In my insurance practice, I am meeting more and more baby boomers with the same predicament: they have a life insurance policy they no longer need, that has no cash value and annual premiums that are getting more and more expensive. It becomes a source of irritation to see cash going out the door each year with no perceived value.
Sometimes this happens because a policy was taken out years ago at a time when they were just starting out and had limited assets to protect their families should they die prematurely. Sometimes it’s a case of having a policy that was needed to fund a shareholder’s agreement that is no longer required today.
So what do you do with an old insurance policy that has no cash value when the premiums are expensive and the need has changed?
Well, you have a couple of options.
You can keep it and keep paying the premiums until the term runs out. You can let the policy expire. This stops the premiums of course, but it can be tough to walk away from that given the amount of money invested over decades.
In our practice, we work with clients to consider another option: one that creates value from the policy and helps them satisfy their charitable giving desires.
It works like this:
1. You take steps to make sure that the policy will be in force when you die. For example, if you have a Term10 policy you need to convert it to a Term-to-age 100 policy. This can be as simple as signing a policy conversion form without providing medical information.
2. We obtain an independent actuarial value for the policy based on the net present value of the death benefit. So for example, a five million dollar policy might have a fair market value of $500,000.
3. You donate the policy to a charitable organization that issues a tax receipt for the amount of the value as determined by the actuary. So, using our example, a tax receipt for $500,000 results in a tax credit of $233,500 (assuming the highest marginal rate in Ontario). In other words, you’ve unlocked $233,500 of value from your policy.
Now, the charitable organization owns the policy but the annual premiums still must be paid. You can make an annual donation to the same charity to cover the premiums and receive a tax receipt for that amount, therefore essentially cutting the cost of the premiums you had been paying in half. In some cases, we have been successful in working with charities that will pay the premiums for the policy as they view the vehicle as another asset class within their endowment funds.
Point being, either way, you have options if you have an outdated policy for which there is no cash value. Something to think about next time you receive your annual premium notice and wonder why the heck you’re continuing to pay into it.
On vacation with my family last week in Los Angeles, we couldn’t help but get caught up in the Oscar mania that surrounded us. As we drove through the streets of Beverley Hills, and walked the famed Rodeo Drive, we were struck by the irony and the contrasts: California, the near bankrupt state, bloated with debt, yet opulence everywhere you turn. Every car seems new and everyone is in a hurry to get to where they can be seen wearing the latest fashions.
My partner, Kelly Willis, wrote a poignant post last week about the loss of her husband and the estate challenges she found in her path, all during a time she struggled with her bereavement. As a private client lawyer with many years of estate planning under my belt, I wanted to share some of the more frequent issues and misconceptions I have witnessed in dealing with families who were unprepared or had inadequate estate plans.
My husband passed away a year ago last month. We ought to have been prepared. Two years earlier he had been diagnosed with a rare form of cancer for which there was “little predictive data”. We chose to be optimistic. When he died due to complications from surgery I was shocked and devastated.
Last week, our team met with Julie A. Morton, PHD, a certified mediator, family business coach and change management specialist for high net worth families. Julie is one of only a handful of individuals in North America holding a PHD in Communications with a sub-speciality in Creative Problem Resolution – which is to say she knows a lot about how families can function and communicate more effectively.
