I recently went to a financial planner to review my retirement plans, after the my kids’ colleges are paid off. He was very objective, professional, and explained everything in a consistent proactive manner. My husband and I were very impressed with his professionalism.
He recommended that I get rid of a universal life insurance policy, that I have had for a while, because he said it’s a waste of my dollars and it’s draining money every month. I realize that there are hefty fees with withdrawals, but I don’t know where to look on the IRS pages for taxable information.
It’s not a whole lot of money, and he said it wasn’t worth the monthly direct deposits because I’m not making any money on it, but that I can lose money on it . I do have another life insurance policy that is significant and has a decent amount of money through my husband’s benefits. This account was something that was a left over from before I was married. It does add to my overall monthly expenses. Does anyone have any experience with this?
If you have any idea where I can find the information on the IRS tax pages I would really appreciate it! thanks
Whether you will have taxable income on your gain on the policy, i.e., the difference between the cash-out value and your basis (your basis is the total of the premiums you have contributed over the years) has nothing to do with your age. You are probably thinking about the penalty for an early withdrawal from a retirement plan that applies if you take a distribution before age 59 1/2. Assuming this is insurance you hold outside of a retirement plan or IRA, the life benefits (as opposed to the death benefit) is taxable like any other investment. You may not have any taxable gain if the cash value is less than your total premiums.
The company that holds it should be able to tell you what your gain is currently. The gains I have seen over the years are fairly minimal. Most of these policies were not good investments for the individual.
I would think a competent financial planner would not only understand the tax implications of this transaction but would factor them into any forecasts and show the financial ramifications of his recommendations.
@RichInPitt
He’s not a tax specialist and advised us of that, and If we wanted specifics, we would need to confirm his information with a tax person.
Since this is not my area of expertise, I needed a starting point before I meet with a tax specialist. (We do TurboTax so we’re not tax experts either.)
Over the years, we’ve met with several financial planners, either through my husband’s work accounts, through inheritance advisors, etc. and this guy has been very open and direct. Sometimes it wasn’t what we wanted to hear, but we needed to hear what he had to say, which is fine.
Here’s what my advisor did: Have them run an illustration to see if the policy can pay for itself out of dividends. Sometimes UL policies have enough cash value where you don’t have to pay for them anymore. I think it’s called End Pay? Otherwise, when you surrender the policy (that’s what it’s called) you will have to pay taxes. Or see if you can transfer it into an annuity product which is tax deferred it’s an exchange or transfer? of some sort. We ended up going with the End pay option and I couldn’t be happier, essentially I still have life insurance but I don’t pay for it. The annuity was one of the cheaper ones with a surrender schedule so it wouldn’t be fully liquid for x number of years but we didn’t really need that, so chose to keep it as a life insuarnce policy. Ask your advisor if something like this is possible. It can’t hurt to ask.
Very simple solve without jumping through lots of hoops. The taxable piece would be gains above basis. The insurance company knows how much you have paid into the contract (unless you transferred existing cash value from another contract - and even sometimes they know that as it should have been reported to them).
Call the company or go online and see what your accumulated premium contribution is. Anything above that is fully taxable at ordinary rates (like an annuity) if you surrender the contract. If the surrender value is less than your accumulated premium contributions, there is no taxable event. Simple as that.
A financial advisor should know this as it’s an important part of being an advisor but that’s a whole different conversation…don’t get me started on that one
I asked just to confirm that you have all rights with respect to the policy & its assets. (Often life insurance policies are owned by a trust which often limits options with respect to trust assets.)
Check with your life insurance agent or the insurance company to determine if you have the right to reduce the death benefit on your current life insurance policy to an amount which will require no further funding through premiums & which does not trigger any type of insurance company imposed early withdrawl penalties. (For whole life insurance policies this is referred to as a “reduced paid up policy option”.)
If available without penalty, this should alleviate the need for any additional premium payments while also averting a taxable event. This course of action, if available, will not liquidate any of the current cash value (although that too, may be an option, but you might want to limit withdrawals to your basis so as to avoid triggering a taxable event).
A cash value life insurance policy can be a complex financial instrument. This is why dealing with a well trained, experienced life insurance agent is important.
Other alternatives exist. There are companies which will purchase existing life insurance policies from policy owners. Also, consider transferring policy ownership to any or all of your children if they see value in it. Especially important if the insured’s health has deteriorated since the life insurance policy was originally underwritten & issued.
Your existing life insurance policy is a valuable asset, therefore, it is worth considering all options available to you if thinking about surrendering it. Might be worthwhile to inform your adult children of your thoughts and options about your universal life insurance policy prior to taking any final action.
P.S. One approach is to ask the insurance company: What are my options with respect to this policy ?
What Publisher says above is correct in theory, but honestly it doesn’t sound relevant to the OP’s personal situation as described here.
One important footnote, though: If instead of surrendering the policy and withdrawing the cash value, the OP sells the policy to a third party – something that would be likely to happen only in special circumstances that are not part of anything the OP said – the tax consequences could be very different. The IRS has ruled that the OP’s tax basis in the policy would be determined less favorably than in the surrender scenario, so that much of the purchase price (maybe most) would be taxable, a significant portion of that ordinary income, not capital gain.
Ah, yes, those investment strategies of the '90’s. We rolled over individual high amount policies into a single on years ago because of the tax consequences of just plain cashing out. Kid will get a hefty sum after we both die. We stopped paying additional premiums a long time ago as well- finally reached the no penalty for cashing out stage recently.
As in above posts- added income taxable. IRA funds are also taxable at any age- the concept was to defer taxes until later and perhaps in a lower tax bracket. You need to start taking money out of an IRA by a certain age (I heard it is changing) but know of no other age dependent withdrawal types of funds.
Sometimes it is best to “bite the bullet” and get rid of investments/consolidate to simplify life and pay any taxes now. It will be a whole lot easier for our son now than years ago- heck, so much easier to know ourselves.
My take on financial things is that I’m fortunate to be wealthy enough to have to pay taxes on income (and medicare premium extra cost as well).
Yes, @wis75, the IRA RMD (required minimum distribution) will now start at age 72 (up from 70.5). The other change is that non-spousal inherited IRAs (like your kids) have no minimum distribution requirements but must be depleted within 10 years, and may cause significant income/taxes for said kids.
@“aunt bea” : Seems as though your financial planner does not fully understand the options available to an owner of a universal life insurance policy.
Should be easy to reduce the death benefit to a level which would no longer require any premium payments. No need to rollover to a new policy and no need to cancel or surrender the policy.
Before altering any facet of your current policy or surrendering it for the cash value, call one of the companies which purchase existing life insurance policies.
Due to change in age, health, and underwriting standards, life insurance is not as easy to obtain. You have a valuable asset. Appears that your financial planner mistakenly views the universal life policy as a liability, rather than as an asset.
Consult with your adult children before making any changes as they may want to take over the policy.
With respect to life insurance policies, it is usually better to consult with a CLU (Chartered Life Underwriter) than with a CFP (Certified Financial Planner).
