By Bill Broich
I can remember my dad buying a house in 1965 for $9,000. To make sure the mortgage was covered in the event he died, he protected his family by buying a $10,000 whole life policy from New York Life. Fortunately he lived a long time and when he died, his house had long been paid off, but he still had the New York Life Policy…. and he was still making the annual $120 premium payments.
Because of the dividends which had accumulated in the policy, the actual amount paid to his beneficiaries was snot $10,000 but actually $17,000 a nice increase from the original amount of protection. The other curious thing about his policy — it was cash rich. The actual death benefit was $17,000 but his accumulated cash value was almost $14,000. New York Life actually paid most of the death benefit with my dad’s own accumulated money. Plus dad was still adding to the policy annually, money that really only grew his eventual cash values.
Don’t get me wrong, New York Life is easily one of the best insurance companies in the industry, highly rated and highly respected. But as far as I am concerned, they do have a flaw in their policies: they become way too cash rich in later years. If the purpose of the policy is an eventual death benefit, then why have so much cash value in the policy?
If my dad had known, he could have stopped paying premiums years ago and the dividends in the policy would have kept it going forever. But for him the purpose of the policy was not cash accumulation, it was protection.
One way you can change the insurance policy to more protection is to have it renewed based on today’s rates. The original policy could be exchanged for a new policy where the only real benefit is a future death benefit paid to beneficiaries. I will use my dad as an example, if at 75 he had exchanged his old policy for a more modern one, his old policy with $14,000 cash value could increase the death benefit from $17,000 to $55,000 and he would never EVER paid another premium.
You exchange the old policy for a new policy with no tax liability. The details are fairly simple, a copy of your medical records are needed, sometimes a nurse has to visit with you, (costs are paid by insurance company). The new company will provide you with an offer and if it makes sense (and only IF it does make sense) you then sign the paperwork.
In my dad’s situation he would have tripled the benefit paid to his beneficiaries and he would have paid no further premiums. If you happen to have an old policy still in force that was purchased for something that is no longer really needed, think about modernizing it and increasing the ultimate benefit. It costs you nothing to look and if you decide to modernize, there is no tax liability to you. (use a 1035 exchange)
Plus when the benefit is paid to your beneficiaries the amount they receive is also tax free.