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Often times you buy a Life Insurance Policy and in later years you might feel or be advised that it just doesn’t fit into your planning. This is a great article that address’s some of these concerns and how to possibly handle the situation.
I am a firm believer that if you have a permanent type of policy and it is not needed then you may want to consider selling it in the secondary market. Just make sure that you get an in force policy ledger with Internal Rate’s of Return listed, it’s important for you to know that life insurance can possibly generate a great rate of return. Please speak with your adviser to review completely before you surrender a policy.
Q: I have a net worth of $7.5 million, all bonds and cash. I also have a $1.5 million life insurance policy that costs $38,000 per year. My friends say that is too much to pay, and I should cancel the policy because it’s like giving away a new car each year to the insurance agent. Should I cash in the policy and get a lot of money back, or simply stop paying for the policy and let my children pay the estate tax? My wife died 10 years ago, and I have three grown children and a new wife of eight years.
A: At $7.5 million, your estate would owe about $1.8 million in estate taxes if you died this year. But because you own the life insurance policy on your life, that would cause an additional $675,000 in estate taxes.
You don’t really have a compelling need to own the life insurance in order to pay the expected estate taxes. You have plenty of cash to cover the tax bill. If your estate consisted of a business or real estate, with little liquidity, the need for life insurance would be far greater.
If you determine you don’t need the policy, before you cancel it, you should try to sell it on the secondary market. There may be investors who will pay you a very large sum of money, sometimes many hundreds of thousands of dollars, to buy the policy from you.