What to do with unneeded life insurance?

In the not too distant past, federal estate taxes were imposed when a person with a net worth of more than $600,000 died.  Under those circumstances it was common to use permanent insurance policies to provide heirs with a source of funds to pay the estate tax.  More times than not, these policies were acquired inside of irrevocable trusts so that the insurance proceeds did not increase the estate tax bill.

With the dramatic increase in the amount of assets that can be transferred without the imposition of estate taxes (currently over $11 million for single persons and potentially over $22 million for married persons), many are wondering what should be done with insurance policies that are no longer needed.  Options include surrendering the policy for its cash value, keeping the policy in effect as is, modifying or exchanging the policy to reduce (or perhaps even eliminate) premiums, or selling the policy to a third party.

As one might guess, the proper course of actions depends on a careful analysis of the particular facts and circumstances.  A great place to start is to request an “in-force illustration” from the insurance company that issued the policy.  Such an illustration should show (i) the amount of premiums needed to keep the policy in effect, (ii) the policy’s current and projected cash value, and (very importantly) (iii) the rate of return that the policy can be expected to generate if it remains in effect until the insured dies.

Once an in-force illustration is obtained, the correct course of action will depend upon a number of factors including (but not limited to) the financial strength and investment performance of the insurance carrier, the health of the insured person, alternative uses of the funds that would be used to pay premiums, and the likelihood that laws will change yet again, causing estate taxes to once again be a concern.

We have helped many of our clients with this type of analysis and would welcome an opportunity to do the same for you.  Please call us to schedule an appointment if you would like our assistance.