Looking at our options above, we get this:
1. Keep it—Unappealing.
2. Surrender it—Premiums stop but $70,000 in ordinary income is not attractive.
3. Let it ride—She could stop premiums and if Kim gets hit by a bus before it lapses, there is a death benefit but the policy probably won’t stay in force to her life expectancy.
4. Sell it—Kim is young and healthy and not likely to net much. Taxation is as unattractive as it is for a surrender.
5. Donate it—Not attractive to Kim and Tim.
6. Get some help—Not applicable for Kim and Tim
7. Modify it—They could drop the death benefit so that they could stop premium payments and increase the odds of the policy paying upon death. They would still be getting an unneeded death benefit, but the death benefit wipes out the potential ordinary income taxation issue from prior options.
8. Exchange it—An exchange can produce a similar result to modifying. Often premiums are not needed to keep the new policy in force long enough to pay a tax free death benefit. New underwriting is needed and initial policy costs are incurred but there may be better underlying costs or cash value investment options. As with modification, death erases the taxation on the cash value.
If an exchange is possible, clients in a similar situation to Kim should consider an asset-based LTC product. Doing so adds an additional trigger to using the cash value tax free.