07/25/2022
Once you are retired, your kids are grown, and you are living on a limited income, you may start thinking about whether you really need that insurance policy that is now costing you more than you can comfortably afford. There is no one-size-fits-all answer to this question. The first issue to consider is whether your beneficiaries, whoever they are, need the money? (The death benefit is tax free to the beneficiary in almost all cases.) If they don't need it, i.e. your children are financially successful beyond your wildest dreams, and you have enough assets to support your spouse for the rest of their natural life in style, then maybe you don't need it anymore.
If you really don't need the life insurance, you can either surrender it for its cash value, or in some cases, sell it to an investor. Depending on the situation, your policy may be worth more than its cash value, sometimes a lot more. But don't just call up those guys that are advertising on TV. They are sharks. If you want the best price, we can refer you to a reliable, honest broker who will get a fair price for your policy. Even a term policy can have substantial value, depending on the situation.
If you do have beneficiaries who need the money, and you are having trouble paying the premiums, one possiblity is to give the policy to the beneficiaries and let them pay for it, or share the responsibility. A transfer of ownership is a relatively simple transaction that does not require the services of an attorney except in rare cases, and it will relieve you of having to pay premiums for a policy you can no longer afford.
Another possibility is to reduce the death benefit. That will reduce your premiums pro-tanto, more or less, and can enable you to keep the policy when you might otherwise lose it. You have an absolute right in nearly all cases to reduce the death benefit.
Finally, if none of these options works, you can surrender the policy, or simply let it lapse. But beware, there may be tax consequences for doing so. If the total of money borrowed and received from the surrender of your policy exceeds your cost, you will get a 1099 from the insurance company, and in many cases, it will be substantial. One hidden horror I have often run across is policy owners do not realize that the premiums they didn't pay result in tax liability, because of the APL, the Automatic Premium Loan. If there is enough cash value to pay your premiums, and you don't pay them out of pocket, they will be deducted from your policy accumulation account as a loan. You are not obligated to repay that loan, but if the policy terminates, it will become ordinary income and you may have to pay tax on it. We have dealt with situations where policy owners were suddenly faced with tax liabilities in the millions after the termination of a life insurance policy.
We have also seen cases where a policy is about to lapse for non-payment, but the insurance company raised cost of insurance charges more than they should have under the contract. Those cases can be litigated, and won.
If you or your clients are in a situation where they need to decide what to do with an existing policy, we may be able to help. Feel free to call us for a free consult, at 888-270-0051 or 213-629-9922.
