24 May How should I pay for this life insurance policy?
Q. I have a $50,000 permanent insurance policy that my parents bought for me when I was a teenager. It only costs $325 a year and it has a cash value of more than $25,000. Should I have the cash value pay the premiums or should I keep paying out of pocket?
A. That’s a great gift from your parents.
The fact that you have more than $25,000 in cash value demonstrates how starting a “permanent” insurance plan early in life has worked to your advantage.
The answer to your question depends on many factors, including what kind of permanent policy it is. said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.
He said if it’s a pure whole life policy, it truly is permanent, but if it’s something else, such as a universal life or variable life policy, it may be — but possibly not.
Once you figure out which it is, you should request several things from your broker or life insurance company.
First, ask for a current policy status report, which will show you current values and whether there are dividends that can be used to offset premiums. Then ask for an “in force illustration,” which will project assumptions going forward so you can see projected future values, he said.
“Make sure you compare the values that say `Guaranteed’ to those that say `Non-Guaranteed,’ which illustrate the projections based on those current assumptions,” he said.
You may discover paying $325 will add double much that to your cash value, he said.
“So it wouldn’t be a terrible place to put $325,” Gaelick said.
Should you simply want to stop paying for whatever reason, first see if the policy is “participating,” which means you are getting dividends and if so, use dividends to offset the premiums.
“While dividends are not guaranteed, they may very well hold true since your policy has performed so well over time, implying your policy is with a very strong insurance company,” he said. “If there are no dividends, you really should speak with a professional to ensure you’re not going to be setting up policy loans or diminishing the life of the policy. Really everything depends on what you have.”
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This story was originally published on May 24, 2021.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.