Life insurance can serve multiple purposes in an estate, including inheritance funds, liquidity for taxes and expenses, business buy/sell arrangements, and even charitable gifts. Being aware of ways to maximize the value of existing whole life, universal life or term policies is important to assure the most bang for the premium buck.
Recent upgrades in cost-effectiveness by insurance companies and changes in mortality tables used to calculate premiums mean that new life insurance policies may provide more coverage at lower costs.
Also, some policies that were set up to be financially self-sustaining are now failing to generate the income needed for new premiums because of current low investment returns. Policy owners should contact the insurance companies to learn the true financial picture.
When needed, the provisions of Internal Revenue Code section 1035 permit an existing policy to be exchanged for a new one while avoiding taxable income from the changeover. The policy to be exchanged should not be cashed in.
Considering current economic conditions and the potential for improvements in coverage through a new policy, it may be advisable to have a policy review performed on a whole life or universal life policy while there is a reasonable amount of cash value available.
Conducted by an experienced life insurance professional, the review involves two steps.
First is the evaluation of the policy to see whether its investment return is within the expected range. Second, if the policy is underperforming, the agent can get quotes on one or more new policies with the same or different companies.
A 1035 policy exchange may also yield more stable coverage with a higher-rated company.
Often a policy on a married couple allows coverage even when one would not be insurable otherwise and will have lower premiums overall.
Switching policies does require a medical examination.
With the goals of removing market and premium instability, a policy review can yield future financial rewards.
That's good planning.
Deb Miller is the senior director of planned giving for the West Virginia University Foundation.