeping the life insurance.
Taxes: In most cases the proceeds from life insurance are non-taxable to your heirs, free from income taxes, but included in your gross estate. Since your policy was a work related benefit, you would need to do some checking with the insurance company, former employer or accountant to see if this holds true for your policy. If you find out that your benefit will be non-taxable, then keeping the non-taxable life insurance benefit to replace taxable accounts can make sense. IRA's, 401(k)'s and other such retirement accounts will be taxable to your heirs whereas the life insurance benefits are usually tax free. So you could take more money out of the qualified accounts each year to pay the insurance premiums but in the end save on taxes and consequently leave behind a greater share of your estate. You would have to pay taxes on the withdrawals from IRA’s of course. Hypothetically, if you have a $1mm IRA and pass it along to your heirs and they’re in the 25% tax bracket, then the net after tax proceeds to them would be $750,000. Whereas the net after tax proceeds from the life insurance policy could be $1,000,000. A significant difference for sure! I still think you could pay less taxes and pass along a greater share of your estate via the life insurance even after considering the opportunity costs of paying premiums and additional taxes on the withdrawals from the qualified accounts.
- Any discussion about replacing this policy assumes that your healthy enough to qualify for a new policy.
- Since it's an adjustable life plan of insurance, you can make changes to the policy. For example, you could reduce the death benefit to a level where the premiums are more tolerable. You would need to either understand policy design or work with someone who does because you have to be very careful when making policy changes. The insurance company can provide in force policy illustrations to help you solve for the right amount of coverage, premium or cash value. I'd make sure that in whatever scenario you choose you confirm that the policy will last longer than you expect to live.
I hope that this added some value. Without knowing the exact particulars of your estate, it's hard to know what's best for you. But I submit this information as food for further thought to the answers you're seeking. Feel free to call or write if you have further questions and best wishes!
That’s a great question. Life insurance has one primary purpose: to replace the earnings of the family’s primary breadwinner if he does prematurely. I doubt if that is an issue at your age.
Life insurance can also be used to leave your heirs a tax-free inheritance. If your policy has a death benefit of $1 million I doubt if you will be able to invest the cash value in such a way as to leave your heirs a million dollars.
However, if you need the cash for your living expenses, by all means cash the policy out because it’s a wasting asset and will expire worthless in 2024 unless you continue to make premium payments.
I also suggest you check out what your estate will be worth on your death. If you own the policy it will be part of your estate. If the policy and the rest of your estate exceeds $5.4 million you should check with a good estate planning attorney.
I'd consult a fee-only financial planner before doing anything, but based on the limited facts you present here, I'd favor cashing it in and investing it. If there is no use for it, why keep it? The only rationale I could think of is the possibility that you would need assisted living or skilled nursing care for an extended period of time and deplete your family's assets. In that case, you could replenish your assets for your surviving spouse or family if necessary upon your passing.
Another possible use for the policy would be to pay estate taxes, if there are any.
Cancelling an insurance policy is a big decision, but if you are convinced that there is no possible need for the proceeds, don't throw money away. Even if you aren't paying the premium out-of-pocket, it's your money paying the premium here.
No financial advisor in his right mind is going to recommend to you that you surrender the policy. The fear is that when we recommend the surrender of the policy, you’ll die. Having said this as a caveat, what you seem to have is a wasting asset. You specifically indicated that you do not need any of the death benefit and that the cash value will exhaust itself in the not-too-distant future, especially if no future premium payments are made. Begin by contacting the insurance company and ask them what the ” tax basis” of the policy is if you were to surrender the policy. What this means is that at the time of any surrender, if this is the decision you make, there may be a taxable event on the funds they return to you in the form of remaining cash value. This will provide you with a sufficient amount of information to determine whether surrendering the policy makes economic sense. What does not make sense to me is that if the future cash value was going to be zero and there is no need for the death benefit, then surrendering the policy should be a serious consideration for you and your family. I hope this helps and good luck.