Can There Be New Life for Your Old Insurance Policy?

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing alternatives to abandoning or surrendering current life insurance coverage:

Life insurance can serve many valuable purposes.

However, later in life — when your children have grown, you’ve retired, or you’ve paid off your mortgage — you may no longer think you need to keep your coverage, or perhaps your coverage has become too expensive.

You might be tempted to abandon the policy or surrender your life insurance coverage, but there are other alternatives to consider:

Term vs. Perm

If you have term life insurance, you generally will receive nothing if you surrender the policy or let it lapse by not paying the premiums.

However, depending on your age, your health status, and the time left in the term, you may be able to extend the coverage or convert the policy to a permanent policy. The rules for extension and conversion vary by policy and company.

On the other hand, if you own permanent life insurance, the policy may have a cash surrender value (CSV), which you can receive upon surrendering the insurance. If you surrender your cash-value life insurance policy, any gain resulting from the surrender (generally, the excess of your CSV over the cumulative amount of premium paid) will be subject to federal and possibly state income tax. Also, surrendering your policy prematurely may result in surrender charges, which can reduce your CSV.

Exchange the Old Policy

Another option is to exchange your existing permanent life insurance policy for either a new life insurance policy or another type of insurance product. Under the federal tax code, this is known as an IRC Section 1035 exchange.

The exchange must be made directly between the insurance company that issued the old policy and the company issuing the new policy or contract. The rules governing 1035 exchanges are complex, and you may incur

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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