Sometimes whole or universal life insurance policies that people bought years ago no longer serve their original purpose and become forgotten. For instance, such policies may have once been intended for heirs to pay off estate taxes, but now with estate tax exemptions set at more than $5 million per person, that isn’t needed.
So You Want to Be a Philanthropist

By: Evan Williams
Florida Weekly, 26 November 2015

Sometimes whole or universal life insurance policies that people bought years ago no longer serve their original purpose and become forgotten. For instance, such policies may have once been intended for heirs to pay off estate taxes, but now with estate tax exemptions set at more than $5 million per person, that isn’t needed.

It’s not uncommon for people to do nothing, stop paying the premiums and let them lapse in such cases. But looking at the larger picture of estate planning, that is the worst option, said Craig R. Hersch, a board-certified wills, trust and estate attorney and a CPA with Sheppard, Brett, Stewart, Hersch, Kinsey & Hill P.A. in Fort Myers. Instead of letting them turn into a wasting asset, giving them to your kids or a charity can convert them into an asset of significant value.

The strategy wouldn’t work with a term life insurance policy because unlike universal and whole life policies, which are a sort of hybrid between investments and insurance, a term policy doesn’t build up cash value.

Mr. Hersch outlined four reasons why keeping whole or universal life insurance policies current, or donating them to heirs or charities that may keep them current or convert them to cash, is a better use of such policies:

1. The policy could be used to offset income taxes that heirs still might owe upon your death, such as those from an IRA or 401(k). When that money is pulled out it’s taxed like income, while “insurance is, generally speaking, a taxfree gift,” he said.

2. The policy could provide additional liquid (cash) assets along with items such as stocks and bonds to offset illiquid assets such as real estate or a family business that could take months or in some cases years to sell and incur short term costs.

“If my estate is heavy with illiquid assets insurance is a way to provide liquidity,” Mr. Hersch said.

3. A whole life or universal life insurance policy can provide a gift to the charity of your choice such as a hospital, a school, a scholarship, a synagogue, charitable foundation or any other organization.

“The charity now has a policy they can convert to a paid up in full policy and then realize the death benefits one day,” he said.

Donors can receive a tax deduction for the amount of the life settlement sale proceeds, not simply the cash surrender value, which may be less. Say the cash value is $250,000 on a $1 million policy when you are 50. Surrendering or cashing out the policy means getting $250,000 less any surrender charges, which can be significant. By transferring the policy to charity you could take the $250,000 deduction without any surrender charges.

The charity could also decide: to either continue paying the premiums on your behalf to keep building up the value of the policy or convert it to a paid-up in full policy.

Or, you might negotiate with the insurance company based on your relative health and age. The insurer could say that based on your health and age that whether you die this year or in 30 years, the payoff will be $500,000.

4. Give the policy to children or heirs and let them decide whether to continue paying premiums or cash it in. Maybe the premium payments are eating into your lifestyle, but your kids would want to continue paying the premiums to build up the value of the policy.

A fifth and worst option, he said, is to take no action, stop paying the policy and create a “wasting asset,” the cash value wasting to nothing when not funded by premiums.

“I see a lot of people make that worst choice often because they’re not knowledgeable about the choices that they have,” he said. ¦

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