Do I Still Need Life Insurance?

Is that life insurance policy that you bought decades ago still serving a purpose or could you be doing something better with it? Typically, life insurance is purchased to provide financial protection and peace of mind for policyholders and their family members. Some of the most common reasons we hear our clients purchase life insurance is to 1) replace income if someone passes away unexpectedly, 2) pay off outstanding debts or 3) provide cash to pay estate taxes. We often discover the original reason our clients purchased their policy has changed and life insurance may not be as critical. Here are several alternatives for how to maximize the value of a life insurance policy you may no longer need:

Surrender your policy for cash value

One of the most straightforward options is to surrender the policy. If you have a whole life or universal life policy, it likely has accumulated a cash value. By surrendering the policy, you receive this cash value, minus any surrender charges or outstanding loans against the policy. This option provides immediate access to cash, which can be used to invest, pay off debt, or cover unexpected expenses.

However, it is essential to consider the potential consequences. Surrendering a policy typically results in a loss of the death benefit, meaning your beneficiaries will no longer receive a payout upon your death. Your cash proceeds may also be subject to income taxes if you receive more than the premiums you have paid into the policy.

Friendly reminder: even if you choose not to surrender, this is an ideal time to review the investment options for your cash value. We have often noticed investment strategies were selected decades ago and were never revisited.

Convert your policy to “reduced paid up” insurance

If you no longer want to pay premiums but still want to maintain some level of coverage, consider converting the policy to a reduced paid-up insurance policy.

Paid-up insurance refers to a life insurance policy that no longer requires premium payments to remain in-force for life. In other words, the policyholder has fully paid for the policy and the contract will remain in force for the duration of the insured’s life without any additional payments required.

This option is typically available for whole life policies and involves using the accumulated cash value to purchase a smaller, fully paid-up policy. This means you will not have to make any more premium payments, and the policy will still provide a death benefit.

This option allows you to maintain some level of coverage without ongoing premium payments. It can be a good choice for those who no longer need coverage but still want to leave something for their beneficiaries.

Donate your policy to charity

For those interested in philanthropy, donating a life insurance policy to a charity is a meaningful way to contribute to a cause you care about. You can transfer ownership of the policy to a charitable organization, which then becomes the beneficiary. Alternatively, you can maintain ownership and name the charity as the beneficiary.

Donating a policy can provide several tax benefits, including a charitable deduction for the policy’s fair market value or the premiums paid, whichever is less. This option allows you to make a significant impact and potentially receive a tax benefit.

Use your policy for long-term care expenses

Some life insurance policies offer accelerated death benefits, which allow you to access a portion of the death benefit while you’re still alive if you need funds for long-term care or are diagnosed with a terminal illness. This option can provide valuable financial support if you need to pay for long-term care such as in-home care, assisted living, or nursing home expenses.

Accelerated death benefits can be a clever way to access funds without surrendering the policy or taking out a loan. However, it is important to understand that accessing these benefits will reduce the death benefit available to your beneficiaries.

Exchange your policy for a new life insurance policy

If your insurance needs have changed, consider exchanging your current policy for a new one that better suits your current situation. The IRS allows for tax-free exchanges of life insurance policies under Section 1035 of the tax code. This means you can exchange an old policy for a new one without incurring any immediate tax liability.

This option allows you to potentially obtain a policy with lower premiums, different benefits, or more suitable coverage for your current needs. It is essential to consider any fees associated with the exchange and the new policy’s terms to ensure it is an advantageous move.

We have noticed a popular option today is to exchange a life insurance policy for a hybrid policy. A hybrid insurance policy combines life insurance with long-term care benefits. This type of policy provides a death benefit to beneficiaries if the insured passes away, but it also offers the option to use part of the death benefit to cover long-term care expenses if needed.

Exchange your policy for a long-term care policy

Another significant benefit of a 1035 exchange is that you can use the cash value from your life insurance policy to purchase a new long-term care policy without paying taxes. A long-term care policy is designed to help cover expenses associated with care that you might need as you age, such as in-home care, assisted living, or nursing home expenses.

Typically, surrendering a life insurance policy could result in a taxable event if the payout exceeds the amount you paid in premiums. Exchanging your policy will allow you to shift the risk you are attempting to cover without paying income taxes.

It is important to note that when you consider exchanging or purchasing a new long-term care policy, you may need to go through underwriting again. This could impact your premiums or eligibility, depending on your current health status.

Life insurance policies are valuable financial tools, but they can become unnecessary, expensive, and burdensome over time. If you find yourself questioning your current life insurance contract, do not let your policy go to waste. Your team at Greenleaf Trust stands ready to help you surrender, convert, exchange, or donate your policy so you can maximize its value and align your financial planning with your current needs.