Good Policies Gone Bad: When to Let Go of a Universal Life Plan

Good Policies Gone Bad: When to Let Go of a Universal Life Plan

David Lee Roth once said that he’d never owned anything better than a dog, a radio or a bicycle.

No mention made of Dave’s favored flavor of life insurance: term, whole, universal, variable… He’s age 66 now; it’s likely an issue. I hope a good insurance agent got to him in his reckless youth, when he was a leaping, ludicrous rock star. Imagine the commission potential!

The best thing I ever owned was a camera: a Leica M6, with a 35mm Summicron – the name alone suggests sharp resolution, to me. I purchased this beauty in 1998 and carried her every day for 12 years. You’ll never feel lonely if there’s a dog at your ankle; get forever in shape with a bike ride daily; and no boredom is allowed if there’s a camera to hand, as I see things. A radio? Whatever is that, our younger readers say? I’ll let them do their own research just this once.

Alas, the digital revolution gave the photo ancien regime a sound kicking. It’s advantages are legion, but film fanatics remain, if only to collect the old gear. I’m not the sort, nor prone to hang onto things for sweet sentiment alone. I rely on memories, which neither moth nor rust can stain. So I sold the old girl, raked in a nice pile, bought the latest digital apparatus. I recall my M6 as a joy without blushing, but when sunset comes, move on and greet a new dawn.

Not prone to sentiment; hmm. Lesson: it’s OK to feel, but rationality freshens, it keeps the mind open to what’s better. You wouldn’t want to miss anything that’ll make you happier.

Here we are finally at life insurance. We like permanent life insurance around here, universal or whole, or any other focused variants. It offers tax advantages for certain, with a seductive enhancement of cash value. The premium is divided into three parts: one funds the death benefit; the second covers insurer costs; the final bundle is deposited in a cash value account.

Whole life insurance pays a rate that increases in line with a schedule, while universal is keyed to current money market rates or some other benchmark. Some permanent policies allow the policyholder to invest in funds of their choice – cost, risk and performance, the usual suspects, must be examined with care and consultants. Pick your pleasure.

The cash account increases in value tax-free, and after a preliminary period has passed, the policyowner can borrow against the funds or withdrawn them. This proportionately shrinks the death benefit until the loan is repaid or the funds are paid back, but when faced with a crisis – medical bills in a pandemic, or when your fine-breed dog needs a companion, say, you’ll be grateful that it’s there.

The bedrock rule of permanent: hold it long term. The premiums are high, the endeavor a serious one. The advantages, though – in emergency, retirement, or for one’s heirs – make it worthy of sacrifice and commitment. That is, until the day comes when it’s not worth it.

There can be sound reasons for letting go of a permanent policy. Life changes with time – a fabulous camera becomes a boat anchor (classic cameras are heavy), as it were; rock gods turn into ‘internet personalities.’ Surrendering these policies is not normally counseled. There are exceptions, carefully weighed, acted on solely in the clearest necessity. Let’s consider and see how it’s done.

Riddle yourself this: why did I buy the policy in the first place? Review your original goals and expected performance: has anything changed since then? Is the policy performing in line with my plan? I used to love the darkroom, the aroma half-toxic, but digital processing is faster, flexible and if I want aroma, I plant flowers by my computer. Change is good, particularly when poisoning, of lungs or estates, is obviated.

Yes, things change; you bought the policy to leave to your kids, but those brats became prosperous and won’t need it. Your retirement accounts are humming like Barnack’s brain (nerd alert: the Leica’s inventor) and the life premiums are suddenly vexing. Wouldn’t it be nice to spend a bit, you think – live it up? The M10’s on the market, righteously digital, and the first Google result reads: “Why is it so expensive?” If you don’t need that policy anymore, surrender it. Just take care, now…

Let’s look at this performance issue: what’s eating into profit? Your insurer may have hiked fees or cut dividends – the industry is stressed; it happens. The underlying funds perhaps let everyone down. As always with investments, don’t overact and sell low. But if the downtrend is clear and you’re anticipating retirement, it may be time to hit the silk and focus your cash on a more rewarding alternative.

Take stock with your planning team. If your permanent life bubble has burst, and experts agree on a bailout, commit brainpower to a 1035 transfer. Under the tax code, a 1035 swap allows policyholders to switch tax-deferred funds from a permanent life policy into another account, tax-free. The 1035 works similarly for endowments, long-term healthcare policies, and annuities.

So what should you get? Depends on what you have: if you’ve neglected to fund a long-term care policy, swapping into one makes sound sense. An income annuity is a fine portfolio alternative. Consider the options with your advisors. If executed correctly – this is a given, and why specialist advice is vital – you can avoid taxation on the switchover and seamlessly resume tax-deferred growth in your new account.

Permanent life is a long-game play as a rule, so take great care before moving to seemingly greener fields. Life sometimes brings disappointment, even from the steadiest friends. In these cases, it’s good to know you have options.

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