Don’t Let Your Life Insurance Lapse. Schedule an Annual ‘Check-up’

Permanent cash-value life insurance can be a valuable part of your long-term portfolio. But it needs to be managed correctly. If you don't maintain your whole life, universal life or variable life policy and let it lapse, there may be unexpected tax consequences. To prevent this from happening, schedule a life insurance review with us each year. Here's why. What is cash value? Cash value represents the reserves that a life insurance company must hold against the actuarial certainty of your death. That pool of money grows tax-deferred within the policy over time, as long as it remains in an in-force policy. If you borrow against it, the IRS considers it a loan, and it is therefore not taxable as long as the policy is in force. If your policy earns dividends, those dividends accumulate cash value tax-free and you can withdraw them tax-free at any time. Those cash values are available for you to access, at any time, for any reason. Many people use their accumulated life insurance cash values as a source of emergency savings, to help fund college costs (life insurance doesn't count against a family when calculating need-based financial aid) or to supplement their lifestyles with tax-free withdrawals and policy loans. As long as you keep the policy in force, it's one of the most flexible and tax-efficient strategies there is, with the following advantages:

• No penalties for early withdrawal.
• No required minimum distributions.
• Dividends are withdrawn tax-free at any time.
• Loan proceeds from intact life insurance policies are tax-free.
• Loans can be repaid, or you can let the insurance company deduct any outstanding loans from the eventual death benefit.
• Tax-free exchanges to annuities can help generate guaranteed income.

But remember, you need to keep the policy in force. If you don't pay premiums, they will come out of the cash value. If this continues for too long, the policy may lapse - which has tax consequences: Other than dividends, any amount you took out over the premiums you paid in becomes taxable as ordinary income. Example: You contribute $50,000 in premiums over the years to a life insurance policy that now has a cash value of $100,000. You stop paying premiums. The life insurance company then subtracts premiums from the cash value. You may have taken out a few loans along the way. If the policy lapses, or if you choose to cancel it, the insurance company will add up everything you paid into the policy, and everything (other than dividends) you took out. Any net gains are taxable as ordinary income. Universal and variable life Universal life insurance policies may be more complex to manage than whole life insurance, which features steady, guaranteed premiums. Variable universal life insurance adds another layer of potential volatility, as the sub-accounts in variable universal life insurance can potentially lose value, and potentially require the owner to contribute extra premium or risk having the policy lapse. Universal and variable life policies generally require more monitoring to keep them in force. The benefits of adequately-funded permanent life insurance policies are generally well worthwhile - but it's important to monitor them. If you neglect them for too long, you could wind up having to make an unpleasant choice between contributing an unexpectedly large amount of premium to "rescue" a foundering policy, or letting it lapse. If it's been a year or more since you've had a life insurance "check-up," call us. We can go over your policies with you and help you make sure your life insurance policies are firing on all cylinders. For more information, feel free to Contact Neptune Financial to schedule an appointment. Basic Understanding This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings. An individual seeking information regarding their investment or retirement needs should contact a financial professional. Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.