At HCM we often help clients decide if they should keep old paid-up insurance policies that they may have owned for decades. There is often tax-advantaged “buried treasure” inside those policies in the form of cash surrender value.
So, the questions that arise are should you:
- Allow the money stay there and earn a safe but low rate of interest; or
- Borrow the cash surrender value out of the policy in a tax-advantaged manner; or
- Convert the policy to one that better suits your needs; or
- Cash it in?
Will Anyone’s Life Change for Financial Reasons After Your Death?
To determine if you need the policy, ask yourself if anyone’s life would change for financial reasons if you were to die unexpectedly. If the answer is yes, then you should consider keeping the policy, in some form, as part of your family’s financial freedom plan.
Depending on the source of your retirement income, the ability for your family to maintain their quality of life could be affected after you pass. Pensions – which 27% of retirees use to help fund their retirements – may be reduced or disappear entirely after the pensioner dies. Social Security, which 78% of the retiree population depends on for income – is substantially reduced or eliminated when a benefit holder passes. If this decline in income would cause financial problems for your loved ones, continuing the life insurance policy in some form could help hedge against negative outcomes.
Are There Bills to Pay?
Another postmortem planning consideration deals with any debts that may need to be settled. The Federal Reserve Bank reported that, in the last 20 years, the debt burden for people in their 60s has increased by 471%, and the debt burden for septuagenarians has swelled by 543%. This debt mostly falls under housing, education, and medical debt. If you are in this situation, keeping the policy in some form may be advantageous.
Is Your Financial Legacy Secure?
Most of the families we work with have plenty of assets to retire well. However, many also rank leaving a legacy as a very important goal. No matter if it is for children, grandchildren, or charity, the consequence can be the same. The retiree’s desired standard of living may be sacrificed to ensure there will be enough left to fund legacy goals. This is a perfect reason to keep an insurance policy or consider acquiring a second-to-die policy. In this way the retiree can be sure there will be adequate resources to fund their legacy goals while being unburdened to spend their retirement savings as they wish.
It is rare to see families encounter estate tax liabilities now that the exclusions are nearly $13 million for an individual and twice that for a couple. However, those exclusions are expected to be halved in 2026. And while still very lofty, more families will be exposed to estate tax. When properly planned, insurance can provide an efficient means to pay an estate tax liability. As a result, higher net worth families may benefit from properly owning and titling insurance.
Of course, this decision needs to be tempered with the other facts of your life, such as age, overall health, and other financial priorities. If you don’t have any debt, no one’s relying on a retirement income source that will be affected by your death, you have no specific legacy funding goals, and you have plenty saved, keeping the policy in some form may not make sense.
If you have an old policy or are wondering how insurance may fit into your financial freedom plan, give your HCM Advisor a call. We don’t sell insurance, or anything else for that matter. We would be happy to offer an unbiased opinion to help you decide what to do