Should we cash in our life insurance?

[Ronstar]

We’re in our early 70’s. No kids, no debt. Adequate assets. Doing some estate planning, trying to make things easier for my niece when we pass. We have several IRAs, taxable accounts, checking accounts, insurance policies, cars, etc that she will have to handle.

So I’m trying to downsize the amount of accounts to make this easier. One thing that sticks out is life insurance. DW and I each have a universal or whole life plan that I’m wondering if we really need. Do we really need life insurance? I don’t think so. I think the cash value of each is around $40k. I’m thinking about cashing it in and putting the proceeds in our taxable account. This would get rid of 2 things that my niece will have to deal with.

But I read that we would need to pay income tax on the amount by which the proceeds exceeded our payments if we cash it in. And that our heirs would pay no income tax if we kept the life insurance and they inherited it.

So the tax issue makes me want to keep the life insurance policies.

Am I missing something?

 

[Dash man]

Does your state have an inheritance tax or estate tax that these proceeds could help pay for? Are your funeral expenses already paid for? Life insurance can come in handy for those kind of things.

 

[Flyfish1]

Yes, I believe you do owe tax above your basis. Does it pay a dividend yearly? Mine does, somewhere around 5%/yr. We started a slow draw down on that for travel expenses. Anyways, if you don't need it and some of it may be taxable on withdrawal I would leave it be. Won't be that hard for your niece to deal with.

 

[Aerides]

We cashed in, but the excess vs payments was not very much - do you have the data on your policy?

 

[YellowSubmarine]

We’re in our early 70’s. No kids, no debt. Adequate assets. Doing some estate planning, trying to make things easier for my niece when we pass. We have several IRAs, taxable accounts, checking accounts, insurance policies, cars, etc that she will have to handle.

So I’m trying to downsize the amount of accounts to make this easier. One thing that sticks out is life insurance. DW and I each have a universal or whole life plan that I’m wondering if we really need. Do we really need life insurance? I don’t think so. I think the cash value of each is around $40k. I’m thinking about cashing it in and putting the proceeds in our taxable account. This would get rid of 2 things that my niece will have to deal with.

But I read that we would need to pay income tax on the amount by which the proceeds exceeded our payments if we cash it in. And that our heirs would pay no income tax if we kept the life insurance and they inherited it.

So the tax issue makes me want to keep the life insurance policies.

Am I missing something?

We had Allstate Universal Life policy in my working years. Our agent got over on me and sold me on it. She claimed it was a business expense if I insured my wife, principal employee. The premium started rising steeply and I put the policy in self-maintenance, i.e. it was funded by the value of the policy for several years and we paid no out of pocket premiums for, perhaps 6 - 9 years. It's history now -no more policy.

 

[Kings over Queens]

Yes, you can surrender the life insurance.

Yes, you will pay tax on gains in excess of the premiums paid.

I dont have enough info to advise one way or the other. Have you considered making your niece the beneficiary of them?

 

[aja8888]

Cash out the insurance, buy something nice for both of you.

 

[frayne]

Am I missing something? Is there anything wrong with just leaving it as is and letting the beneficiary receive it without triggering a tax event?

 

[Aerides]

Am I missing something? Is there anything wrong with just leaving it as is and letting the beneficiary receive it without triggering a tax event?

in our case, continuing to pay premiums was the driver.

 

[VanWinkle]

You could use the proceeds to pay for Roth conversions so that your niece will inherit with no tax liability. More info is needed to see if the numbers make any sense.

 

[mystang52]

Shouldn't be difficult math: Cash-in amount less premiums paid is your taxable gain. How much of that would be due in taxes, then leaving with a net amount. If the tax due bothers you, don't cash it in; if you're happy with that net amount, cash it in.

 

[timbervest]

I had a UL policy that I took out when my kids were born. Since then the cash value had grown (as did they) but I didnt want to cash it in and pay the taxes on it. Converted it to paid up where the cash value pays the premium and I have no out of pocket. Maybe consider it an option and leave it to your niece (tax free).

 

[RunningBum]

I don't think life insurance is that hard to deal with, is it? It's not like selling a house.

 

[Koolau]

in our case, continuing to pay premiums was the driver.

This was my dilemma as well. BUT...

Am I missing something? Is there anything wrong with just leaving it as is and letting the beneficiary receive it without triggering a tax event?

I think leaving life insurance to someone is potentially a good thing to do. No taxes to the beneficiaries BUT...

There is a price (aka premiums) BUT...

In my case, I'm keeping my policies in force because I think I'm a good risk - to die early. IOW actuarially, my policies are a "good deal."

You gotta do the math yourself. You could take your cash out or keep paying premiums and leave a nice legacy. Best to you as you decide.

 

[rk911]

We cashed in our last remaining whole-life policy several years ago. No kids and we no longer needed the insurance so we saw no need to keep it. Yup, we had a taxable gain but it was one less thing to keep track of and one less thing for our successor trustees to deal with. So, yes, OP, were I you I'd cash that puppy tomorrow.

Had we been smarter back in the day we would've purchased term insurance instead of whole life and invested the money saved. We each still have a small, no-cost to us 'burial' policy from our retirement systems. We pay nothing and the payout is very, very small.

