Replacing a Insurance policy with a new policy

[Lori H]

A doctor maintains a early 80's 100,000 face policy in his plan. Premiums are $1500 annual and he has about $50,000 cash value in it. He is considering changing the policy to one that would not build as much cash value but would give him substantially more than double the face amount of the current policy. Are there any reasons to keep him from making any changes? The plan has about 1.4 mil in assets with just over 1 million allocate to the doctor.

[Don Levit]

Lori:

I assume this is a UL policy.

If so, what are the insurance charges for the $50,000 of net coverage?

Don Levit

[Lori H]

Don,

its a Genworth issued Flex Premium Adjustable Life issued in 1985 when the rates were much higher than they are now. He is trying to decide whether the CV is more important than providing more life ins for his family at the same $1500 annual premium. His agent estimates that it would more than double the current face amount of $100,000. However one downside is that he would have to pay income tax on a lot more of the 1500 premium, which he(the agent) explains is due to 1) More life ins. to pay the PS 58 tax on and 2) lower cash value, because the CV is going to purchase more life ins.

Thanks.

[Don Levit]

Lori:

I can't comment on the tax issues, but I feel competent to discuss the insurance cost issue.

Since this policy is 23 years old, the cost per thousand should be very high.

Typically, UL's insurance costs per thousand are similar to a yearly renewable term policy.

Even though there is "only" $50,000 at risk, the cost per thousand is probably 7 times what it was at policy issue, depending on his issue age.

If that is true, and he is in good health, it may be time to make a switch.

Don Levit

[Lori H]

Don,

He was 44 in '85 when policy was issued. No major health concerns.

So he could replace the plan policy with a newer policy, higher face value and just show the "hit" (loss in csv) on the 5500 if he so desired?

Thanks

[Bird]

There's no plan (qualification) reason not to make this change. But if he has a taxable estate, he might want to (re)consider whether it is appropriate to be increasing his insurance coverage in a vehicle that will ultimately expose it to estate taxation. Odds are that it's flat-out stupid.

[Lori H]

There's no plan (qualification) reason not to make this change. But if he has a taxable estate, he might want to (re)consider whether it is appropriate to be increasing his insurance coverage in a vehicle that will ultimately expose it to estate taxation. Odds are that it's flat-out stupid.

Bird, So are you thinking that another option for him would be to take the insurance out of the plan altogether and replace the current cash value with personal assets outside the plan?

[Lori H]

Bird, So are you thinking that another option for him would be to take the insurance out of the plan altogether and replace the current cash value with personal assets outside the plan?

[Bird]

Bird, So are you thinking that another option for him would be to take the insurance out of the plan altogether and replace the current cash value with personal assets outside the plan?

I assume you mean "...with personal assets [from] outside the plan?"

That's one option; if he has outside assets and can buy the policy. Or just surrender it inside the plan and start a new one outside, in an irrevocable trust or owned by his kids. That's even easier, and from an estate planning standpoint, better, since it (the new policy) will be out of the estate from day 1. (Of course you want to reverse the order - secure the new coverage before surrendering the new policy.)

[Don Levit]

Folks:

While the typical UL policy may be ripe for replacement due to the increasing cost per thousand charge (similar to a yearly renewable term policy), whole life policies are intended to remain in force.

While the premium cannot rise, dividends are variable.

I bought many policies over 20-25 years ago.

Virtually every one of these policies has not had an increase in dividends over the last 10 years.

They have no loans againsdt the cash value.

If you add up the total cash value (dividends buy paid-up additions), the dividends range from 1-2% of the total cash available.

Back when I bought these plans, the dividends were estimated to exceed the dividends in about 20 years.

After 20-25 years, the dividends are about 20-30% of the premiums.

Is this scenario typical for others on this board?

Don Levit

[GBurns]

Lori

There is not enough info available to go beyond what Bird is suggesting.

What should be done, rather than hypothetical speculation, is to have a few agents, who have experience etc, to run some actual illustrations. Do not forget to take into account any tax consequences of policy transfer or change.

[Lori H]

Lori

There is not enough info available to go beyond what Bird is suggesting.

What should be done, rather than hypothetical speculation, is to have a few agents, who have experience etc, to run some actual illustrations. Do not forget to take into account any tax consequences of policy transfer or change.

Well this is exactly what lead to this thread. The agent is considering replacing the policy with a higher face/same premium policy. Makes sense. I believe my inquiry was thoroughly addressed.

Thanks for the comments.