Archive for October, 2016

Help Me Decide…

October 11, 2016

I started as a life insurance agent in 1986 (began morphing into long term care planning in 2000).  All of my training since then has reinforced the belief that no one should ever be encouraged to drop an existing life insurance policy.  Now comes the idea that selling one’s policy may, under certain circumstances, be best for the Policy Owner**.

Keeping a life insurance policy until the Insured* dies always results in the largest death benefit payout to the beneficiaries, usually the family.  But…the beneficiaries must wait until the Insured Person dies and premiums must continue to be paid until then by someone.

But what if the Policy Owner has already decided to “drop” the policy (and cannot be convinced otherwise) because he/she is unable to pay the ongoing premiums?  Or the reason for buying the insurance no longer exists?  Perhaps there are mounting bills for long term care services (If, for whatever reason, long term care insurance was never purchased).

Maybe the Policy Owner is struggling to meet other financial obligations like rent, college tuition, or credit card debt.  The important point here is that a definite decision has been made to “get rid of” the life insurance policy.

Here are the options for someone with a life insurance policy he/she has already decided to get rid of, depending upon the type of policy:

  1. Whole Life policy that is more than a few years old: The policy can be surrendered to the insurance company for its Net Cash Value***.  Most of the policy Net Cash Value can be borrowed, with future premium payments also borrowed and added to the policy loan…this can often buy some time, but cannot go on forever as the policy will Lapse** when the accumulated loan (principal plus interest) equals or exceeds the cash value.  Another option for a whole life policy: Convert into a “Paid Up” policy (Extended Term) with a significantly reduced death benefit, but no future premiums.
  2. Universal Life (or Variable Universal Life) policy: Same as Whole Life, above.
  3. Term Life insurance policy: Term Life has no Cash Value.  Premiums can stop at any time, thus causing the policy to Lapse.
  4. Selling the policy to an investor or group of investors (Yes, the Policy Owner has the right to do this): Usually limited to whole life or universal life policies that are more than two years old and have at least a $500,000 death benefit.  The Policy Owner receives a fraction of the policy death benefit (based upon the Insured’s particular remaining life expectancy).  The investor(s) then holds the policy, pays the premiums, and waits for the Insured to die so the investor(s) can collect the death benefit.  THIS IS NOT WHAT I AM CONSIDERING.
  5. Giving up (essentially selling) the life policy in exchange for having a long term care services trust fund:  At the Insured’s death, any remaining funds are paid to the trust beneficiaries.  Almost any life insurance is eligible, including $10,000 individual and group Term policies.  As with Option #4 above, the amount of money put into the trust fund is determined by the policy death benefit and the particular Insured’s remaining life expectancy.  The amount paid into the trust fund is always considerably less than the death benefit.  Major differences between this and Option #4 are: a) almost any life insurance policies, including very small term life, are eligible and b), the proceeds go into a trust fund that can only be used for the benefit of the Insured person. Almost always, this option will result in a higher payout than surrendering the policy to the applicable insurance company.

If I were to add Option #5 to my portfolio, here is what I would consider in every case before making a recommendation:

  1. Is the existing life insurance policy going to lapse no matter what I may recommend?  That is, has the policy owner absolutely determined that the policy will be cancelled?
  2. Is the Insured person’s need for long term care services imminent, or are they already receiving care?  (Either one means that long term care insurance is no longer a solution to the problem of paying for care.)
  3. Will Option #1, #2, #3, or #5 result in the largest payout to the policy owner?  Converting an existing policy to a long term care trust (Option #5) will usually, but not always, produce a higher payout than surrendering the policy to the insurance company (Options #1, #2 or #3).  Option #5 will always result in more money for the policy owner with Term Life.  As a matter of principle, I will not participate in #4.

On the one hand, it goes against my grain to recommend that someone sell an existing life insurance policy.  On the other hand, if someone has already decided to get rid of a policy, shouldn’t I use my knowledge & experience to help him/her obtain the largest payout possible?  So Dear Reader, what do you think?  I would really like your help with this.  Please email me at ray@LTCinsuranceGuy.com or call me at 303-699-4172.

Definitions:

  1. *The Insured (or Insured person): The person whose life is “insured”.  A life insurance death benefit is paid when the Insured dies.
  2. **The Policy Owner: The person or entity that actually owns the rights to the property (or asset) that is the insurance policy.  Only the Policy Owner has the right to surrender the policy, borrow against the cash value (if any) or change beneficiaries.  The Insured cannot do any of these things unless the Insured is also the Policy Owner.
  3. ***Net Cash Value: Applies to Whole Life or Universal Life.  Term Life policies have no cash value.  Net Cash Value is the amount the applicable insurance company would pay, after any deductions, in exchange for the policy being cancelled.

Disclaimer: This article contains a simplification of some of the technical issues involved with life insurance.  I am only asking for your opinion as to whether or not I should offer the concept of converting (selling) an existing life insurance policy to a long term care services trust fund when appropriate.  Ray Smith, The Long Term Care Specialist, is not an attorney or a CPA.  This article should not be construed as legal or tax advice because it is neither.