Many people buy life insurance at a time when they are younger in life, like when purchasing a first home or when a baby is born. Whether it is a term policy for a period, or a permanent policy, one which allows for cash savings balances to build, it is most likely a good decision. The challenge with term is that there will be a time, especially if leaving an inheritance is a consideration, which you may need to reapply for coverage since you are outliving the term. Having a conversion feature on a policy is a good thing, as it will allow you to convert to a permanent policy sometime in the future without proving insurability, but I find even that option comes with an expiration. If a permanent policy is purchased, and premiums are paid on a regular basis, many times the policy holder will enter retirement with a well-funded (actually, over-funded relative to the death benefit) policy with a smaller relative death benefit to prevailing valuations. Said another way, that cash value can buy more coverage, even at an older attained age, than what is provided by the current policy.
As a Wealth Manager, I am always looking for ways for clients to receive more value from the financial products they purchase, always looking for ways to upgrade their financial plans to current circumstances. As such, I often recommend the replacement of a well-funded, low-face amount policy with one that can provide more leverage, sometimes 3x to 5x more than what the current cash value is supporting. There are two things to know that have created this opportunity.
FIRST – The Commissioners Standard Ordinary (CSO) Mortality Table, the actuarial table used by life insurers to price life insurance, was updated in 2017 for the first time since 2001. Hence, insurers are now pricing in that people are living longer and longer than previous generations, and have a better understanding of experience data, like certain smoking and other behaviors that can affect a person’s life expectancy. This allows for more favorable pricing for new policies for those in their 50s and 60s than that of previous generations of issued policies. On a practical note, this allows for many to increase their life insurance coverage without any additional out-of-pocket cost. For many a win-win - allowing for the goal of an inheritance to remain possible.
SECOND – This transaction is supported by a provision in Sections 1035 of the IRS Code - commonly referred to as a “1035 exchange”. When done correctly, the existing cash value, both basis and appreciation is rolled over to start the new policy, and any embedded tax liability (if any) is carried forward to the new policy.
I have found each case needs to be evaluated on its own merits. If you’d like to discuss your situation further, please schedule with me on my website at www.pickandrollwmt.com.