11 Feb Variable life insurance and cash value

Q. I have a Prudential variable life insurance policy for $100,000.I am 68 years young. I am not paying any premium and it is taken care from the investment choice I have. The cash value is about $10,000. What are my options with the account?
— Need advice

A. You have several options, but the important ones surround your overall goals and depend on what other investments and insurance make up your overall financial picture.

Variable life is basically a term product where the extra deposits above the necessary premium for the cost of the life coverage are invested in some “side fund,” typically mutual funds, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said the policy owner would usually get to pick the mutual funds from a long list offered by the company.

“Theoretically, it may work long term if the funds perform really well over time consistently,” Gaelick said. “That hasn’t historically happened and to add insult to injury, the cost of the insurance increases each year internally in the policy.”

Gaelick said you may not notice it because the premium stays level, but each year more and more of the “side fund” goes towards paying the insurance portion and less and less added to the investments.

At some point, Gaelick said, the premiums will be higher than your deposit and a carrier, in your case Prudential, will take the extra term premium needed to keep the policy in force from the investments.

“So even if you get good returns, the investments will start to reduce,” Gaelick said. “To make matters even worse, you are not paying premiums, so with $10,000 cash value left, that could be used up quickly at a young age of 68; even quicker should the fund values drop because of market fluctuation.”

He said variable life has its place, but he doesn’t think it has served you well for long term planning.

So what are your options?

Gaelick said you can ride it for as long as the policy will stay active, “knowing it will self-destruct at some point soon.”

Or, you could start paying premiums again, which will keep the policy active longer, or finally, you can consider a “1035 exchange,” which allows you to roll the cash value from Prudential into another policy that may perform better over the long term and with more predictably.

“Of course this assumes you are insurable,” he said. “There are so other many things to consider here. Best to find an advisor knowledgeable in variable life and discuss your specifics to determine your best options.”

Email your questions to .

This story was first posted in February 2016.