Cashing out a Universal Life policy

[dsog]

I purchased a universal life policy several years ago as a way of getting out of a whole life insurance policy that I had previously owned. I did this in part because the universal policy has a long-term care rider that allows me to use a certain percentage per month of the total policy amount to pay for LTC if needed in the future.

I am rethinking the wisdom of this policy. I currently pay ~$1000/year of premiums to pay for this policy. The death benefit/LTC benefit is $400k.

A couple of questions about this:
1. Is this a wise decision?
2. If I cash this policy out, will there be taxes due or does that depend on what I would do with the cash?
3. What else am I missing as I think about this possible move?

[dsog]

A couple more pieces of information:

-surrender charge = $1,200.
-net cash surrender value = $35,000

[GasFIRE]

What is your cost basis? If you don’t know ask the company for an in-force illustration.

[Scott at MD Financial Services]

As GasFIRE said, get an inforce illustration and have them calculate the cost basis. The cost basis is what will determine if there is tax on any money received. The inforce I would suggest would be 2 of them. The first just assuming you continue to pay the premium as you have been what do the results look like? The 2nd I would have run is if you did not pay anymore premiums then what happens to the policy values. By doing those it will give you a few options 1: What does the take the money and run look like, 2: What does keep on doing what your doing look like, and 3: What does the keep the policy but don't put any more money into it look like. With that you should be able to make a good decision for yourself.

[afan]

The company will be able to tell you your basis and hence how much, if any, will be taxable.
Whether you need LTC insurance or whether one should buy it as part of a life insurance policy are separate questions.

Has WCi done a post on LTCI bundled with life insurance? If not, it would be a good topic.

LTCi has had a rocky road since it was launched. It was initially badly underpriced. Insurance companies lost a lot of money. They responded by raising rates. People who had paid for years discovered they could not keep up with the premiums and ended up with nothing. I don't know whether the industry has figured out the right price for covergae that would be useful.

The general comment about LTCI is "Those who need it cannot afford it. Those who can afford it do not need it."

[dsog]

All helpful comments - thank you.

I also am trying to determine if having the LTCi rider in the VUL policy is actually needed as I have adequate disability insurance and I personally have $3M in term (laddered structure) and my wife has $1M in term.

Does that alter the conversation or the approach that I should consider?

As an update, my cost basis for the VUL is $46k and my total cash surrender value is $34k, so I'm behind by $12k.

[GasFIRE]

You should check your disability insurance to see if there is an offset for other insurance payments such as this LTC rider. If yes, the rider is not useful. If you consider your term life insurance adequate for your family then you don’t need the UL policy. Cashing out the policy is $12K tuition paid towards personal finance education. If you want to capture the loss and break even you could 1035 exchange the policy into a low-cost variable annuity then surrender it once the value reaches $46K.

[Tim]

LTCI- you mentioned this is $450k benefit.
But you didn’t mention the actual qualifying and payments.

• The LTCI and LTDI are event qualifiers and then a monthly benefit. LTCI can have a cap.
• The Life insurance is a lump sum for a different event, death.

The evolution of the LTCI means you really need to understand this particular LTCI wrapper benefit, down in the weeds and the actual monthly payments and what LTC expense will actually be covered and the monthly amount.

We personally have two separate LTCI policies (not wrappers) that to me are more of a coinsurance for $5k/mo. with in home options.
I view these as the insurance company paying a monthly deductible. Cheap decades old policies.

Short version, you need to really understand the cost/benefit of the long term care wrapper.
My guess is that it is more limited than you are expecting. It won’t be $450k lump sum.