Recently I cam across an article on the CNN Money Help Board posted from someone who was looking for some advice on deciding what to do with two life insurance policies he and his wife had. The central sticking point for the individual was that the kids were gone and now he was trying to decide if it made sense to keep the life insurance policies he and his wife had.
Here's the Article
Now, trust me when I say that I don't live in some idealistic fantasy land were I remain oblivious to the point of a financial help desk run by a major media outlet. Answers need to be succinct and generally broad. More-over since CNN is more worried about acquiring “followers” (which I'll define as individuals who have decided that they like the CNN brand and choose to consume their news from them) than it is being thorough and correct, the shoddy, generally useless, and potentially dangerous take-away from this piece is simply a product of their business model (please note, this is not a direct attack towards CNN, all of the financial press is just as likely to take an opportunity such as this and blow it).
The information the poster has provided is nothing more than vague. Sure we know his and his wife's age, the fact that they have no children, and that they identify themselves as “fairly” financially secure (whatever that means). We also know that they own some sort of cash value product that has a $100k face value and $60k in cash (so they say, rule number one of advising on insurance is never take the policy owner/insured's word on what they have).
At this point we really don't have enough details to truly make any suggestion to these people. What they have provided is analogous to someone's stating: I have a 15 gallon gas tank and half a tank of gas in my car, do you think I could make it Albuquerque? If you're confused I'll take a moment to state the obvious:
Here's what we don't know about this couple:
Lapsing a policy is a serious irrevocable move, and it generally requires a lot of consideration. CNN would have done this couple and the whole world a much bigger favor if they had merely responded with, “We need way more information in order to even begin to answer this sort of question.” Of course, that probably wouldn't fit the editor's paradigm for content.
This was a ridiculous suggestion that calls into question Erika Safran's competence. I'll give her the benefit of the doubt and assume she's a victim of journalistic miss-quoting here. Transferring a cash value life policy has a gift tax implication which is based on the Cash Surrender Value of the policy transfered. If they transfered these policies to their children, they'd have (according to the numbers and information provided) a $60,000 gift each, which can be split up among the children at $13,000 per child, but transferring ownership of a life policy to more than one person gets messy without a trust involved. In any event, they would need 5 children to successfully transfer the policies without using gift tax credits.
The suggestion that the kids might not have the means to pay the income tax due on the surrendered policies was very strange. If they surrender the $120,000 and owe taxes on it, they'd simply use part of the surrendered cash value, eliminating any additional need to gift more money as per the suggestion in the article.
Another point that I found odd about all of this was that CNN chose to use a Financial Planner from New York to advise a couple who live in Ohio. Safran, who owns Safran Wealth Advisors is based in New York and she appears to hold a CFP. According to a query of the Ohio Department of Insurance's Licensed Agents Database she doesn't hold an Ohio Insurance License. It's weird that CNN would choose someone like this to provide commentary on the topic.
Even though I don't know nearly enough to make any recommendations on this situation. I do want to point out that there are plenty of better options than what CNN presented.
First, anyone with an older cash value policy should look into simply leaving it alone. If the premiums aren't a problem, take a look at look at IRR (internal rate of return) and compare that to what you could get else where, and seriously ask yourself if you think you need to make a change. In most cases you'll discover that IRR on the life policy smokes alternatives especially given the tax benefits and risk exposure.
In a lot of cases, older policies may not require any premiums to be paid. You'd have to check with the insurance company, and your best off discussing this with a qualified agent (you can always contact us for personal advice or a referral to an agent if you don't have one). This way the policy can remain growing cash value (and often times death benefit) and leave the death benefit intact as well.
One way in which CNN really missed the mark here, was in their failure to mention the tax distribution treatment of a life insurance policy. Life policies have First in First Out (FIFO) distributions. Meaning, just like a Roth IRA. The policy owner can withdraw their contribution basis (i.e. all of the money he or she put into the policy) first. Then once the basis is withdrawn, the owner would then begin to withdraw the taxable growth in the policy. Instead of trying to transfer the policy, the owner could simply withdraw the basis and then choose what to do with the rest. Couple of options:
By now you've hopefully learned a lot more than you would have by reading that CNN article. Keep in mind that people who dabble in the financial world in the media rarely have the depth of understanding that a true practitioner has. Sure there are a lot of bad practitioners, but please be very careful about where you go for advice. Just because the media is disinterested in your situation from a personal financial gain perspective, doesn't guarantee that they will give you good advice.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.