Vol 10 No 11		December 2008

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Costly Policy Terminations

"In these very tough economic times astute management of life insurance assets is critical. Just plunging ahead with policy terminations is probably a costly approach."

A longtime client, Greg, called with the news that the bank stock his family had long owned was dramatically down. This put in jeopardy his cash flow to fund life insurance and to pay college costs for his three youngest grandchildren. Greg's two old whole life policies can use the dividend values to pay all premiums with the values illustrated to continue going up. The other policy, a $3,000,000 survivorship universal life (SUL) policy in an ILIT, cannot continue long-term without premiums. With cash values of about $880,000, Greg's first inclination was just to cancel the SUL, making the cash available to his four children if they needed it. (Greg's children have been getting considerable dividends from the stock that will no longer be paid). Upon questioning, Greg determined that none of his children needed the money in the foreseeable future. His plan was to put the surrender values into a Treasury money market fund that has practically zero yield. I noted that even without the target premium being paid the SUL cash values would go up for another five years - taking Greg and his wife to age 86. This was a better yield than the Treasury money market and the ILIT would continue to have the $3,000,000 SUL. Also making this the ideal decision is that the SUL has surrender charges that will continue to decline as long as the policy remains in force and that taxable gains can be avoided, at least for the next five years.

Planning ahead, if Greg and his wife are in good health in five years, cash flow is tight and their children could use a financial boost the SUL could be partially terminated. Full termination is probably not a good idea because of about $100,000 taxable gain. Reducing the policy to the minimum death benefit while leaving $100,000 cash value will allow for the withdrawal of about $800,000. This should avoid any taxes. The ILIT would then have $800,000 to distribute to the Greg's children and the residue of the SUL would remain and pay out tax free death benefits when it matures.

In these very tough economic times astute management of life insurance assets is critical. Just plunging ahead with policy terminations is probably a costly approach.