Making Cents: Should you keep your life insurance policies
By: John P. Napolitano, CFP®, CPA, PFS, MST
For many people, life insurance is to replace lost earnings or fund some other need that may not get accomplished should the funder pass away. Some other advanced uses are for business continuity or buyout and to help pay death taxes. But what happens when the need you were insuring disappears? That may occur when your children are free from the nest and on their own, after the sale of a business or when the calculation shows that you’ve accumulated enough assets to accomplish what you want without the life insurance death benefit.
For term insurance, the answer is rather simple. If the need for the death benefit has ceased, then you really don’t need the policy. If you’re healthy with a normal life expectancy, you may consider letting the policy lapse. You’ll save the premium cost, and of course, will lose the death benefit even if you pass only a few days after letting the policy lapse.
Other possibilities may include converting the policy to one with cash accumulations. It isn’t the death benefit that you want (especially if you really don’t need it) as much as the potential return of your cash value that may accumulate inside the policy. Some companies may permit an exchange of your existing policy into one with hybrid features to include death benefit and potential long term care coverage.
The analysis gets a bit more complicated when your life policy is a permanent life policy that has some mechanism to accumulate cash value. The review will start with an inforce illustration. The inforce illustration is a forecast as to what may be reasonably expected to happen with this policy if you keep it. There are many different assumptions that may go into the in force illustration, such as rate of return on cash value, the company’s dividend crediting rate, mortality costs, the number of years that the premium is paid, amongst a few others.
The in force illustration often will not show you the policy’s internal rate of return (IRR) on cash value or the death benefit. These are something that your planner should do for you. IRR on cash value is simple, it would show how well your cash accumulates and earns inside the policy. This is easily compared to other alternative savings methods.
The IRR on death benefit is a concept that may be strange to you. Simple, you invest $XX,XXX per year and have a death benefit much larger than that. The IRR on Death Benefit will show you the return on your premium dollars that will be returned with a death benefit check. Naturally if you pass early in the life of the policy, that IRR number will be huge. If you have the policy for a long time, the IRR on death benefit declines and starts to look like the return in a fixed income investment.
Get an independent advisor to do the analysis for you as opposed to someone who will try to sell you another product.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.