Seniors & Aging

Real Life | What to do with all that old life insurance?

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For many years we’ve been fussing about having to pay the premiums on all that life insurance that “the agent talked me into,’ right? But, deep down inside, we really rejoice about the love-imbued security that it’s provided.

Now the kids are grown and independent, Beloved is deceased, adequately provided for by retirement income and assets, or is ex-beloved. And, we’ll bequeath a decent-sized estate.

So, do you still need the life insurance? Probably not.

Why not cash surrender it, and invest or squander the proceeds?

One reason not to is the “ordinary income” tax on the “gain” in the year of surrender on all the proceeds in excess of the premiums that you paid. “Proceeds” includes all the previous annual dividends, withdrawals and outstanding policy loans.

If the policy is a couple of decades old, that could be a lot. Besides, those policies could be very welcome financial tools and do some beneficial things for our loved ones, our charitable favorites and for us, if we’re savvy about them.

Ever known a beneficiary to decline the additional value that insurance added to their inheritance, no matter how affluent? I haven’t, in six decades in the life underwriting profession. And it’s all cash, income tax-free and estate-tax free if the decedent was worth less than $5,400,000.

Keeping the insurance in force is welcomed, of course, especially when it’s been in force so long that the real annual cost of keeping it going has declined to zero dollars, and even has turned into a yearly increasing profit for the policyowner.

Actually make a profit every year on your old policy while you’re still alive? Yep! For example, here’s what can happen: The annual premium on Marvin’s 1994 $100,000 Whole Life policy in a leading mutual insurer is $ 5,336. But this year he has to pay only $731 after deducting the current annually increasing dividend.

At the same time, the guaranteed cash value (you can call that “equity,” adding to his net worth) grows by $3,100. Result: $2,369 net gain, not cost! And no current tax. A good deal worth keeping?

Even if your policy and insurer aren’t quite so kind to you, where in today’s comparable tax-favored risk-free pitiful-interest-rate investment media will the money work harder for you, hm?

If your policy still runs at an annual net cost, and you don’t want to sacrifice scarce dollars for premium payments any more, do consider the alternative no-more-premiums “nonforfeiture options” instead of surrendering it: “Reduced permanent paid up” insurance with increasing cash values and continuing dividends, or “extended term” coverage at the full death benefit for a long time into the future. Both can be surprisingly favorable.

Then, there’s the “win-win” promise of cash value (“permanent”) life insurance: It replaces your lost earnings if you either die too soon or live too long. One or the other must happen. Apparently you’ve not died too soon, but you have outlived your earning power. Now you can turn its cash value into a tax-favored pension. Many options: One of the options, for example: At age 65, each $ 10,000 can convert into about $60 monthly, tax-favored and guaranteed for as long as you live, with any remaining balance of principal to your beneficiary.

Borrowing money for opportunities and big-ticket purchases? Those cash values itemized on our financial statements are really persuasive. Also, lenders love life insurance assignments as collateral for loans, and we might negotiate better terms. Or, if they still don’t like us, our life insurance company still does, because cash value loans are guaranteed to us, and at way below finance company rates.

Even if your estate plan is nice and complete the life insurance can make it better in many ways. Some ideas:

▪ Let it fund the final expenses and estate administration costs, enabling liquidity, and permitting the other desirable assets to pass to the family intact without sacrificing their value or future gains.

▪ Ditto for funding the charitable bequests. And the charities will love you for it.

▪ Add a legatee, perhaps another charity, without diminishing the others’ shares of the assets.

▪ Correct the imbalance resulting from leaving an asset to one, and a lesser asset to another.

▪ Added to the assets, the entire estate is worth more for all of the legatees. You’ll be a hero again!

▪ Make desired inter-vivos gifts without giving up productive assets.

Let’s be sure to adjust the ownerships and the beneficiary designations properly. And do seek truly professional guidance from practitioners with letters like CLU, ChFC and CFC after their names, who aren’t biased securities salesmen.

Let’s also do the kids a favor by sharing our life insurance wisdom with them. Encourage them to choose and listen to a quality professional agent, to buy in young and early and while they’re still healthiest, and to convert out of dead-end term insurance as soon as their budgets can support a sufficient amount of cash value plans.

See, aren’t you glad that you long ago wisely let that agent “talk you into” this multi-faceted, many-benefits financial marvel?

Contact GARY NEWMAN at gary@gnewman.org. Your ideas and comments are always welcome.

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