LIFE INSURANCE: A REALITY CHECK
Should you hold on to your insurance? Dump it? Get more? Find out here.
BY:JEFF IORIO
Into our fifties, most of us couldn’t imagine being without life insurance—and with good reason. With children, a mortgage and college tuitions to consider, the premature death of an uninsured parent can be financially devastating for a family. But as financial obligations decrease, it’s time to reassess the necessity of life insurance.
“If your life insurance was originally in place for family protection, and your kids are on their own, you might want to consider cashing out and reinvesting in something that will give you a predictable monthly income,” says David Goldstein, president of The Goldstein Group, a Manhattan-based Allstate affiliate.
But what you do with your life-insurance policy depends on your financial situation, he explains. Depending on the size of your estate and how well it is sheltered against taxes, for instance, “you could be left with a severe estate tax. A life-insurance policy can serve as a means to pay your estate taxes.”
“The problem with cashing out,” warns Jeff Camps, chartered financial consultant with John Hancock in Manhattan, “is that most people are not as complete from a financial point of view in their fifties and sixties as they’d hoped. College costs more than they thought; their business wasn’t as steady as [expected]. They’re rethinking whether or not they need life insurance.”
If you choose to terminate the policy, you can opt for a lump-sum payment or installments, with your tax liability on capital gains kicking in only on a balance above what you paid into the policy. Depending on your needs, you may then want to reinvest in an annuity to ensure you’ll have an income stream to coincide with your pension, 401K and Social Security payments. You also might seek advice from a financial planner on where the money now going to pay for life insurance could get you a better return. Or, you could use that money to pay for long-term-care insurance.
With the current estate laws in flux, those looking for estate-tax protection have a dilemma. If your estate will likely eclipse the $2 million limit currently in place, would your life insurance cover or, at least, significantly defray the taxes? “No one can predict what’s going to happen with the estate tax, so you have to plan properly,” says Goldstein. “If you have significant assets, you might want to either keep your life-insurance policy or roll it into a trust to avoid estate-tax consequences.” An estate planner can determine how much life insurance might be necessary to neutralize these expenses.