Here’s a good article from Forbes to share with family, friends or clients who have Universal Life policies for the past decade or more. An evaluation of the policy may be overdue.
All the Best,
Blame Bernanke–Your Life Insurance Policy May Need A Rescue
Jack Black for Forbes
HERE’S A GHOULISH dilemma. A Florida widow, now 90, and her late husband took out a $2 million second-to-die universal life insurance policy in 1996 and put it in a trust for their three kids. It was a standard bit of estate planning for the well-off: The parents could make annual tax-free gifts of $10,000 per child to cover the policy’s $30,000 yearly premiums, and on the death of the second spouse $2 million would go to the kids tax free.
Now the annual premium is jumping to $225,000 and the kids don’t know what to do. The policy expires when Mom turns 95, so they could shell out $900,000 over four years and get nothing. “How do you make that decision? The kids have to decide when their mom is going to die,” laments Ron Weiner, founder of RDM Financial Group in Westport, Conn., which manages money for the family. One option they’re considering: selling the policy to an investor–say, a hedge fund or a life settlement company–which might bring a few hundred thousand.
Since the 1980s universal life policies have been sold to older, affluent folks for their tax savings and flexibility. You start off paying annual premiums (or even one big single premium) that more than covers your death benefit. The excess grows tax deferred, building a cash value that supposedly covers some or all of the higher premiums as you age. Problem is, during the 1980s and 1990s policies were sold with illustrations showing the excess earning anywhere from 6% to 12% interest. With Federal Reserve Chairman Ben Bernanke keeping interest rates low since 2008, it’s been more like 3%–or 4% with a minimum guarantee. (Variable universal policies are tied to stock returns, and some were also illustrated with consistent 12% annual returns.)
Yet many policyholders remain unaware of what could hit their families. “Even large, sophisticated buyers who spend truckloads of money on these policies never check on them,” says Jonathan Forster, an estate lawyer with Greenberg Traurig in McLean, Va. He has a 92-year-old client who just received a $600,000 premium notice for what he thought was a paid-up $5 million policy. Since the man is worth almost $50 million and the policy has no expiration date, he’ll likely pay up.
Don’t have $600,000 sitting around? Be proactive. Start now by requesting an “in-force” review of your policy from the insurer. It shows how the policy’s cash value and premiums are expected to change using current interest rates, death benefit costs and other fees. Depending on your age and how bad the numbers look, you might decide to: sit tight; reduce the death benefit to make the cash reserves last longer; put in more money (if you’re sitting on cash and a 4% return is guaranteed); swap the policy for a different one; or sell the policy.
You’ll likely need help running what-if simulations and evaluating options, including their tax consequences. A handful of fee-only insurance analysts perform policy reviews, as do many financial planners and independent insurance brokers. Ask a planner or broker to disclose any commissions he’ll earn from a swap.
Where Not To Die
With the federal estate tax exemption now $5.25 million per person and $10.5 million per couple, you might feel little need to use insurance to pass on wealth. But before you let a policy lapse, consider state tax–17 states and the District of Columbia impose taxes on smaller estates than does Uncle Sam. For a map with up-to-date information on all the states, go to www.forbes.com/state-estate-taxes.
Original Article: http://www.forbes.com/sites/ashleaebeling/2013/06/26/blame-bernanke-your-life-insurance-policy-may-need-a-rescue/