Fall / Winter 2016-2017 | BWD 21
As we approach the end of the year , our thoughts often turn to giving — to our families , friends or the charities we support . It ’ s also a good time to review our financial and estate plans to ensure we can make these gifts comfortably and tax efficiently .
As you review your plans , don ’ t overlook your life insurance policy , particularly if it ’ s held in an irrevocable life insurance trust ( ILIT ). Too often , people file their policies and trust documents away and forget about them . But it ’ s important to review your life insurance policy at least every three years to ensure it continues to meet your needs . What if your ILIT owns an underperforming universal life insurance policy that ’ s in danger of lapsing unless you pay higher premiums ? What if you purchased insurance to fund estate taxes that are no longer relevant ?
Many people take advantage of the annual gift tax exclusion ( currently , $ 14,000 per recipient ; $ 28,000 for gifts to married couples ) to fund their ILITs . This allows them to make taxfree gifts to the trust to cover the premium payments . But if they no longer need the insurance policy , or if more efficient investments are available to accomplish their goals , they may be better off using the exclusion for direct gifts to their loved ones .
View insurance as an asset
To properly evaluate life insurance , it ’ s important to view it as an asset rather than merely an expense . Does the return on your investment ( ROI ) justify the continued expense ? If your original purpose was to cover an estate tax liability that no longer exists , perhaps not . On the other hand , if you purchased life insurance to provide a specific dollar amount to your children or other beneficiaries , fund a buy-sell agreement or create wealth for charitable giving , it may continue to be a good investment .
Even if you need a policy ’ s “ death benefit ” — the amount paid to the beneficiary upon the death of the insured person — to accomplish your goals , you should determine whether continued premium payments are necessary to preserve the death benefit . If not , your premium dollars may be better spent on more efficient investments . Consult with your advisors to determine whether the policy ’ s cash value can support the death benefit and , if so , for how long . There may also be a “ reduced paid-up ” option . In other words , you accept a reduced guaranteed benefit and give up the cash savings in exchange for the right to stop paying premiums .
Review your options
If you no longer need a life insurance policy held in an ILIT , you have several options . However , keep in mind that because the trust is irrevocable , surrendering the policy and taking back its cash value isn ’ t one of them . Here are a few possibilities :
• Stop paying the premiums and have the trustee use the policy ’ s cash value to make distributions to your spouse , children or other beneficiaries .
• Elect the reduced paid-up option and use your premium funds to make gifts or for other purposes . Make sure the reduced death benefit is guaranteed and not tied to a certain level of market returns .
• Do a Section 1035 tax-free exchange to trade the policy for an updated one that offers lower premiums , more attractive benefits or both ( assuming you ’ re insurable ). For example , you might exchange a policy whose death benefit depends on market returns for one that offers a guaranteed benefit regardless of market returns . Or you might upgrade to a policy that includes long-term care coverage .
• Do a Section 1035 exchange for a deferred annuity that provides your beneficiaries with a guaranteed income stream for life .
Other options to consider include selling the policy to a third party in a “ life settlement ,” removing the policy from the trust by exchanging it for an asset of comparable value ( if the trust allows ) or donating the policy to charity .
Look at the big picture
If you feel you no longer need a life insurance policy , be sure to consult your wealth management and insurance advisors before taking any action . They can help you evaluate the policy in the context of your overall financial and estate plan , identify alternative investment options and review the terms of your ILIT to determine which actions are permissible .
ABOUT THE AUTHOR
Jennifer is a Certified Financial Planner™ Professional and Financial Advisor with Rehmann Financial . She has in-depth knowledge of retirement plans , social security analysis , insurance offerings and investment strategy reviews . Contact her today at jennifer . baldini @ rehmann . com .
Jennifer Baldini offers securities through Royal Alliance Associates , Inc ., member FINRA / SIPC . Investment advisory services offered through Rehmann Financial , a Registered Investment Advisor not affiliated with Royal Alliance Associates , Inc .