 

[SecondCor521]

Unless you are an extremely conservative investor in your taxable account, the amount of income tax you will pay when cashing them out will probably be offset by the larger gains of that $80K in your taxable account vs. inside the life insurance policy. The simplicity gained for you and your niece is also nice and fits with your stated goal.

I've watched over the past 35 years as my parents bought a bunch of whole life as well as invested in the usual taxable accounts and IRAs. The selling point the insurance agent gave that my parents bought was to have cash to pay estate/inheritance taxes and avoid selling when the market is down. I've also watched the estate tax limit changes over a lot of that time frame.

What I've observed is that the life insurance policies have been relative losers by a very wide and obvious margin. The estate tax limit has also generally increased enough to stay out of their way. And the market is occasionally down, but not by enough and not frequently enough to where I agree with the agent's selling point.

As a result of the above, I personally have zero life insurance on myself (56M with 30DS, 25DS, 23DD). In the unlikely event that estate taxes are due, my kids can sell off some other asset to pay the estate taxes plus any taxes owed on the asset sale and still come out way ahead in my opinion.

 

[Ronstar]

Thanks everyone for the great replies! Some for cashing in, some for keeping it. And some for analyzing the options in better financial detail before making a decision.

For now, I’m going to analyze the options in more detail. I need a better understanding of the numbers before I make a decision.

 

[Koolau]

We each still have a small, no-cost to us 'burial' policy from our retirement systems. We pay nothing and the payout is very, very small.

Heh, heh, when I joined Megacorp, one of the "big" benefits they told us about was the "death benefit" to retirees. Five whole thousand dollars!! Just think. You could have a super-nice 2-day viewing/service, limos to the grave yard, a 1st class wake, a head stone with your life story on it and cash left over for your loved ones' bills.

Here I sit, 55 years later and guess what the retiree death benefit is from Megacorp. Yep! $5,000. Inflation will kill you - but it won't bury you!

 

[FIYes]

“Inflation will kill you - but it won’t bury you”. Love it!!

 

[Kings over Queens]

Thanks everyone for the great replies! Some for cashing in, some for keeping it. And some for analyzing the options in better financial detail before making a decision.

For now, I’m going to analyze the options in more detail. I need a better understanding of the numbers before I make a decision.

I'm a big fan of keeping it in force and letting it do the job you hired it do. It's done most of it all these years providing the protection for you and your wife. Imagine the windfall to your niece, or if you wanted to go a different direction, you could name a charity or your church or synagogue as the beneficiary.

Assuming that the cash value will pay the premiums, or if you have to pay them, it's not an issue, think of how much more good the death benefit can do over the $80,000 put into your stock account. I assume we are talking about a couple hundred thousand in life insurance, yes? Perhaps more?

I'm facing a similar decision and for now am leaving it alone. The cash value pays the premium and and if I go its more tax free money to my family.

 

[badatmath]

Life insurance is probably the easiest thing a beneficiary will have to deal with. Wish somoene would leave me some. . . fill out a few forms and bam! you have money.

 

[Koolau]

I look at most insurance as a "bad" investment - especially other than term. BUT once you've paid the price for buying it (first 3 years or so), I'm not a big fan of cashing it in, late in life. It DOES have some advantage - like the lack of taxation of the death benefit.

Some policies have reasonably good investment options for cash value. DW had a policy for $100K. The cash was invested in the stock market and grew to even more than the death benefit. We decided it was no longer a good investment for us (at the time, she was pretty healthy). So we took the cash and put it into a MYGA (3 year IIRC).

SO there are options. BUT don't forget the potential "pay off" - especially if you weren't rated on the original policy. Your death may be like winning at the casino - after you've increased your odds in some fashion.

 

[Kings over Queens]

I look at most insurance as a "bad" investment - especially other than term.

I don't think anyone should look at life insurance as an investment, because it's not. It's first and foremost protection. Sure, it can have an investment or savings aspect to it, but can't hold it's own under a direct comparison or scrutiny as an investment. I don't like when producers, of which I was one, sell it as an alternate investment.

 

[Koolau]

I don't think anyone should look at life insurance as an investment, because it's not. It's first and foremost protection. Sure, it can have an investment or savings aspect to it, but can't hold it's own under a direct comparison or scrutiny as an investment. I don't like when producers, of which I was one, sell it as an alternate investment.

Actually agree. It's often "sold" as an investment - especially if it has investment plays for the cash value. That's why I said "bad" investment -but your point is well taken. It's protection - pure and simple.

 

[pb4uski]

A few years ago I cashed in a whole life policy that I had taken out just after graduating college. We no longer needed the insurance coverage and it would be one less thing for DW and DD to have to deal with. It wasn't a huge amount and the surrender gain just reduced the amount of low tax cost Roth conversions that I could do that year.

When I bought the policy it was so that I would have insurance coverage and could get more insurance coverage if it ever ended up that I couldn't pass underwriting. I could add coverage through riders without having to go through underwriting.

While I didn't buy the policy as an investment, it ended up providing a decent return for a safe investments... 4.38% IRR over the 46.8 years that I paid premiums.