16 July 2012 0 Comments

The Permanent-To-Permanent Replacement (Part 2)

Now that I’ve covered the replacement of Whole Life, I’ll move on to Universal Life replacements. The policy I will be suggesting as the new policy is also Universal Life (UL), so you might ask, what is to be gained? Until a few years ago UL policies had lousy death benefit guarantees and anticipated interest credited to those policies was much greater than actual experience. Consequently, unless premiums are substantially increased above the original projections, the policies will implode. And even if you do increase premiums, typically the death benefit will still not be guaranteed, but will be based on assumed interest crediting and expense charges.

As many UL policies are structured today, they can produce a lifetime guaranteed death benefit at very low premiums. This is accomplished through a complex policy design involving secondary guarantees that I discussed earlier. So, if it is pure death benefit that you are looking for, these new breed of guaranteed premium UL policies can be an excellent replacement for any Permanent Policy described in this and my previous entry.

To determine if replacing one permanent policy with another makes sense, you must first ascertain your underwriting class and then select the company that will issue a competitive, guaranteed policy. Your agent will assume that any cash surrender value from your current policy is transferred to the new company* and then solve for the ongoing premium required to produce the death benefit guarantees. If the required premium is less than would be needed to guarantee the same death benefit with the existing policy, then this is an option you must consider.

Just consider? Why not just do it? In addition to restarting the suicide and contestable period I mentioned earlier, the cash value in your new policy will be substantially less than had you kept the current policy. So, if you think you may be surrendering the policy in the future, replacement could be costly. But, if the new policy is definitely to be maintained in force for the pure death benefit until the day you die, then it’s time to take action!

*Next I’ll be covering IRC Section 1035 that allows you to transfer cash from one policy to another avoiding taxation and preserving cost basis… important considerations in policy replacements.

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