Cash value life insurance carries an investment component along with death protection. Premiums paid in excess of mortality and administrative costs are credited to the accumulation value of the policy. The accumulation values illustrated in the policy at inception are based on an assumed rate of compounding or crediting. These projections do not assume changes in interest rates or equity markets in a variable policy. The last decade has seen some remarkable changes in interest rates. Actual cash values may not have grown as illustrated due to lower interest rates or higher policy expenses. Policy premiums paid, in some cases, may be higher than current policy values, particularly after applying surrender charges. What do you do now?

It may be worthwhile to review your life insurance policy. Perhaps your situation has changed and you no longer need as much insurance or the premiums have become burdensome. In reviewing your insurance plan you and your advisor will want to get a current in-force illustration. This will show actual accumulation values based on current interest rates. Compare this illustration to the one from the policy inception date. A market comparison is part of the policy review process. It could be that despite being older, mortality improvements and increased competition could result in a new policy that could cost you less or, for the same premium, provide a greater benefit. As with term life insurance rates, it pays to shop around from time to time. A policy review should be conducted at least every 24-36 months.

If you and your adviser agree that policy replacement is the correct course of action, you have some options. One is to surrender the policy in a 1035 exchange using the existing cash value as equity in acquiring the new policy. The cost basis in the old policy becomes the basis in the new and any taxable gains are deferred.

Another possible option is to sell the old policy and use the sale proceeds to acquire a new policy in a life settlement transaction. This option is generally available to seniors over the age of 70 with health impairments that developed after the purchase of the old policy. If you qualify, the settlement proceeds may far exceed the surrender value making this a preferable option to a tax-deferred exchange. As always, please consult with a tax advisor regarding possible tax ramifications of a life settlement.