Numerous beneficial uses for life insurance are possible. When your kids have grown up, you’ve retired, or you’ve paid off your mortgage, you may no longer feel the need to maintain your coverage, or you may feel that it has become unaffordable. There are other options to think about even if you might be tempted to cancel the policy or forfeit your life insurance protection.
Term versus Perm
If you don’t pay your premiums on term life insurance, you usually won’t get anything if you surrender the policy. However, you might be able to extend the coverage or change the insurance to a permanent one depending on your age, your health, and the remaining term. By policy and business, several regulations apply to extension and conversion.
However, if you have permanent life insurance, you might be able to cash it in for a cash surrender value (CSV), which you can get by giving up your policy.
The excess of your cash-value life insurance policy’s CSV over the total amount of premiums paid will often be liable to federal and potentially state income tax if you decide to surrender the policy. Additionally, early policy surrender may incur surrender fees, which could lower your CSV.
Replace the previous policy
Another choice is to switch your current permanent life insurance policy for a different kind of insurance product or a new life insurance policy. This is referred to as an IRC Section 1035 exchange under federal tax law.
The new policy or contract must be exchanged directly between the insurance company issuing it and the company issuing the old coverage. There are many regulations governing 1035 swaps, and you can be subject to surrender fees from your present life insurance policy. For the new policy, you can also be liable to new sales, mortality, expenditure, and surrender charges.
Why Purchase Life Insurance?
Although acquiring life insurance has traditionally been done to replace income in the event of a wage earner’s passing, consumers are increasingly likely to cite other factors.
Here are a few 1035 exchange alternatives.
Reduce the fee. If the cost of your existing life insurance premium is a concern, you might be able to reduce the death benefit, which wouldn’t require an exchange, to lower the price. Alternately, you might consider switching your current policy for one with a reduced premium. However, due to your age, health issues, or other factors, it’s conceivable that you won’t be eligible for a new insurance.
Create a source of revenue. An immediate annuity, which might offer an income stream for a certain amount of time or for the remainder of your life, may be exchanged for the CSV of a permanent life insurance policy. A portion of each annuity payment will be allocated to taxable gain and nontaxable capital return. You should be aware that if you convert your CSV into an annuity, you will forfeit your right to the death benefit. Additionally, annuity contracts typically involve fees and expenditures, limitations, exclusions, and termination clauses. Additionally, any annuity guarantees are subject to the issuing insurance company’s financial stability and ability to pay claims.
Enable long-term care. Another choice is to switch your life insurance policy for a long-term care insurance (LTCI) coverage that qualifies for tax deductions. The long-term care policy delays any taxable gain in the CSV, and benefits received from the tax-qualified LTCI policy are tax-free. Remember that you would need to make multiple partial exchanges from the CSV of your current life insurance policy to the LTCI policy provider to settle the annual premium cost if an LTCI policy does not accept lump-sum premium payments.
Only the policy has a comprehensive summary of coverage, including exclusions, exceptions, and limits. Carriers are free to increase their prices and withdraw their goods from the market as they see fit.
Whatever route you take, it might be a good idea to use the cash worth of the undesired life insurance policy to cover other expenses.