Real Life Story: Increase Death Benefit by 80% w/No New Money!

 In Boomers, Indexed Universal Life Insurance, Life Insurance, Retirement Planning, Seniors

One of the under appreciated and often ignored sources of value many families have is existing life insurance policies.  If you haven’t sat down with your agent and done a “policy audit” recently I’d encourage you to dig those policy documents out of storage, dust them off; and with the help of a good agent, see what kind of gems you can uncover!

I’ll highlight two very common examples:

Older Permanent Policies with Existing Cash Value

These older policies (usually more than 10 years old) often have higher internal costs than newer products on the market today.  These lower costs are driven by two things: lower mortality rates (people living longer means lower costs of insurance) and a more competitive market with more efficiently designed products.  Don’t get hung up on the technical details behind the pricing “why” – what you should focus on are the trade-offs (advantages/disadvantages) between keeping an existing policy and owning a new one.

Basically what you can do is surrender or “cash in” the existing policy you currently have, take the proceeds and make a lump sum payment into a new policy. If done correctly, it is a tax-free event for you.  In fact you never see any money at all.  It all moves from one insurance company to another seamlessly.

Why does this make sense? I have a friend about 70 in good health.  He had a $1,000,000 Death Benefit Whole Life policy with a cash value of $600,000.  He was able to take his cash value of $600,000 and exchange it for a new policy with a $1,800,000 guaranteed death benefit.  He will never have to make another policy payment and he increased the amount he’s leaving to his loved ones by 80%.

Of course he has to be in good enough health to qualify for insurance; but even if he wasn’t in great health he still could have taken advantage of this strategy.  Note it is important to understand and carefully consider all of the tradeoffs involved in switching policies.

This type of trade or exchange is called a “1035 Exchange” named after a section of the IRS (Tax) Code.

Term Policies with Conversion Options

Most Term Life polices (the ones that expire or increase in price after a fixed number of years, e.g. a “20 Year Term”) have an option in them that provides the ability to convert the policy to one of the company’s permanent policies without proof of insurability.

Said in plain English this means even if your health situation has deteriorated (maybe you had a heart attack or were diagnosed with a really bad disease), you can make your term life policy permanent simply by paying the then current rate for your age for the new policy.  You do have to fill out some paperwork but there won’t be any medical questions.

A variation on this is a “partial conversion” where you convert part of the policy to permanent.  Say you have $500,000 in term coverage.  Converting all $500,000 to permanent might not be practical for you budget-wise, so you could peel off say $50,000 or $100,000 as permanent coverage thru a conversion and keep the remaining $450,000 or $400,000 as term coverage.

Bottom line: Lots of opportunities out there.  Many of them are right under your nose (or sitting in your safety deposit box).  These are just two very common ones.  Invest a little time sitting with a knowledgeable licensed agent that can help you sort through the options you have.

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