Five Reasons Older Clients Might Want To Keep Their Cash-Value Life Insurance Policies
Posted on: November 5th, 2013

A recent article at www.wealthmanagement.com discussed five reasons older clients might want to keep their cash-value life insurance policies. Life insurance is a critical component of estate planning for young families with small children, and for owners in a closely-held business, but what about empty nesters and retirees?  The article details five scenarios where hanging on to that old policy can be more beneficial than cashing it out.

First, even financially-independent couples may find the policy beneficial down the road.  For example, when the first spouse dies there will be a reduction in Social Security benefits along with a reduction and/or elimination of any retiree pension payments.  Add to this the fact that living and health care expenses will continue to mount as a person ages, and the life insurance funds could add a needed cash infusion for the surviving spouse.

Second, the proceeds from the policy can be used to add liquidity to a cash-poor estate.  This point is especially relevant in West Texas where many farmers and ranchers have a majority of their wealth tied up in land and other assets.  The proceeds from a life insurance policy can help avoid the situation where land is sold in order to pay for expenses and/or taxes when a family member from an older generation dies.

The third option is to give the life insurance policy away to a charity. The easiest method is for the policy holder to maintain ownership of the policy and name the charity as the beneficiary.  Because the beneficiary can be changed at any time, this allows the policy holder to change the beneficiary (or cash out the policy) if it becomes necessary in the future.  If a policy holder is looking for a more immediate tax-benefit, the life insurance policy can simply be donated to the charity with the result that the charity becomes both the owner and the beneficiary, the original policy holder remaining the insured.  The donor should be able to deduct the cash value of the policy, or the amount paid in premiums – whichever is less.

Fourth, depending on the terms of the policy it may be a “good” investment in light of today’s low interest rates.  Some clients may find that they are getting a superior return on their investment by paying the premiums necessary to keep the policy in force, especially if it’s an older policy that could be earning 3% interest or more.

Finally, a policy holder may want to consider keeping the policy in force, but borrowing against the accumulated cash value.  The loan is usually tax-free, and unlike borrowing from a traditional lender, there is no need for an application or approval.  There are several interest, tax, and penalty considerations when borrowing against a policy, so be sure to check with your  insurance company for the specifics.

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