Evaluating Old Life Insurance Policies

Not all financial decisions are made with a clean slate.  Nearly everyone we meet has made choices both good and bad.  Our approach has always been to look everything over with a critical but nonjudgmental eye and find the most appropriate way forward for the future.  Often our first opportunity to practice this approach is with an old life insurance policy.  In our final Atheneum commentary about insurance, we’ll walk you through our evaluation process.

The first question we try to answer for owners of life insurance is simple but often overlooked- do I have a need for insurance?  The answer to this question changes throughout one’s life.  As debts are eliminated and children become self-sufficient, needs may decrease.  However, some may see their need grow over time for business reasons, charitable goals, or even for peace of mind.  If you still have a need for insurance today, we want to hold insurance and can move on to the next question.

Does my current life insurance policy fit my needs as well as current alternatives in the marketplace?  To answer, we compare both features and price.  Pure term-life insurance bought at a younger age usually beats replacement at a later age on price, but replacement can be a good choice if your current policy has features that you no longer need.  This situation usually lends itself to an easy apples-to-apples comparison.

Things get more complicated if you own life insurance but don’t need to transfer financial risk.  At that point, we stop comparing your policy against new policies and instead begin to evaluate opportunity cost.  For old whole life policies that pair insurance with investment, we look at two pieces of information- an in-force illustration and the policy features.  An in-force illustration, which can be requested from your carrier, shows how your policy has performed to date and provides an updated projection for the future.  We use this data to determine guaranteed and projected rates of return, which yield the elusive apples-to-apples comparison.  We pair this with an analysis of policy features.  Some old policies have guarantees or conversion options so attractive that carriers stopped offering them on new policies.  In this happy case we evaluate the policy against alternatives periodically like any financial holding.

It is often the case, especially with whole-life policies that are less than 10-15 years old, that the owner doesn’t need the insurance and the policy doesn’t have features or performance to justify continued premiums.  In this case, you can stop paying premiums and keep your death benefit as long as the cash value lasts.  Alternatively, you can surrender the cash value or exchange it into a more suitable insurance policy or annuity.  There are several strategies based on the history of the original policy, each with different tax implications that require personalized analysis.

As with all financial conundrums we’re presented, we endeavor to use common sense to provide the best advice for your current circumstances.  Whether your old policy was a slam dunk or a long-term cash vacuum, it’s always a good idea to revisit and determine the best option for the future.  We’re happy to help with this anytime.

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