Retirees in the Philippines often say to themselves, “Should I keep my whole life insurance policy? After all, the children are grown up, I am financially comfortable, maybe I do not need the policy.” There are several things to be considered when you are considering to keep or not to keep an old life insurance policy, such as, with proper planning, the older policy can be converted into an effective estate planning tool to shift wealth to younger family members, to provide estate liquidity, or to provide for your Filipina spouse after your death.
One thing to keep in mind, the face value of the policy is what is paid out to heirs upon your death. The cash value is what you get if you cash in the policy. For example, if the face value is $250,000, that is the payout to your heirs. If the cash value is $50,000 and you cash in the policy, all you get is $50,000. The $200,000 is gone.
A common mistake by retirees is to cash in their insurance policy to buy a car, property, etc. In most cases, the better approach is to borrow the cash from the policy. When the insured dies, their heirs will receive the face amount of the policy, less the loan amount and accrued interest. For example, assume the face amount is $250,000, the loan is $40,000 and no accrued interest. The heir will receive $210,000. In most cases this is better than cashing in the policy for $50,000, leaving nothing for your wife or heirs upon your death.
After considering the options favoring keeping the policy, if you still decide to terminate the policy, the method of terminating the policy needs to be analyzed. The most common approach to terminate a policy is simply to cash it in. This is not the only option and often not the best option.
Another option is to apply the cash value, if it is large enough to buy single premium term insurance policy with the same death benefit. Alternatively, you could keep the policy but declare it “reduced and paid-up” policy. This would give you a lower, lifetime death benefit. For example, assume the policy had a $500,000 face value, and the paid-up benefit would be $250,000. Instead of taking the cash, you could elect a permanent death benefit of $250,000 with no more payments required.
If you still wanted to cash in the policy, but keep your income-tax deferral on gains (if the cash value exceeds the premiums paid), you may want to make a tax-free exchange into an annuity. If you have no gains in the policy, an annuity could let you use the losses in your policy to shelter a portion of your future earnings from the annuity. If, for example, the premiums you have paid add up to $20,000 but your policy’s cash value is only $15,000, you roll the $15,000 into an annuity; the first $5,000 of earnings on the annuity is tax free.
If you are an American citizen married to a Filipina who is not a U.S. citizen, most likely she will not qualify for your Social Security benefit upon your death, due to the five year rule. This rule requires for your spouse in the Philippines to qualify to take your Social Security benefit upon your death, that as a couple you live in the U.S. in a marital relationship for five years. If your wife does not qualify, you may want to keep the policy to replace the lost Social Security income upon your death. If your spouse is a U.S. citizen, no problem, Social Security will be paid to her in the Philippines.
Whatever your decision, it pays to analyze your options before terminating your old life insurance policy. There are other options to consider, other than just cashing it in. These options can be helpful in developing a plan for your wife or girl friend financial security after your death.
__________________________________
Author’s email: wolff2000@earthlink.net
