Perhaps you bought a life insurance policy some years ago to protect your family, but your family is now grown and moved on, your investment assets have increased, your mortgage is small or paid off, and you’re wondering what to do with the old policy. You have a number of alternatives.

Do You Still Need Life Insurance Protection?
First, consider carefully why you acquired the life insurance in the first place, and determine whether you still need some or all of your insurance. If your investments are sufficiently large and you’ve paid off your debts, perhaps there is no economic reason to keep the insurance. On the other hand, if you took advantage of low interest rates and refinanced your home a few years ago, you still may have a large mortgage. In addition, through job losses, health problems or poor investment returns, your investments may not be quite what you earlier hoped for – so don’t be hasty to drop your protection.

Change the Policy
Before discontinuing your policy, you might also consider ways to retain the policy, but reduce your annual cost. Your insurance company might lower the death benefit, which would reduce your annual premium. Alternatively, it might utilize your existing cash value to continue to provide you with a death benefit for a number of years in the future.

Surrender the Policy
On the other hand, if you’re convinced that you just don’t have a need for the life insurance, you can always simply surrender the policy. If it is a term-life policy, there is no cash surrender value, so there is nothing to recoup upon surrender, except perhaps a few months of unearned premium that would be returned to you. If your term policy is a “level-term” and you still have a few years to go before premiums ratchet up, you might still consider retaining the policy until the end of the lower-premium period.
If your policy is “cash-value” policy, you’ve built up a savings account within the policy that will be returned to you upon surrender. You may or may not owe income taxes upon surrender of a cash-value policy. Ask your insurance company what taxable income – if any – you would have upon surrender.

Exchange the Policy
If you have a cash-value policy and you’re facing a significant amount of taxable income if you surrender the policy, another alternative to consider is a non-taxable “1035” exchange of the policy into another life insurance policy or annuity contract. Moving your cash value into an annuity allows your money to continue growing tax-deferred while saving you the expense of the life insurance premiums. An exchange into a new life policy that also has long-term-care benefits would be a tax-effective way of shifting your focus from insurance death benefits to long-term-care living benefits.

Gift the Policy
If you have a favorite charity, you might also consider using your policy to benefit the charity. You could always continue owning and paying premiums on the policy, but naming the charity as the beneficiary. Alternatively, by donating a policy to the charity, you might receive an income tax deduction, approximately equal to the cash-surrender value of the policy.

Sell the Policy
A final option is to consider selling your policy. Known either as “viatical settlements” or “life settlements,” you would be selling your policy to a company for cash. Prior to considering this option, be sure to contact your insurance company to determine if your policy qualifies for “accelerated death benefits” or “living benefits.” Also consider other options for maintaining your policy such as borrowing on the cash value. Also, selling your policy may have tax consequences.

For any of these alternatives, I suggest you discuss them thoroughly with your spouse and financial advisors before making any final decision.



The Right Questions for Long-Term Care
by Gerald Townsend, Financial Editor

Long-term care is not about insurance, and it’s not even about the possibility that you might need care – after all, if you need care, you will receive some level of care (of course, perhaps not where or what you would desire). Long-term care is about the consequences that providing your care over a period of time will have on your family and your assets.

So, with that in mind, let’s examine the key long-term care questions you need to ask yourself:
Only after thinking through questions like these can you even begin to consider whether you should consider acquiring long-term care insurance, and if you do, what features and benefits that insurance needs to provide.

Long-term care insurance is about how you finance the cost of providing your long-term care. The alternative to shifting the risk to the insurance company is to self-insure. Is this feasible?

The average stay in a nursing home is perhaps 3 years, but some receive home care for many years. Let’s assume you need assistance for 5 years and the cost is $200 per day. Ignoring inflation, this would be $365,000 over 5 years. If you are married and both you and your spouse needed this same level of care, that doubles the potential cost, so the amount is now $730,000. Now, could you reduce your current investments by this amount and still have sufficient assets to provide for your retirement and other financial goals? If you can’t answer that question with a resounding “Yes,” then self-insuring is probably not an option to consider.

Even if you might be a candidate for self-insuring, consider these additional issues:

Regardless of how you ultimately decide to finance the cost of your long-term care plan, don’t forget that while this is your plan, it is really about the consequences your care will have on your family, finances, and friends

Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.