Let’s examine what you should do when cashing in old life insurance policies. Frequently, people have old life insurance policies that require a review for purposes of the viability and an inquiry into the current “cash value” of the policy. Over the years our law firm has had many people who have come in with life insurance policies which are thirty, forty and even fifty years old. Before you can do an analysis, you must understand the difference between the two following descriptions of life insurance. For the purposes of this article, we discuss whole life insurance policies only.
Face Value. The “face value” is the overall death benefit, meaning the amount of insurance that will be paid to the beneficiary of the policy upon the death of the insured. For instance, if the insurance policy says (i.e., on its face) $50,000, then the face value of the policy is $50,000. When you die, there may be additional interest or dividends added to that amount, but it depends upon the policy.
Cash Value. The cash value is the amount that the insurance company will pay you right now if you requested to surrender the policy. In other words, the “cash value” is the amount the insurance policy is worth on the date of your inquiry to the company. If you elected to surrender the policy for cash value, you are forfeiting the death benefit, in return for cash now.
The issue arises when the difference between the cash value and face value are relatively small, which creates the need to conduct a risk-benefit analysis as to whether it is more prudent to surrender the policy now (i.e., take the cash value of the policy) or wait until the insured’s death for the face value.
For instance, if the face value of an older policy is $5,000, and the cash value of that same policy is $4,600, it may be worth “cashing in” on the policy, instead of waiting for the face value upon the death of the insured. Under this scenario, if the insured were to die today, the face value would pay out $5,000 (plus any accrued dividends and/or interest). On the other hand, if you “cash out” the policy, you would receive $4,600 now (or as soon as the insurance company distributes the cash value).
Nobody knows when we are going to die, but often the differential between the face value which will be paid at the time of death and the cash value is so small that it makes sense to simply liquidate the policy right now.
The first step in this analysis is to contact your insurance company and find out what the cash value is and what the face value plus accrued interest would be at the time of death. If, for instance, the difference is small, and the insured is in very good medical condition, you may want to cash the policy in right now. Obviously, if the insured on the life insurance policy is, for example, dying of cancer, you would not want to cash in the policy, but instead wait until after death for the face value.
Like many things in life, this is a risk-benefit analysis and there is no right answer because we do not know when we will die. The point being, you should review your cash value versus face value and determine if it may make sense to cash in the policy early.
If you have children, especially minors and/or children with a disability, you should consider how your current estate plan would effect your children in the event that you pass away or become incapacitated and unable to manage your affairs. While planning for your children is part of a proper estate plan, you should also consider whether your estate planning documents, including, a Last Will and Testament, General Durable Power of Attorney, Medical Power of Attorney and Living Will, are up to date and accurately reflect your current circumstances and objectives. In a Last Will and Testament, for instance, you may nominate a Legal Guardian for your minor children or appoint a custodian for assets passing to minor children. Each decision is a step toward a fully articulated estate plan, which takes time and thought.
The following are a few ideas and estate planning tools to consider when planning for your children’s financial security. This list is not fully inclusive of all options available, but instead, are some of the many options available to parents planning for their children. Should you have any questions regarding your estate plan, please do not hesitate to contact the experienced estate planning attorneys at Puff & Cockerill LLC.
A trust is a common way for managing and protecting your children’s assets. A trust can be tailored and structured in many ways to accommodate your specific intentions. Once you discuss with an estate planning attorney your circumstances, finances and goals for the trust, you will also have to select a trustee. A trustee should be an individual who you have confidence in to manage and make advisable decision regarding the trust assets. Assets held in a trust may be limited to specific purposes, such as education, health, maintenance, or they can be more freely distributed at the discretion of the trustee. Again, trusts are flexible to accommodate your circumstances and goals. Given the numerous options available, it is highly advisable that you speak with an estate planning attorney to understand the nuances that a trust can provide in planning for your children’s future.
Uniform Transfer to Minors Act (UTMA)
New Jersey has Uniform Transfers to Minors laws which establish restrictions on how assets may be distributed to minors. Depending on your circumstances, the UTMA may be an appropriate way to make gifts to a minor and allow the custodian of the account to collect, manage, and invest the property on behalf of the minor or use the property for the minor’s benefit. As the laws regarding the UTMA are stringent, it is important to discuss with an estate planning attorney.
Children with Special Needs
If you have a child with a disability, proper planning for your children and their future is particularly important. Without a proper estate plan in place, you may jeopardize your child’s eligibility for government benefits, such as Medicaid, Supplemental Security Income (SSI) and Social Security Disability (SSD). A special needs trust is designed to hold assets for an individual with a physical or mental disability while preserving personal eligibility for benefits. Special needs trusts are subject to stringent legal requirements in order to maintain eligibility, therefore, it is highly advisable that you speak with an experienced attorney.
Please contact our office at 856-845-0011 or at email@example.com to discuss your estate plan with one of our estate planning attorneys. We will continue to be available for our clients and new clients. We hope all of you remain safe and healthy.
Jeff Puff recently shared his views on the estate planning process on the Justice For All television show. Jeff discusses wills, estate planning, estate litigation tax concerns and much more.
Watch the Video Below to Learn About
- Creating a Will
- Contesting a Will
- Setting Up a Trust
- Probate Assets vs Non-Probate Assets
- Power of Attorney
- The Danger of Annuities
- Living Wills