Review life insurance policy to make sure it's living up to intial projections

Review life insurance policy to make sure it's living up to intial projections

Published: Monday, October 18, 2010, 8:00 AM

Karin Price Mueller/The Star-Ledger
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Q. I have accumulated quite a bit of cash value in a whole life policy, but the ongoing premium obligation has become quite prohibitive. Also, the death benefit is inadequate for my family since it was procured so long ago. Is there anything I can do to minimize my premium obligations going forward while at the same time increasing my protection?

Steve R.

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A. It’s always a good idea to review life insurance policies.

The good thing about whole life policies are that the death benefits and cash values are guaranteed, and the mortality and expense charges do not ding the cash value, said Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester. The premiums, while a level amount, are, however, inflexible, and can be challenging for the policy owner to meet over long periods of time.

You should request a few different projections regarding your current policy, called in-force illustrations, he said.

‘‘You want to see how the policy will perform if you keep paying the premium, and how the policy will perform if the premium came out of the cash value,’’ Marchesi said.

This will help you determine the longer-term value of the policy. Over time, the reality of certain policies can be quite different from the initial projections, he said.

Before you dump the policy, you should think about your age, your current health (which would affect you getting a new policy) and the policy’s primary objective.

Marchesi said if the cash value will not be needed for living expenses or supplemental income, and the primary objective is maximizing the death benefit, you have options. You may be able to exchange the current policy for another policy that guarantees the death benefit and may have lower premiums. You should get quotes and illustrations of other types of programs to compare and see what makes the most sense.

If you keep the policy and use the cash value to pay the premiums, this can effectively convert a whole life policy to a term life policy, or reduce the amount of coverage over the policyholder’s lifetime, said Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence.

A policyholder may also have the option to surrender a whole life policy for the cash value, which can in turn be used to purchase term life insurance. Pawlik said any excess of the cash value above the premiums that have been paid, less dividends, would be taxable.

Some policies, known as "participating" policies, pay dividends to the policyholder, Pawlik said. Dividend payments are not guaranteed and are typically driven by the rate of return that is credited to the cash value, as well as the mortality and operating expense factors determined by the insurance provider.

‘‘These dividend payments can generally be used to reduce premium payments, or to purchase additional paid-up whole life insurance coverage,’’ he said. ‘‘These paid-up additions can serve to increase the death benefit and cash values of the policy. ‘’

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