Lifetime insurance coverage without the lifetime need?

By Compuquotes Team on October 9th, 2010
Life Insurance

If you have a whole life insurance policy that you no longer need, your first impulse may be to stop paying premiums and to let your policy lapse. While that is certainly one option, there are a number of other solutions open to you as a whole life insurance contract owner.

Whole life insurance is meant to provide life insurance coverage for your entire life. When whole life is initially purchased, it's usually selected over term life because there is a permanent need for life insurance. However, as time goes by, there are many reasons why whole life insurance may no longer be needed, including:

  • Death no longer poses a financial threat to loved ones
  • Premiums are too expensive
  • Other life needs arise, such as elder care

If you believe you no longer need your whole life insurance policy, the first step is to think about why you no longer want the policy. According to Rick Blaser, marketing director for The Hartford's private wealth management group, you can clarify this by figuring out whether you are saying, "I don't want insurance" or "I don't want to pay the premiums anymore."

What to do if your premiums are the problem

If you don't want to pay premiums anymore, one option is to use the cash value in the contract to purchase reduced paid-up insurance, Blaser says. Paid-up life insurance refers to a policy in which you have enough cash value, or you've already made enough premium payments, to cover the cost of insurance for the rest of your life.

Paid-up insurance can be purchased by either working with the insurance company that issued your original life insurance policy, or working with another life insurer and using a 1035 exchange to get a different policy, he adds. A 1035 exchange is when one life insurance contract is exchanged for another in a way that does not trigger income taxes. One caveat, Blaser notes, is that a new life insurance policy, from a new insurance company, is usually accompanied by new charges such as sales fees.

But those costs may be offset by new mortality rates. According to U.S. News & World Report, over the last several years life insurance companies have begun using new mortality rates with longer life expectancies. With longer life expectancies comes reduced risk, and in turn, the possibility of reduced life insurance rates. This may also lead to the possibility that you'll be able to buy a larger amount of paid-up life insurance.

What if you don't need life insurance any more?

There are many options for terminating a whole life policy, including surrender, accelerated death benefits and life settlement, according to Doug Head, executive director with the Life Insurance Settlement Association, Orlando, Fla.

If you decide to terminate your contract for the cash surrender value, keep in mind that the decision is permanent and that there are risks associated with this course of action. For example, you may not be able to purchase another life insurance policy at a later date if you become uninsurable.

But before you surrender your whole life policy, particularly if you believe you can no longer afford the premium payments, Blaser suggests you check with your life insurance company regarding the availability of automatic premium loans. Such an option allows premiums to be paid from the policy's cash value, he says. Should you decide to surrender the contract, keep in mind that any loans you've taken against cash value are taxed as ordinary income, he adds.

Take advantage of available life insurance riders

An accelerated death benefit rider or long-term care rider may also be options, Blaser offers. Riders are attachments to life insurance policies that alter the coverage or terms of your policy.

For example, say you are interested in giving up your whole life insurance policy because you need the funds to pay for a serious or life-threatening illness. Rather than surrendering your policy for the cash value, an accelerated death benefits rider would allow you to access money from the death benefit in the event that you are diagnosed with a terminal condition. However, keep in mind that these funds would be subtracted from the payout beneficiaries receive when death occurs.

The life settlement option

A life settlement is when a life insurance contract is sold to an investor in exchange for a sum of money, which often exceeds what would have been paid to you if your life insurance contract was allowed to lapse or was surrendered for cash value.

A life settlement could be an option if you have determined that you no longer want your whole life insurance policy because you no longer have a life insurance need.

Confirm your life insurance needs

Jim Holtzman, an advisor and shareholder with Legend Financial, Pittsburgh, Penn., recommends that you contact your life insurance agent or financial advisor to do a needs analysis. This is an assessment that can help you define your financial needs and goals, and to account for ongoing responsibilities such as education costs, mortgage obligation, or retirement needs. Since there may be tax consequences to modifying or terminating a whole life policy, consultation with a qualified tax advisor is also a good idea.

Holtzman adds that he is cautious when clients want to get rid of a life insurance policy. There are several options that should be considered first, including paying premiums from cash value or through policy dividends. For those who have a need for the funds, the cash value can be used to pay for a long-term care policy or a combination of long-term care and life insurance.

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