Kyoto, Japan at the Shirakawa River in the Gion District during the spring cherry blosson season.


What Is It?

Life insurance can be complicated. Yet many people have life insurance because they recognize the need to provide adequate resources for their dependents when they die. Many others treat their life insurance policies as investments from which they hope to realize a sizable return. If you own a policy, you probably derive peace of mind from the protection it offers, and you may even make money for yourself at the same time. You probably also remember how much work went into choosing the right insurance company and the particular policy that's best for you.

Even after you finally decide on a policy, your work is far from over. The purchase of a policy is only the first step in an ongoing process that should include periodic reevaluations of both the company and your policy. It makes sense that you should keep track of the company's performance and continue to feel that the policy you chose still matches your needs and circumstances.

Don't be surprised if a conscientious review indicates the need to replace or exchange your policy. And yet there will be times when it's definitely wise to keep your existing policy in place. A middle ground course of action between the two extremes of replacing a policy and keeping it without making any changes at all is to adjust the level or amount of coverage provided by your existing policy. Another possible strategy is to transfer the interest in your policy to another party. If you exercise this option, be aware of how the transfer-for-value rule might apply to the transfer.

Caution: Usually all of these replacement and conservation considerations require that you consult additional resources such as a financial professional, a CPA, an insurance agent, and/or insurance companies before making any decisions.

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What Are Some Specific Replacement/Conservation Considerations?

When to Replace or Exchange a Policy

There are many possible reasons for replacing your existing life insurance policy. However, there is no precise formula to tell you when replacement is the best strategy to follow. The final decision will ultimately depend on your individual situation. In general, though, reasons to replace might include dissatisfaction with your company or various aspects of your policy and changes in your financial circumstances or coverage needs. If changes are drastic or your dissatisfaction is extreme, you should probably consider replacement as an option.

Reasons to Keep Existing Policies

Reasons to keep existing policies are many and varied and do not constitute anything close to an exact science. You certainly shouldn't let laziness or fear of change keep you from replacing your existing policy, but there are legitimate reasons why you might want to leave it as is. If you've been happy with the company and the policy, if the terms and provisions of the policy still suit your coverage needs, and if your financial circumstances haven't changed much since you bought the policy, there may be no grounds for a change. In fact, there may be tax issues, insurability issues, replacement costs, and other considerations that induce you to stick with your existing policy.

Changing Levels of Coverage

If you feel that your circumstances warrant some kind of change but you're unwilling to replace your policy, the appropriate strategy may be to simply change your level of coverage. This involves adjusting the amount of the death benefit (either up or down) payable to your beneficiary if you die and will often require a corresponding adjustment to your premium. Reasons to alter your coverage level might include marriage or divorce, children or other additions to your family, employment changes, and changes to your financial situation.

Transferring Policies

Under certain circumstances, it may be to your advantage to transfer all the interest in your life insurance policy to another party. This is generally known as a transfer of ownership or an absolute assignment and involves assigning ownership of the policy to someone other than you, the person named as the insured party. Such transfers are an exception to the general rule that the owner of a life insurance policy and the insured are one and the same. You may also be able to transfer some--rather than all—of the ownership rights in your policy. However, flexibility in terms of ownership rights will vary from one policy to the next, so read the appropriate clauses in your contract. A transfer may be an appropriate option if you want to use some of the interest in your policy as collateral for a bank loan and may be advantageous for tax and other reasons, as well.

Transfer-For-Value Rule

Section 101(a) (1) of the Internal Revenue Code provides for the income tax free status of life insurance death benefits paid to your beneficiary upon your death. The transfer-for-value rule is an important exception to this general rule. If you transfer an interest in your policy to another party in exchange for valuable consideration, Section 101(a)(1) no longer applies, meaning that the portion of death benefits paid under the policy exceeding the value of the consideration paid by the transferee plus any premiums paid by the transferee after the transfer, may now be subject to income tax. Thus, you should find out how this might apply to you if you are considering a transfer of all or part of your policy.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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Tags: Financial Planning, Lump Sum, Pension, Retirement Planning