Life insurance is for the living, not for credit card debt
Elderly couple's daughter wants to cash out policy to pay off cards
By Alan Klayman
Maturing Loans
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.
Dear Maturing Loans,
I just read an article about how as you get older you no longer need life insurance. My parents are in their 80s, and I am trying to convince them to get rid of their life insurance so I can take the money that is in their life insurance policies and use it to pay off my credit cards. There is probably over $100,000 in these policies, and they have no need for $1 million of life insurance. My mother doesn't think this is such a good idea. I showed her the article and she still won't do it. Can you help me convince her? Or is there a way I can get to the life insurance cash without them? I think this is a better use of the money, don't you? -- Shelly
Dear Shelly,
I understand you wanting to pay off your credit card debt as it can be burdensome, and the less of it you have the better. But I am with your parents on this one.
I also have seen articles that claim that the older you get, the less need you have for life insurance. This may be true for some people, especially those buying new life insurance policies. But this is not true for everyone, especially people like your parents who have held their policies for quite some time. And there is a catch. Let me explain.
Life insurance, as the ad used to say, is for the living. That means that you never really need a cent of life insurance death benefit proceeds because you will never collect on it. It is your beneficiaries who benefit from the life insurance. Life insurance creates an immediate estate. Before you try to do any more convincing with your mother, you need to take a look at what your mother's needs are going forward. With your mom in her 80s, if your father were to pass away, would she have enough money to live on without the life insurance? Is her health care taken care of? Are her credit cards and other debt eliminated? Life insurance creates a tax-free lump sum of money that will assist your mom in paying off her credit cards, paying off her debts, paying for health care, and maybe she can give you a hand in paying off some of your credit cards.
It is important that you understand these factors before trying to cash in these policies. There is another, more mathematical and common sense reason that works to you and your mother's benefit over the long term. If your parents paid life insurance premiums of $75,000 over time and the policy is worth $110,000 for $1 million in life insurance death benefit proceeds, and you cash them out (excluding any taxes that may be due) -- this may sound very attractive. They paid in $75,000 and now it is worth $110,000. But when they die, your parent's beneficiaries (assuming you are one of them) get $1 million. Which sounds better? Exchanging $75,000 for $110,000 today, or $75,000 for $1 million down the road?
I suggest your parents review the owner and beneficiary information and make sure it is up to date. Have them meet with their attorney to make sure their wills are in order. With this much life insurance, it may be necessary for your attorney to look at trust structures to help direct the assets in the manner that is most efficient for the family.
Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
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