I have had an interesting week thus far as I have run into a couple people whose parents have been told to cancel their whole life policies because they are debt free.

After hearing this, I managed to close my bottom jaw and ask calmly why they would do that? They indicated their parent’s accountant and/or financial adviser had instructed them too. The professional said because of the parent’s age and the fact that they no longer have debt there is no need to have a life insurance policy.

I proceeded to comment, “I bet your dad had to pay a lot of tax on the cash he withdrew from surrendering the policy.” This individual said, “YES, he paid a lot of tax that year.”  Oh, my I just don’t know where to begin as this sort of misunderstanding from accountants and advisers is so sad for their clients.

First off let me clarify best I can without going into very initiate detail about life insurance loans. Inside these policies, there is cash value and it can be used several ways but I am only going to go over two of them here. (These are the two most commonly given advice on.)

  1. The policy can be “surrendered” in which case the company would send the owner of the policy (in most cases that is the same person as the insured) the cash surrender value. This money then is TAXABLE to that individual because it is income and they physically withdrew it from the policy. At the same time, the policy is no longer valid and there is no death benefit. most widely given advice on by other professions)
  2. The owner of the policy can take a loan against the cash value of the policy. Now let’s say the owner of the policy is also insured and they are 80 years old (which was the case of those I visited with.) This option will allow them to use this money tax-free, leave them with no obligation to pay it back before death, and still have a death benefit to leave to the children. Now should the loan not be paid back, the beneficiaries will get the death benefit MINUS the loan. Example $500,000 death benefit – $250,000 loan = $250,000 death benefit to the beneficiaries.

One of the individuals I visited with had a few minutes and I explained option two to him. His father could have avoided the tax implications, at age 80, used his money and he and his siblings would still have had some death benefit to help out with funeral arrangements. He had no idea it worked this way and apparently neither did the accountant.

Individuals are being instructed to cancel the policy at age 65 or older because they are debt free and won’t need the death benefit. These recommendations have to be the craziest things I have ever heard! A whole life policy is purchased for the purpose of having it your whole life. Now, I find it interesting how accountants and/or financial advisers give advice on life insurance when their profession is not life insurance. This is a matter that should be visited by a life insurance representative, preferably the one who sold the policy to the owner and who is familiar with whole life insurance and not just term.

Do not be fooled by individuals who give advice outside of their profession.  Even within the life insurance industry agents specialize in certain products. Just as I specialize in whole life, the next guy may specialize in the term. The guy focused on term insurance, in most cases, knows nothing about whole life. I run into this frequently and as well-meaning as these professionals are bad advice only hurts the owner of the policy.

Be educated on what you have. You have invested money into the policy for such a long period of time and the rewards are tremendous. There is no reason to literally pay the consequences of tax because you listened to the wrong professional. You and your family deserve to be well educated on the matter and if your insurance agent is not doing that please start looking for one that will.

Please do not hesitate to ask for help if you need it. I am here to answer your questions where I can. Leave a comment or question below, email or call.