Q. I am a 68-year-old veteran. I lost my wife about three years ago to cancer. My wife did not have life insurance. I have a small life insurance policy from Prudential that has been costing me about $76.00/month for the past 15 years and is supposed to pay out $250,000 upon my death. I also receive about $800 a month from my VA pension and $1,400 a month in Social Security.
I almost went bankrupt last year because I simply could not afford living without the benefit of my deceased wife’s income. Before her death, our combined income kept us afloat and we were able to pay our bills. But now that she is gone, I am having a hard time making ends meet. I have heard about people who cash out of their life insurance policy. Is this a viable alternative for me?
A. That depends. It’s your money. It’s your decision. Leaving money to your children may not be your main priority, especially if they have been educated and are financially stable.
Clearly, for many seniors living on a fixed income without a nest egg presents a serious financial risk if later you need to access emergency funds. The last thing you want is to spend the rest of your retirement in debt. For this reason many seniors are choosing to cash out of their life policy to beef-up their savings, cover unexpected expenses, and have enough to live comfortably. For other seniors, those that were relatively high-income earners, the extra money can be a great way to do some traveling and visit loved ones.
Letting Your Policy Lapse – Same As Cancellation
Consider that some policyholders will allow their life insurance policy to lapse rather then surrendering their policy for its actual cash value. Letting the policy laps is effectively the same thing as cancelling your policy after years of paying monthly premiums. This makes no sense whatsoever. Surrendering the policy for its present cash value can go a long way to meeting your long-term financial retirement goals. So what ever you do, think twice before letting your policy lapse for nonpayment.
Possible Tax Consequences When Surrendering Your Policy
Surrendering your policy for cash is not a tax-free event. If it turns out that you paid more in premiums dollars than what you will receive in cash upon the surrender of your life insurance policy, then you will not have a net gain and therefore you will owe no taxes on this money. The opposite is also true, should your cash surrender result in you receiving more then the total premiums paid, then the “overage” will be considered a “income gain” and therefore taxable. Make sure you consider the tax consequences before you surrender your policy.
Borrowing Against Insurance Policy – Another Option
You have a choice. You can either surrender the policy for its present cash value, or you can borrow against the policy depending on how much equity you have built up in your policy. If you believe borrowing the money will better fit your financial needs and circumstances, then a full surrender of the policy might be the better choice. Either way you should compare the borrowing rates verses a straight out policy surrender.
Benefits of Cash Surrender
According to the 2014 Census Bureau, 45% of adults ages 65 and older had incomes twice below the poverty threshold. No doubt the problem of elders living below the poverty line has grown to unacceptable levels.
With the annual cost of long-term elder care reaching into the six-figures, unless you are one of the lucky few that are fortunate to carry long-term health insurance, your financial options are quite limited. In short, you may find yourself too old to work and too broke to live comfortably.
With cash surrender of your policy you can choose to give your family their inheritance early and while you are still alive.
Much can be said for living a comfortable life debt free, including no longer having to pay your monthly insurance premiums. In addition, having access to cash reserves can be used for travel, hobbies or just having a more comfortable life.
In conclusion, obtaining the cash value of your insurance can be a welcomed source of income for cash-strapped seniors. However, before making a final decision to cash out, borrow against, or keep the status quo, make sure you obtain expert advise from a financial advisor and investigate the “Cash-For-Policy” company that is making the cash offer to ensure they are reputable and trustworthy.
We recommend consulting with a financial expert trained in life insurance conversion-to-cash policies and get all the details including the risks and benefits of converting your policy to cash.