Many of you might have purchased life
insurance at some point because someone depended on you financially and you are
a responsible person.

But what if you were sold a permanent
policy that you don’t need anymore, if you ever needed it. There are different
types of permanent insurance, but this article focuses on whole-life insurance.

Generally speaking, you don’t need
life insurance when you no longer have dependents or you are financially
independent. For this reason, there are a lot of people out there who own
whole-life insurance and do not need it anymore.

Of course, there are always exceptions,
so you must do a proper analysis of your unique circumstances. You’re probably
asking yourself why so many people own it if they don’t need it. One reason is
the significant economic incentive life insurance agents have to sell it.

Conflict of Interest

A simple example illustrates this
point. Life insurance agents earn a percentage of the premium you pay as a
commission. Term insurance premiums are worth significantly less than
whole-life premiums. An agent can make significantly more money by selling you
permanent insurance than term insurance.

This is perfectly legal even if you
don’t need it, because insurance agents do not have to act in your best
interest, unlike a Fiduciary financial advisor. They are
simply doing what any sales-person would do.

Fee-Only advisors are legally required
to act in your best interest and don’t even own the licenses required to earn a
commission, thereby eliminating this conflict of interest.

Your Options

So, what are your options if you
already own whole life insurance and do not need it anymore? Thankfully, you
should have several dividend options and non-forfeiture options. As you’ll see,
the best option for you will likely depend on your specific situation.

You can try the
following dividend options:

Receive as Cash

When you need cash flow, you can ask the
insurance provider to send you a check in the amount of the dividend.

Reduce Premium

You can also use the dividend to
reduce the amount of premium you pay out of pocket. This option can make sense
when you want to keep the policy but reduce your cost.

Purchase Paid-Up Additions

Another option is to use the dividend
to increase the cash value and death benefit of your policy. This can make
sense when you have significant cash flow and are looking to maximize the size
of your policy.

Accumulate at Interest

Perhaps you want to leave the dividend
with your insurance company to earn interest in a separate account. Make sure
you evaluate all alternatives to maximize your return.

Extended Term

You can also use the dividend to buy a
one-year term policy in addition to the existing policy. The amount is
determined by the size of the dividend. This can make sense when you need more
death benefit and the terms of this option are more favorable than purchasing a
separate policy.

There
are several non-forfeiture options as well.

Cash Surrender

If you’d rather just cancel the policy,
you can accept whatever cash value may be available. This can be a taxable
event if the cash value is more than your basis. This option can make sense
when you do not need the death benefit anymore and have a need for the cash.

Reduced Paid-Up

You can also reduce the cash value and
death benefit, which will allow you to keep the policy without paying any more
in premium. Reduced paid-up can make sense when you have a need for some death
benefit.

Automatic Premium Loan

In another option, you can allow the
cash value to pay the premium. This can make sense when you need the full death
benefit but may not be able to continue paying the premium out of cash flow. Be
careful with this option because it could result in a policy lapse and severe
tax consequences.

Extended Term

You can convert your death benefit
into a term policy and eliminate your cash value. The length of the term would
be determined by the amount of cash value. This option can make sense if you
need the full death benefit for a limited time.

1035 Exchange

There is one other option that doesn’t
fit into the categories above and is often overlooked. The IRS allows you to do
a 1035 exchange of a life insurance policy to an annuity or long-term care
insurance. This means you can convert your policy without tax consequences.

Think Your Options Through

To recap, you may or may not still
need a death benefit. Even if you do, your policy may or may not still make
sense for you. A Fiduciary advisor without a commission conflict of interest
can help you evaluate your options.

Insurance policies are contracts and
can be drastically different, so it is important to know all the options
available to you. The best course of action depends on your need for a death
benefit, available alternatives, and the specifics of your policy.

Download Robert’s e-book 9 Mistakes to Avoid When Retiring Solo for more retirement guidance from a Fee-Only advisor.

Have
you paid for a whole-life insurance? Do you still need it? Are you keeping it?
What alternatives have you explored? Please share your thoughts or tips with
our community!