Many people no longer need their existing life insurance. Is it a better investment to continue paying a policy that you have already paid into in hopes of a gain at maturation, or to recoup some of the investment by trading the policy for its cash surrender value?
Corporate policyholders often face additional dilemmas when dealing with departing executives with key-man or split-dollar policies, or insurance purchased as part of a buy-sell agreement.
Another option is to sell the policy for cash. With a life settlement, the policyholder realizes an amount much greater than the cash surrender value in exchange for the ownership of the policy, thus increasing immediate revenue for companies holding unprofitable policies.
You can also sell term insurance policies. Life-settlement transactions involving keyman or buy-sell policies can provide businesses with increased cash flow to solve immediate financial problems, while transactions concerning split-dollar policies typically involve retirement planning and charitable giving issues.
An individual can also sell their policy for cash. In a recent advisor survey, nearly half of the respondents had clients who had surrendered a life insurance policy, many of whom might have qualified for a life-settlement transaction and subsequent lump-sum cash payment.
The life-settlement process takes about a month, is confidential, and the proceeds can be used for anything.
A recent settlement example is a 66-year-old male with a $2 million universal life policy with $4,200 of cash surrender value. The owner, who could no longer afford the increasing premiums, was paid $194,992 for the policy.
If one still needs life insurance, but does not want to continue the existing policy, the insurance swapouts should be compared to the lifesettlement offer for the best results. That involves the exchange of insurance, elimination of taxable "paper" gain, or credit against a new policy of basis in an old one.
The alternatives to the above are keeping unwanted insurance, canceling and paying taxes, or canceling insurance and losing credit for the taxable loss.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him at 516-9385007 or visit www.vebaplan.com.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
")