I have 2 insurance policies, one for me one for my husband. If I was to cash in one of them, can I turn around

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and take out another policy? Are there any disadvantages to cashing in a policy.

  1. Reply
    August 23, 2013 at 5:51 am

    You could do that, but you would open yourself up to a taxable event if there are any gains in the policy. You might be better off to look into opening a new insurance policy and do a 1035 exchange from the old into the new. This will carry your existing cash value into the new policy and you would not pay capital gains taxes on any gains in the policy.

    Hope this helps.

  2. Reply
    August 23, 2013 at 6:10 am

    What type of permanent life policy do you have? Depending, you might be able to take a tax free loan without incurring a tax liability. Speak with your insurance agent to find out if this option is available.

  3. Reply
    aaron p
    August 23, 2013 at 6:55 am

    You can do anything you want to. Why would you be cashing them in? There might be a better way to handle it. Talk to an independent and experienced agent or a financial planner. There may be more than meets the eye. I’d offer to do it for you, but I don’t know what part of the country you’re in.

    Oh, and THX 1138 was the best sci-fi ever.

  4. Reply
    August 23, 2013 at 7:32 am

    Well, sure. First of all, you only get a fraction of the money out that you’ve paid into it. Frequently, there is a “surrender charge” that gets subtracted out of the cash value.

    The BIGGEST problem is, now you’re shopping for new insurance – what if you’re not insurable now? Then you won’t find it. If you’re buying ANOTHER cash value policy, well, your husband is OLDER now, it’s going to COST a lot more than the old one.

    On the other hand . . . I’m a big proponent of term insurance, so I’d be inclined to get a new term policy, for about 10% of what you were paying for the cash value policy, THEN cancel the cash value policy out. No use throwing good money after bad.

  5. Reply
    August 23, 2013 at 8:28 am

    The disadvantages of ‘cashing in’ and taking out another policy (I’m guessing you have some permanent life policy with a positive gain and a cash value):

    1. Any gains on the policy are taxed as ordinary income (not capital gains) unless you do a 1035 exchange for a new life policy or annuity.
    2. If you were lucky enough to get a Universal life policy back in the day with 6-8% guaranteed return and you want another; forgetaboutit policies today only have about 2-3% guarantee.
    3. The life insurance portion of the policy will be reevaluated at your current age and health. If you bought the policy when you were young and thin and now you’re old and fat, you’ll pay a much higher rate.
    4. You’ll be inundated with life insurance salesman with drool coming down their chin as they “advise” you to swap policies; their main goal to make a new commission, not help you.

    Before you decide, evaluate what your CURRENT life insurance needs are then act.Do you need a policy? Yes, keep them, no do something else. Involve insurance salesmen in the process and your needs will be secondary.
    Good luck.

  6. Reply
    August 23, 2013 at 9:23 am

    First lets talk about the reasons you are wanting to cash in the policy, is it because you are unhappy with the services you are recieving from the company and/or the agent that you bought the policies from? Is it because there has been a change in your health for the better (ie, you quit smoking, you lost weight, or you are no longer needing to take a certain medication) so you think you can get a better rating else where? Or are you not happy with the performance of the cash value?
    Next let’s talk about the type of cash value policy you have. Is it a Variable Universal Life policy, a Universal Life or a Whole Life policy?

    The answer to your first question of can you take out another policy is… well maybe, that depends on your health. If you have had a change in your health as I decribed above, you may be better off keeping the policy you (depending on how long you have had the policy) and simply ask to be rerated on your health which might lower the premiums you are paying and have a positive effect on the building of cash value as more of the premium is going to that rather than the cost of insurance. Are there disadvantages to cashing in a policy, well there are several, the first being that you loose your coverage if you “cash in” or surender the policy, and if you are not insurable anymore, than that can be a big problem. Next problem you face is that if you have more cash value than the total premiums you have paid of the life of the policy you may find yourself having a taxable event come April 15th next year. Lastly if you cash out your policy now, and you are fortunate enough to still be insurable, and you start another policy lets say it is another cash value policy you are starting that over from scratch or $ 0 in cash value.

    Now there are ways to prevent that from happening, you can do a 1035 exchange and have the cash value of the old policy go into the new policy, there can be some accounting issues later if you decide to borrow from the policy, but all in all if the reason is because you are not happy with the service or the performance this is a good option to use. A bit of advice though is to not cancel your current policy until the new insurance company has approved your application and you have the new policy in your hands, which if you have a qualified insurance agent helping you do this the insurance company can do a replacement as well as a 1035 exchange and you wont have to even talk to the old company again.

    One more warning before I am done, if the performance of the cash value is what you are concerned with please realize that insurance is not intended to be an investment first, it for your financial security first, gains are second. Also the building of cash value should not be equated to anything in the stock market, those are assets that have high risk and therefore can have high returns. Life insurance especially if it is Universal or Whole life should be compared more against bonds, which are low risk assets, and therefore have lower returns. To give you an idea of what a good rate of return would be in a Whole life policy, there should be an internal rate of return around 5-6% at life expectancy, and it should be the equivalant of getting that rate year after year not averaged.

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