Universal Life Policy-Keep, Dump, or Transfer to ILIT?

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Topic Author
Kiana
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Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

My wife is 61 and has a universal life policy with a death benefit of $125,000. The current net cash surrender value is $11,100. Annual premium is $765. She converted to this policy several years ago for emotional reasons when her original term policy terminated and she could not pass underwriting for another term policy due to an underlying medical issue.

I would not need the proceeds if she pre-deceased me and was thinking we might cancel it. I have been thinking of alternative uses for the proceeds, though, so hoped for other thoughts on the topic.

While federal estate law may change many times over the coming years, it is doubtful that we will be subject to federal estate taxes. We do, however, live in a state that has a low inheritance tax exemption thresh hold. As a result, I have been thinking that we simply might maintain the policy and assuming she outlives me then our two kids could use the proceeds to pay the state inheritance that will be owed at her death.

I understand that maintaining the policy as is simply adds to the value of our gross estate and increases what tax may be owed. I then began thinking of transferring the policy to an ILIT as this would keep the proceeds out of our gross estate and then the proceeds could be used to cover the state inheritance tax.

Welcome any thoughts on this. Thanks.
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Stinky
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Stinky »

Kiana wrote: Sun Feb 02, 2025 12:28 pm My wife is 61 and has a universal life policy with a death benefit of $125,000. The current net cash surrender value is $11,100. Annual premium is $765. She converted to this policy several years ago for emotional reasons when her original term policy terminated and she could not pass underwriting for another term policy due to an underlying medical issue.

I would not need the proceeds if she pre-deceased me and was thinking we might cancel it. I have been thinking of alternative uses for the proceeds, though, so hoped for other thoughts on the topic.

While federal estate law may change many times over the coming years, it is doubtful that we will be subject to federal estate taxes. We do, however, live in a state that has a low inheritance tax exemption thresh hold. As a result, I have been thinking that we simply might maintain the policy and assuming she outlives me then our two kids could use the proceeds to pay the state inheritance that will be owed at her death.

I understand that maintaining the policy as is simply adds to the value of our gross estate and increases what tax may be owed. I then began thinking of transferring the policy to an ILIT as this would keep the proceeds out of our gross estate and then the proceeds could be used to cover the state inheritance tax.

Welcome any thoughts on this. Thanks.
Several questions -

What does your wife want to do?

Is the underlying medical condition something that increases her mortality? Is she likely to die in, say, the next 10 years or so? That could be a reason to keep the policy.

Have you gotten an “inforce illustration” on the policy? That will show you roughly how long the policy will stay inforce if current premium rate is continued.

I probably wouldn’t go to the effort of an ILIT for a pretty nominal benefit.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Kings over Queens
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kings over Queens »

An ILIT is a lot of work and expense for a smallish benefit.

Thinking out loud, could you transfer ownership of the policy to your kids? This would achieve the same net result, being removing from your estate.
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by 123 »

Kiana wrote: Sun Feb 02, 2025 12:28 pm My wife is 61 and has a universal life policy with a death benefit of $125,000...
The insurance component of a universal life policy is priced using annual renewable term insurance ART. The price of ART can rise dramatically as you age. If the amount of the premium you pay is less than the cost of ART the difference is taken from the policy cash value which causes the cash value to diminish over time. Many UL holders give up on their policies when they are faced with paying the full amount of the ART because all the cash value of their policy has been absorbed. One thing to consider doing is to get a current illustration of the policy and examine the increasing cost of the ART and decide how long you are willing to pay it.
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Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

Thanks for the replies thus far. In response to some questions:

> At the moment the cost of the insurance is $203 so relatively minimal and not more than our $765 premium;
> My wife's medical condition is not one that we believe would cause early death (obviously the insurance company felt otherwise).

Interesting idea about transferring ownership of the policy to our kids. We could continue the annual premiums, but this feels like it is too easy of a solution :happy I will give the insurance company a call though to find ut and also request an in force illustration.
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Stinky
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Stinky »

Kiana wrote: Sun Feb 02, 2025 2:40 pm Thanks for the replies thus far. In response to some questions:

> At the moment the cost of the insurance is $203 so relatively minimal and not more than our $765 premium;
> My wife's medical condition is not one that we believe would cause early death (obviously the insurance company felt otherwise).

Interesting idea about transferring ownership of the policy to our kids. We could continue the annual premiums, but this feels like it is too easy of a solution :happy I will give the insurance company a call though to find ut and also request an in force illustration.
When you get the inforce illustration, focus on the “non guaranteed” or “current” values rather than the “guaranteed” columns. Also focus on whether the current interest rate is at the guaranteed minimum rate, or whether it’s higher.

I suspect that the illustration will show that the policy lapses sometime in her 80s at current funding levels. But the only way to know is with an illustration.

Please post back if you have questions after you get the illustration.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

I now have an in-force illustration and as I review the non-guaranteed section, it shows the policy lapsing at age 91 assuming policy premiums are made each year. The guaranteed interest crediting rate is 3.5% which is also the Current Interest Rate for New Premium.

Thanks, and appreciate any feedback.
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Stinky
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Stinky »

Kiana wrote: Mon Feb 03, 2025 2:08 pm I now have an in-force illustration and as I review the non-guaranteed section, it shows the policy lapsing at age 91 assuming policy premiums are made each year. The guaranteed interest crediting rate is 3.5% which is also the Current Interest Rate for New Premium.

Thanks, and appreciate any feedback.
I’d say the ball is back in your court.

Is it worth paying $11,100 today (the current cash value), plus $765 per year for the next 30 years, to have a life insurance policy that will expire in 30 years?

Or would you rather surrender the policy, and invest the proceeds plus the future premiums you would have paid, per your asset allocation?

Or do you want to look at keeping the policy, but paying more premiums to keep the policy inforce longer?

Only you know the answer to that.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

Thanks, Stinky. I plugged the figure into a future value calculator and assumed a 5% return which resulted in an ending value of about $101,000.

That money, though, would be in my estate and subject to state inheritance taxes. From internet research it looks like I could transfer the policy to our two kids without gift or estate taxes which would be a better return for them.

I'm sure I am missing something....
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Stinky
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Stinky »

Kiana wrote: Mon Feb 03, 2025 2:41 pm Thanks, Stinky. I plugged the figure into a future value calculator and assumed a 5% return which resulted in an ending value of about $101,000.

That money, though, would be in my estate and subject to state inheritance taxes. From internet research it looks like I could transfer the policy to our two kids without gift or estate taxes which would be a better return for them.

I'm sure I am missing something....
Per my favorite longevity calculator, a 61 year old non smoking female is average health has about a 40% chance of living to age 91.

https://www.longevityillustrator.org/

If DW does that, somebody will need to pump in more premiums (probably a LOT more) to keep the policy in force.

Personally, I wouldn’t keep a life insurance policy that is no longer needed for death benefit protection. So I’d probably surrender.

But it’s your choice…..
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

I see your point, Stinky, and thanks for the link to the longevity calculator.
Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

If we were to cash out of the policy, how is that distribution taxed?
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Stinky
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Stinky »

Kiana wrote: Wed Feb 05, 2025 8:33 pm If we were to cash out of the policy, how is that distribution taxed?
The excess of the surrender value over the “basis” (usually the cumulative premiums paid) will be taxable as ordinary income.
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Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

Thank you!
Topic Author
Kiana
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Re: Universal Life Policy-Keep, Dump, or Transfer to ILIT?

Post by Kiana »

Thank you!
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