By: Dennis Ho
When most people buy a life insurance policy, they file it away hoping to never need it. However, if you have a permanent life policy, such as whole life, universal life, or variable universal life, you purchased more than just insurance coverage. Your policy is also an investment and some of your premiums over the years went to building cash value.
You likely purchased your permanent policy with certain goals in mind, like saving for retirement or your kid’s college. Like other assets in your portfolio, it’s important to review your policy every year or two to make sure it’s performing as expected.
Cash value policies could under-perform for a variety of reasons. For example, worst-than-expected investment returns or claims experience at your insurer could result in lower dividends. For some policies, insurers can increase fees and expense charges over time, which could also reduce your cash value balances. By regularly reviewing your policy, you’ll be able to flag any under-performance before it can compound over many years.
Another reason to review your policy is to ensure the cash value is not at risk of going negative. If your policy has severely under-performed or if you’ve taken large policy loans, your cash value may have fallen to a point that your policy will eventually fall into a deficit unless you increase your future premiums. A deficit could cause your policy to terminate, which not only takes away your insurance coverage but could also lead to some nasty tax consequences. Most people want to avoid this forced termination if possible.
Even if your policy has performed perfectly and there is no risk of termination, a final reason to regularly review your policy is to ensure it still fits your needs and goals. Permanent policies might last 30 years or more and a lot can change over that time. For example, maybe you purchased a universal life policy when you had your first child and now no longer need life insurance as you approach retirement. Rather than continue funding a policy you don’t need, you could do a tax-free exchange into a long-term care insurance policy or a guaranteed income annuity, which might be better suited to your needs in retirement.
In general, permanent life policies are meant to be long-term holdings and should not be replaced or terminated frequently, if at all. If it’s performing well and still fits your goals, you’ll likely do best by keeping the policy. However, if your policy has under-performed or just isn’t a fit for you anymore, replacing it with something else could be the best option, particularly if you’ve built up substantial cash values. By making a change, you could earn a better return on your cash value and/or get insurance coverage that better meets your needs going forward. If you decide to go this route, make sure to consult with your insurance and tax advisors first. Terminating or replacing a permanent policy could have tax consequences and once you terminate a policy, there’s no going back. Also, if you decide to replace your current policy with a new one, make sure your new coverage is in place before canceling the old one. The last thing you want is to be stuck with no coverage if your new insurer doesn’t approve your application.
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