Life Insurance Reviews

As a financial consultant, I am often times asked questions about old life insurance policies--whether they should be maintained or surrendered for their cash values.  In answering questions, I need to ask questions.

For a term insurance policy where there is no cash value, the only question is whether there is is need or desire to continue premiums knowing that ultimately the policy will lapse at the end of its term period.

Renewal rates rates for term insurance can be very expensive and many times the duration of need is past. Often times though, this is not the case and the ability to reset the premiums by purchasing a new policy is compromised by health or other insurability issues. In those cases, the suggestion may be to keep the original policy until the end of the contract period while these lower rates still exist and then let it lapse.

For permanent insurance, more often known as cash value insurance, consideration should be given to several additional factors that don't exist with a term insurance policy; two of the most important being on-going premiums, and the use of the accumulated life values if removed from the policy.

For individuals wanting to reduce or eliminate premiums, many times cash values can be used as an off-set.  For policies that pay an annual dividend, that dividend can be directly applied to reduce or possibly eliminate the yearly premium.  Use of a dividend in this manner is not a taxable event and will not affect the contract cash value increases.  Reducing or eliminating the premiums and still having the tax free life insurance proceeds often times meets client objectives.

For individuals,wanting to release all the cash values from a policy, the contract can be surrendered.  Also, there is a loan provision although this would trigger interest payments and would reduce the face amounts accordingly.

When a policy is surrendered, all cash in excess of lifetime premiums are taxed as ordinary income, not capital gains. Where premiums exceed the cash surrender values, there is no taxable event.

Finally, life insurance policies where need no longer exists at the personal level, can be used for legacy gifts to a charitable foundation or endowment fund as a deferred gift.  Likewise, ownership can be changed without affecting the tax status as foundations and endowments do not pay tax.


For those readers who have questions about in-force policies, a Chartered Life Underwriter (CLU) can assist.  A list of those CLUs in your area can be found through the web site of The American College, in Bryn Mawr, Penn.