Information regarding cancelling a universal life insurance policy?

Question

Years ago I was advised to purchase a $1,000,000 univeral

life insurance policy to cover primarily taxes for my two sons

since I was widowed. My sons are now in their 30"s and my

financial situation has changed and I do not need such a policy. I have 74,000 cash value with yearly premiums of

$6,880.00. In evaluating my holdings and financial status

I am contemplating cancelling this policy. Would this be a

huge mistake? I feel that in time I may not be able to afford

these premiums so what is the point to continue to feed it.

Also, will there be tax consequences I might have if I decide

to end this policy? Does anyone have any information or

answers .....I would appreciate it. I have come to a point in

my life to tap into my investments to live so is it better to

liquidate my holdings (securities) or cash in my policy. I am

63 years of age.

Answer 1

Very generally speaking, I'd say it depends.  The $1 million dollar policy was probably meant to pay estate taxes and provide for your children. It's very possible that you no longer have this need, but you really don't give us enough information.  

What are your securities holdings?  Do you have enough to restructure your portfolio if necessary to produce the income you need so you don't have to invade the principal?  You easily can cash in the policy and take the cash value--you can call the company and ask them what part of the cash value would be considered "return of premium," which would NOT be taxable.  That would help you figure out how much you would get after taxes.

You have a long life ahead of you.  It sounds like you need to consult a financial advisor who can help you structure the money you have to help you live a rich and fulfilling life.  Good luck!

Answer 2

Yes, agreeing with the above answer as to consult a professional before pulling the trigger.  But, shooting from the hip and giving you some food for thought consider the following info....

First to answer you question multiply the $6880 times the number years you've paid it (assuming you simply paid that amount each year for X number of years) and if it's greater than the $74k you'll owe taxes on the amount exceeding what you paid in and if it's less you won't owe.

Consider...

1)  Do you want to leave anything behind to them and do you want to draw off the $74k.  Because you could lower the death benefit to an amount where you just don't owe any more premium.  In other words you may be able to drop the death benefit to $125-$175k and not owe any more premiums.

2)  If you're in a taxable situation you can roll the cash value to an annuity and spread out the taxability AND get an income at the same time.

3)  Also if your situation is temporary you MAY be able to simply not pay the premium for a year or two....

4) etc...

You really have many, many options and depending on you situation and desires for income now and leaving money to beneficiaries later will all come into play.

Hope that helps.....seek professional help....trusted professional help.

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