What Should You Do With “Old” Life Insurance Policies? By Lore Gordon, Managing Director -RMR Wealth Management, LLC

How appropriate is it to hold on to Life Insurance policies when you get older? The answers vary widely depending on your personal goals and responsibilities. Many of you have loved ones who depend on you financially, and those needs do not cease with death. Or, you may have accumulated significant cash value within a policy that is no longer needed. Does it make sense to keep holding on to the policy or consider monetizing the value? Here are some ideas to consider: if you need more insurance and are in good health, there is always the option of term insurance. This inexpensive coverage can be canceled at any time. It is easy to fit into any budget to cover a short term need. However, if qualifying for new coverage is impossible, then perhaps one should evaluate old insurance policies to see if they are convertible to (permanent) cash value insurance without taking a medical exam. These are more expensive alternatives, but they provide permanent coverage beyond age 100, whereas term will always run out eventually. One permanent insurance alternative is No-Lapse Guaranteed Universal Life. Typically this is the lowest costing permanent policy. The Death Benefit can be guaranteed for as many years as you desire (even to Age 115). However, due to its low cost, there will be limited cash accumulation. rnOne option to consider if you can no longer afford premiums on your existing cash value policy but still have need for the coverage is to consider exercising one of the policy options, which is called “reduced paid-up” coverage. The annual dividends will pay the ongoing cost for a policy with a new reduced death benefit. The trade-off is that to be relieved of the ongoing cost of funding the policy, the new benefit amount is reduced to fit the size of the incoming dividends plus the existing cash value. There are other alternatives, such as cancelling the policy, which can release any cash build up. Just be aware that taxes may be owed on any gain from within the policy, especially if there is a loan outstanding. Policy Loans can transform the tax liability on a policy at death or within your lifetime if the policy is cancelled. Policies are transferable. They can be sold to a family member or business partner. Family members may be willing to take over the policy and fund the ongoing costs. It is a way to keep the benefit “in the family”, as it has a value worth evaluating. There are insurance specialists who will appraise and evaluate the policy and, like selling a house, one should consider getting several bids. Another idea is to transfer the cash value of a policy into an Annuity, which can generate monthly income. Annuities can also preserve the cash value from the old policy for future use while relieving the ongoing expense of funding the old insurance. The transfer can be done in a “tax-free” manner, which is called a “1035 Exchange” under current tax code. Annuities, like Life insurance, can accumulate tax deferred earnings. Cash values can also be used to fund a new insurance need like Long Term Care insurance. Providing for living needs versus estate needs might be a better current choice. rnIn the end, reviewing existing Life Insurance coverage has a place in financial planning, and deserves as much consideration as investing. Please contact Lore Gordon, Managing Director of Insurance and Annuities at RMR Wealth Management, to assist you in evaluating all of your options.