A common issue facing many investors is knowing when the reasons for owning a particular investment no longer apply and how best to exit that investment. One area where this issue may arise is with the ownership of multiple life insurance policies. Often sold as an investment, life insurance may build cash value in addition to its provision of a death benefit in the event of an early and unplanned death. The ability to combine the risk protection of pure life insurance with the choice of investments within the policy is attractive to some.
However, the passage of time will change almost everyone’s circumstances and this often means that the original insurance investment no longer fits current needs. For example, insurance purchased to ensure provision for a spouse and children upon an early death may no longer be needed when the children have reached adulthood and are making their own way. Insurance intended to provide liquidity to pay estate taxes upon death may no longer be necessary due to the enormous increase in the personal exemption amount making most estates federal estate tax free. A change in income may make large premium obligations prohibitively expensive and no longer desirable.
In all these cases, a review of the insurance and the intent behind it may help to focus on what to do next. An exchange for a new policy, with perhaps better features and more in tune with your needs is one option. Cancelling a policy and investing the proceeds is another. Borrowing against substantial cash value might provide current liquidity where required. Certainly, your financial advisor and insurance agent should be able to provide you with information about your choices and what might work best for you. In addition, you may well consult with your attorney or accountant to be sure you understand the income tax consequences, if any, of a planned change.