6. Get some help—In some cases, we have seen family members fund a policy because an unhealthy insured could not afford to do so.
7. Modify it—Many policies allow modifications that can make the structure of the policy more appealing.
8. Exchange it—Cash values in a life insurance policy can be exchanged, tax-free, to a new life insurance policy or an annuity contract.
Each of these options comes with its own twists and turns, but I want to focus on exchanges today because this option looks different today than it did only a few years ago.
Traditionally, exchanging under Section 1035 was done to get out of an expensive or otherwise poorly designed policy and into a better policy when a person still wanted life insurance. Today, another situation warrants consideration of an exchange—asset-based long-term care products.
I am not a big fan of asset-based LTC life plans. In general, the life and long-term care coverage has opaque and mediocre pricing. However, there are situations where other benefits may overcome this.
Sometimes, we encounter people who have cash value life insurance they don’t necessarily need, premium payments they definitely don’t want, but who would get hit with a lot of ordinary income upon surrender.
“Kim” would be an example. She is in her early 60’s and has left the workforce permanently. Kim has a variable universal life insurance policy with $100,000 cash surrender value and a basis of $30,000. She sees little need for the policy and does not want to put more money into it.
Her husband “Tim” makes a good income in the family business but is only working until the business can be sold. A deal is close at hand that will involve installments over ten years so they expect to stay in a high tax bracket for years.
They are concerned about long-term health-care expenses but are also concerned about getting LTC insurance because they have read about some big companies leaving the business and some of their friends have seen substantial premium increases.