What If Your Life Insurance Needs Have Changed?

…and what about long-term care insurance?

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Many of our clients wonder what to do with the life insurance policies they have funded for years. The mortgage is paid off and the children have finished school, so the need for life insurance has diminished. These policies usually have accumulated cash value, which may be taxable if the policies are surrendered. The surrender value can be significantly less than the eventual death benefit. Should the policies be maintained or is there a better solution for these assets?

Recent proposals in some states would allow use of a type of life settlement technique to convert the value of the life insurance contract into a stream of income used to fund long-term care.

  • Florida – proceeds of the life settlement must be held in an irrevocable state or federally insured account with a schedule of payments to provide for long-term care.
  • Kentucky – similar provisions to Florida, but also requires the face value of the life insurance policy to exceed $10,000 before entering into a life settlement with the state.

The ability to convert life insurance into long-term care insurance later in life can provide a powerful incentive for maintaining the policy. Long-term care insurance is very expensive for older Americans, and those with certain health issues may not even be insurable. Converting a life policy into income to pay nursing home costs may be their only option.

This option is not right for everyone and may not even be available in your state. Before you surrender a life policy because of a perceived lack of need, you should consider the possibility of converting it into a form of long-term care insurance. The option could avoid the tax implications of a policy surrender, plus provide coverage you may no longer be able to qualify for otherwise.

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