Q&A WITH PETER VITALI
Some life insurance policies may be unnecessary after tax reform
Q: Over the years, many Americans bought life insurance policies that could be liquidated to pay for potential estate taxes. However, recent tax reform roughly doubled the exempt estate values, causing many policies to no longer be needed. Should consumers retain these policies if their estates are valued below the newly exempt levels?
A: The need for your life insurance policy depends on many factors, including your age, health and the structure of your policy — not simply its ability to offset potential taxes. For those who bought policies at a young age or are at risk for serious medical issues, it’s often best not to let your policy lapse, which could forfeit future insurability guarantees. Investigate whether you have a guaranteed insurability option that allows you to convert or expand the policy without additional medical underwriting. Q: How does the type of insurance affect next steps? A: If you have a term insurance policy, you’re limited to two options: keep paying the premiums or let the policy lapse. However, you can tweak the policy structure for other types of insurance, which could lower or eliminate your premiums while maintaining some insurance coverage. Universal life policies, for example, allow you to make changes so the cash value retains some of the death benefit for a predetermined period of time.
Q: What are consumers’ options if they no longer need policies?
A: If your life insurance is not a term policy and you’ve determined it’s no longer needed, you may have the option of transferring the cash value of an insurance product to another product without generating a taxable event. Or, you may have the option to sell your contract on the secondary life insurance market where a company pays you for the rights to the life insurance policy proceeds. In this scenario, financial advisers can’t facilitate the transaction, but we can discuss the tax implications, and the new tax code makes this option slightly more favorable. Be aware if you surrender a policy and take a lump sum of cash, you could owe tax on your cash value withdrawal. Before you proceed, however, discuss all options with your adviser to determine what’s available and most beneficial to you.