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midiman77 | When is it good to cash out a universal policy and replace it with term.? |
I have had a universal policy for a long time and have just been enlightened about term vrs universal/whole life. The cash value is at 14,000 (which I could really use some now), I'm 40 with a wife and 2 kids. Are there any disadvantages to cashing out now, getting term and investing the difference in a roth? How will cashing out affect my taxes? Will it add 14,000 in additional income for this year? Thanks. |
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Doing the Right Thing
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If you cancel your universal life policy, you are subjected to surrender charges from insurance company. What will happen next is that the IRS see that you have additional income. This extra 14,000 may put in you a higher federal tax bracket. And this will hurt you when you do your taxes next year.
If you borrow any of the cash value, you must pay it back with interest. This interest will not be applied back to your cash value, but rather be kept by the insurance company. If cash value was use to pay any miss premiums, this is still consider borrowing. If you don't pay back any cash value that was borrowed, and you die, this amount will be deducted from the face amount. So technically, you are not borrowing your own money, you are borrowing your family's future money.
An alternative way to move the cash value without any taxes or tax gain is by doing a 1035 exchange. This will move your cash value into a variable annuity. Surrender charges may apply still, but at least you won't get hit hard by taxes. Variable annuities is good way to protect your retirement. It guarantees to pay you income for life. When you get the variable annuity, you may take some out up to a certain amount to avoid withdrawal fees (some variable annuities has this option, others don't. So you should read prospectus carefully before choosing a variable annuity).
Getting term and investing the difference is the best way to protect your family's income. Why? If you die during the term, your family will get death benefit plus your investments. If you outlive the term, hopefully by then, you don't need as much coverage and that your investment has lots of equity in it. It is best that you choose a 20, 25, or 30 year term base on your age.
I don't know if you ask your life insurance agent who sold you the life insurance policy, but you should ask the agent what kind of life insurance policy does he/she has? And then ask why? Then ask why shouldn't I keep my investments and insurance separate? "The key to pissing off a life insurance agent is asking them bunch of questions to get the truth out of them." |
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khtanktgrl
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If you invest the difference in premiums, there shouldn't be much of a downside. The premiums for term insurance are significantly lower than for whole or universal life - unless you have some amazing deal because you got the policy when you were really young. Plus, with your own investment, you control it, rather than the insurance co. This is an adv. or disadv. depending on your investment skill.
But you're saying you could use the money right now. If you spend it, there will be no investment. If you spend part of it, you may be able to make up the difference based on saving on the premiums, doing better with the remaining $$, etc.
Another thing to consider - are you paying out of pocket for the premiums on the universal life now? If not, that's a bad thing, because it means the premiums are eating up your cash value each year. But, it will mean that, if you switch, the term premium will be a new out of pocket expenditure for you. It won't be much, but how much of a difference will that make in your budget?
The tax issue I'm less familiar with. I believe that it will be taxable income unless you roll it over in what's known as a 1035 exchange. (Like if you trade one piece of property for another.) I don't know if rolling from insurance to an IRA counts. Perhaps someone else will know. But the money that you put into a Roth IRA will be tax-free when you take it out. Because you already paid taxes on it before it went in. My understanding is that whatever gain you get on your Roth IRA investments is tax-free when you take it out, as long as you do so under the rules (basically, when you reach a certain age, I think 57, but not certain)
With |
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Leisa W
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Get out now, but you can only put $4k a year in the IRA. I'd suggest investing the rest in either a mutual fund or a variable annuity. (there are tax advantages to both the IRA and the VA) talk to your tax professional about the exact advantages - I'd get out of the universal life before it implodes on you. Stay away from the whole life insurance. Why do you want to pay more. As far as the VA's make sure they are based on mirror image mutual funds - they are designed to be a long term investment - I am sure you will find the right thing..... Good luck |
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tigertiggerii
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You need to take a look at your situation as a whole. There are many examples out there where the survivors are paying out of pocket what the deceased left behind.. Chances are you will outlive the term policy you are thinking about. Statistically, less than 1% of all term cases actually have a claim as you will outlive it, lapse it, etc.... You can set up the UL so you do not have to pay much more in if that is your concern. Your tax consequense will be what you have paid over the premium that was paid. Example, if you have paid $10,000 in premium then your tax will be based on $4,000.
Hope this helps. Let me know if you have any other questions. |
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The Defiant One
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Please do not cash out that policy. UL is the cheapest insurance you can buy, as most of the money you are paying is accumulating on a tax deferred basis.
For instance, if you had $100,000 in it, and let's say that 1/2 of that money was accumulated interest, then if you were to need $30,000, you could withdraw the $30,000, and still have $70,000 in there earning interest.
What is the benefit of that you ask? The $30k you borrow is considered principle, so you pay $0 tax. If you were removing $30k from any other investment vehicle, it would be considered interest, and you would have to pay tax on it, so you'd lose $5,00 - $10,000. Or you'd have to withdraw more than $30,000 to end up with $30k of cash, but you wouldn't still have the $70k in the account.
Plus, the commission fees came out of that policy early on, so you are probably getting a great deal on the actual cost of the term insurance the policy is buying.
And if you ever get unemployed, or for some other reason, can't afford to make premium payments on your UL for a while, the policy will stay in force without payment for a long time, probably years, without affecting the face amount. If you are paying for term, and your money is in some other kind of investment, and then you became unemployed, the term would still have to be paid, and if you tried to take the money out of the investment to do it, you'd pay penalties and - here we go again - TAXES.
Finally, your incontestability period has passed, so no matter how you die, your family will get the benefit. If you purchase a new policy, there is usually a 2 year period where you could die and your family doesn't get a dime!
Replacing life insurance is almost never good for the policy holder, but it's great for the insurance agent, because they get commissions anywhere from 50% to 110% of the first year premium, and guess who pays for that?
SUCCESS! |
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Susan C
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There are several ways you could go without jeapardizing your family and life insurance proceeds. You could do a 1035 exchange with part of the 14,000 but please do not put it in a variable annuity. Along with the fees from a broker, it is not guaranteed to make a dime, and you could lose it. That would be silly. Always apply and get approved on the new policy before you cancel the other one. You probably can get quit a bit more death benefit for your money, but its up to you. A thought 1035 exchange it into a Tax Free Single Premium Whole Life which would turn 10,000 into about 22,000 (paid up life insurance)instantly that continues to grow with no more premiums. Take the other $4000 and pay off bills, and get for more life coverage in a term policy for your family. Let me know if you need more info. At this point all is tax free to your family, and you don't have to worry about making it taxable. |
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Sir J
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Get out now. But get the term in place first. (Eight to 10 times your annual income) in 20 year level term, guaranteed renewable term. Never cancel the old until the new is fully in force.
Cash value or whole life is a rip off.
You'll owe tax on your gain over basis (what you earned over premiums paid in) but likely you never earned a cent.
Your Roth plan is a good one. |
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