Thinking about cashing in that old life insurance policy? Sick and tired of paying that premium, and don't really see the need for the coverage anymore? Well, before you make the final decision, consider the value of what you own, and if it's present value or transfer value is higher than the cash you would receive, or the added cash flow you will pick up, by eliminating the premium.
What am I talking about? Most of us look at Life Insurance in the same context as the day when we bought it. That is - its value was strictly a death benefit in case of a premature death. Well, maybe you have lived beyond this risk stage, and now feel that it's no longer valuable. While your old use may no longer be needed, what about a new use with the same policy. How about a use for offsetting the risk of choosing a single life payment option for your pension? This is called "pension maximization" and is a common re-use of life insurance. What about your estate plans? Is your estate going to be subject to taxation? If so, life insurance is commonly utilized to offset these costs. A newer use today for life insurance is a rider that allows for access to death benefit in case of a Long Term Care qualifying event.
These are just a few of examples of possible reasons to keep life insurance or exchanging it. Yet, after exploring these maybe you still cannot find a good reason to have any insurance. So what's a person to do? Here are the basic options that most of us already know:
- Keep it - keep paying or letting cash value pay for - albeit declining in value
- Surrender it (cashing out): assuming you have a permanent policy with cash value.
- Lapse (stop paying). Maybe immediately (term insurance) or later if cash value present.
Beyond these options, Life Insurance has a few more options that many folks don't know about.
- Exchange it (1035 exchange): this is normally a non-taxable event, and is a transfer of value to pay for another life insurance policy or an annuity. These might be for the reasons above.
- Life Settlement: this is the sale of a life insurance policy in exchange for a cash settlement in excess of the policy's cash surrender value. It is done with a 3 rd party and comes with a catch - the buyer becomes the beneficiary of the policy. So when you die, they get the money.
- Viatical Settlement: this is much like a life settlement, but is designed for people with terminal illnesses, or those who are otherwise not expected to live for more than two years. They generally have higher payouts than life settlements ï¿½ because of the expected proximity to mortality.
All of these options may have tax consequences that are favorable or detrimental to your situation. You should speak to your financial planner or tax professional before making any conclusions. Yet, all should be worthy of consideration - and give you reason to pause before tossing that life insurance policy.