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Best strategy for cashing out a universal life insurance policy?
Old 08-04-2012, 04:56 PM   #1
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Best strategy for cashing out a universal life insurance policy?

Over 25 years ago when I had a young family I purchased a universal life insurance policy from IDS. All these years I have been sending in $75 monthly to cover the policy. Along the way IDS morphed into Ameriprise.

At this stage of our lives I see no need for life insurance as we are empty nesters and basically FI. I could see maybe a small term policy to cover funeral etc. but see no need for anything beyond that.

The last quarterly statement puts a value on this policy at approx. $53,000. I would assume a chunk of the value is my own after tax money.

I am trying to determine if I should cash out the policy now or wait another 1-2 years when I retire to cash it out. When I retire we will only have our investments to live on and assume taxes would be very low.

Any thoughts on this? This is the only life insurance policy I ever owned so know very little about cashing out early. I am a bit hesitant to ask Ameriprise and I assume they have no interest in looking out for my best interest if it means losing a customer.

My motto is.... "a dollar saved is better than a dollar earned. I don't pay tax on the dollar I saved."
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Old 08-04-2012, 06:14 PM   #2
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no answers unfortunately....just some homework
1) what is your marginal tax bracket now/in retirement
2) what is your basis in this? insurance co. can tell you and you can compare w/ your own estimate of what you have put in in premiums and added cash......kind of feels like about half of cash balance would be taxable?
3) what APY is your cash balance earning? some of these things can be earning 4-5% these days which is hard to match
4) for 1-2 yrs, you will be spending 900-1800 more; so need to compare how much you will pay in taxes now vs later, perhaps in a lower bracket or not;
vs. how much more you might earn at presumably much higher rates than outside;

my impression (check w/ insurance co. to see what they say) is that you will be taxed at ordinary income rates for cash value in excess of basis. If getting the chunk all at once puts you in a higher bracket (even in retirement), is taking it in smaller pieces an option?

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Old 08-04-2012, 07:28 PM   #3
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when I cashed mine in the taxable portion of about $28k was about $4k. YMMV of course. I had mine for about 30 yrs.
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Old 08-04-2012, 07:38 PM   #4
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IIRC you will have taxable income for the excess of the surrender proceeds (~$53k) over the premiums that you paid over the years. The best thing to do would be to call Ameriprise and ask what the tax implications of surrendering would be.

As kaneohe suggests, find out what the policy is "earning" = [current cash value /(the cash value a year ago + 1/2 premiums paid over the last year)]-1.

If the return is reasonable, you could keep the policy for a couple more years and then cash it in when the tax implications are more benign. You could probably even stop paying premiums and let the COIs and expense charges come out of the account value until you are ready to surrender it. At least that will save you the premium.
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Old 08-04-2012, 07:52 PM   #5
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just to be sure, you might want to ask what your future premiums will be....sounds like they're level forever? I had a group UL policy that was level for 5 yrs, then would step up every 5 yrs.

another thing.......mine had , until just before I left, a premium tax of 2% (kind of like a 2% load) on everything I paid ......does yours?
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