If death benefit coverage is no longer needed, surrendering the policy for its cash value or selling the policy on the secondary market should be considered
Further illustrations to obtain from the insurance carrier will vary depending on policy and/or plan type; however, scenarios showing reduced death benefits to maturity or to a risk tolerable age should be examined. Reducing the death benefit will typically be an option, but if there is minimal cash value, even reducing the death benefit may not prolong the policy far beyond a projected lapse at its current death benefit.
Investigate replacement of the existing policy. If the duration of coverage at the current death benefit or a reduced death benefit is not satisfactory, replacing the current policy with a newer policy from the insurance carrier or a different insurance carrier should be explored. Depending on the age and health of the insured, utilizing the current policy’s cash surrender value to facilitate a 1035 exchange as a single premium into a new policy could potentially provide the trust with a policy providing superior coverage to the current policy.
These are ways to get an immediate return on previous premium contributions in lieu of letting the policy lapse without value. EnTrust Settlements (entrustsettlements), an affiliate of RIC, can provide a preliminary life settlement evaluation to determine if the policy is a good candidate for sale on the secondary market and if the expected sale value would surpass the current cash surrender value. RIC recommends consulting a tax advisor should either of these options be considered to ensure the trustee is aware of the taxation of the proceeds, if any.
As universal life and variable universal life policies are often referred to and marketed as “flexible premium” policies, these are the policy types RIC most often sees with premium fully suspended. In higher interest rate environments, an eventual suspension of premium may have even been planned from policy issue, with the policy projected to persist until maturity. If planned interest or variable earnings have not been achieved, however, premium payments must often continue well beyond the initially planned premium suspension.
Fortunately, the costs of maintaining most universal life and variable universal life policies are fairly transparent and the process of identifying the various options to consider should follow the recommendations above. A notable exception is policies with secondary, or “no lapse,” guarantees. Policies utilizing their secondary guarantees to remain in force can be extremely sensitive to the timing of premium payments. payday loans Dublin OH A trustee should take extra care to understand how suspending premium may affect this type of policy.
Contrary to the “flexible premium” of universal life or variable universal life policies, whole life policies require premium to be paid each year unless the policy is explicitly paid-up. There are, however, a number of ways premium can be paid with a whole life policy’s internal values if out-pocket premium contributions are suspended. Most whole life policies owned by trusts earn dividends, which in turn can be utilized to purchase more insurance (paid-up additions) or reduce the premium amount due. If dividends are robust and the policy has been in force for a sufficient amount of time, dividends may be sufficient to pay the premium in full. Alternatively, previously acquired paid-up additions may be surrendered to pay a part, or all, of the premium.
The remaining cash value in the policy after premium suspension occurs will dictate the insurance carrier’s flexibility in providing these additional reduced death benefit scenarios
Policy loans can also be used to pay premium. In doing so, a loan is taken out against the cash value of the policy in the amount of the premium. Not only does the loan reduce the amount of cash value available for withdrawal or surrender, it also reduces the policy’s death benefit by the amount of the loan. This method of paying premium can be an effective way to suspend out-of-pocket contributions in later policy years; however, doing so too early and over-leveraging the policy can have a devastating effect on the policy’s death benefit. Unsustainable out-of-pocket contributions may become necessary to prevent the loan balance from exceeding the policy’s cash value and forcing a surrender of the policy. In such cases, there can be taxable consequences of the policy terminating, even though there was no longer any value to the trust.