During a regular review meeting with one of our clients they were questioning whether they should keep their life insurance policies or take the cash value now. Here’s three other options we had them consider:
WARNING: Read this before you cancel or cash in any life insurance policies.
What would you do if you had a $6 million term life insurance policy that you no longer needed and didn’t want to pay the premium? You probably would have cancelled the policy and stopped making premium payments.
Unfortunately, if you did this, you wouldn’t get any money back on your term policy. However, you could have sold the policy for $1.28 million!
There is a growing, but well-established business in life settlements, where institutional investors and companies will purchase life insurance policies that are no longer needed or wanted. These companies are often willing to pay more for policies than the cash surrender value of the insurance.
In fact, the purchasers don’t even care what kind of life insurance they’re buying. They will buy whole life, term, universal life, etc.
So if you know someone who has a life insurance policy they no longer need or want, have them look into a life settlement before they cancel or surrender the policy.
It’s not uncommon to get 300 to 500% more from a life settlement compared to the policy’s cash surrender value. This applies even to term insurance where there is no cash surrender value. It’s possible to sell the policy for 10 to 30% of the insurance amount. The $6 million term policy I mentioned is a real-life example.
There are certain guidelines for the policies that are bought. Generally, they must be at least two years old, the insured must be sixty years or older and the insurance amount should be at least $50,000, although most prefer policies of $100,000 or more.
Be careful when selling your life insurance policy to a life settlement company. You are usually better off using an independent broker who can solicit purchase offers from multiple buyers. You also want to make sure and work only with brokers/companies that represent policy owners, not the investors. They should also be willing to disclose all fees and expenses associated with the transaction.
You will have to pay taxes if you sell your life insurance. You will pay zero tax on your “basis.” This usually represents the lifetime premiums you’ve paid into the policy. Then you will pay ordinary income tax on any monies received that exceed your basis, up to the policy cash surrender value. Any money you receive that exceeds your policy cash surrender value would be taxed as a long-term capital gain.
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Clients frequently ask whether they need life insurance since they’re retired. I wish I could give an easy “yes” or “no” response but the answer varies, depending on your personal financial situation. These are the key reasons you have or buy life insurance when you’re retired:
- To increase your pension income by 30%
- To provide a guaranteed inheritance
- To provide a significant charitable gift
- To (possibly) pay estate taxes
Consider this example…
The chart below shows the options faced by one of our clients, Jim and Marge, who recently retired.
|Pension Option||Pay Out|
|Life Only||$5,000 per month|
|Joint Life||$4,300 per month|
Despite it being the lower payout, most couples end up choosing the joint life (also called joint and survivor) pension option to ensure that the surviving spouse continues to receive payments.
In this example, Jim is giving up $700 per month or $8,400 annually in income in order to guarantee an income stream to Marge.
This sounds like an insurance premium to me.
The question then becomes whether there is a less expensive way to acquire enough insurance to guarantee Marge a $4,300 monthly check for a monthly premium cost that is less than $700.
We checked with commercial annuity companies to see what single payment/deposit they would require in order to provide Marge with a $4,300 monthly annuity for the rest of her life no matter how long she lived. In this case, she would need $750,000. This is the amount of life insurance that Jim should have.
He could buy this policy for $3,500 per year, which gives the couple an extra $4,900 per year in income! Over 20 years that’s an extra $98,000 of income. If Marge outlives Jim, she has enough insurance money to purchase a lifetime annuity for her to maintain the same income stream. If, on the other hand, Jim outlives Marge, he is not stuck with a lower pension income.
Life insurance is just one element of a full retirement plan. Not sure where to start for your incredible retirement?
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Life insurance, if used in the right way, can be worth the premiums in the long run.
Take Don and Marilyn’s story, for example. For them, life insurance was a valuable choice as part of their incredible retirement.
Don and Marilyn were in their seventies when they realized they had more than enough money to last for the rest of their lives even if some curveballs were thrown their way.
In fact, they found themselves forced to make withdrawals from their IRA accounts even though they didn’t need the money.
Also, they had already made provisions to leave sizable inheritances to their children so they didn’t need to keep money for their heirs.
So, for the last twelve years, Don and Marilyn have taken those IRA distributions (less taxes) and applied them to two different insurance policies.
The first policy they purchased was a joint life second-to-die type policy, meaning the insurance death benefit of $128,123 would be payable to one of their favorite charities after they both had passed away.
They paid premiums of $4,000 for six years. At that time, we analyzed the policy and found there was sufficient cash value even on a guaranteed basis to maintain the policy.
They decided to stop making additional premium payments to this policy. Instead, they decided to purchase another second-to-die insurance policy, this time for $102,237 payable to another favorite charity.
They would make premium payments on this policy for six years. This policy has now accumulated enough cash to pay future insurance costs so they decided to stop making additional premium payments on this policy as well.
That’s how a total “investment” of $48,000 has helped benefit two of their favorite charities to the tune of $225,360!
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