Today’s Wall Street Journal covers the topic of retirees stung by collapsing life insurance policies in this low-interest environment.
I added the comment: “For those unfortunate individuals who are caught in this situation, there are some tax saving strategies that can help soften the blow. I see too many individuals who lose the benefit of the tax basis of their life insurance policies by allowing them to expire without taking the steps necessary to lock in the tax attributes. Make sure this is included as part of your tax planning strategy and that you have clearly communicated which of your professional advisers is responsible for executing the strategy. (Otherwise the CPA and life insurance agent may each assume that the other is dealing with the issue).”
The financial planning lessons are:
- Every buyer of life insurance should strongly consider the effects of the minimum guaranteed performance and not just the expected performance typically presented and emphasized by the agent.
- Mature buyers of life insurance should consider utilizing a maximum allowable funding strategy rather than the recommended strategy that is typically presented and emphasized by the agent.
- If a policy needs to be surrendered, find a way to utilize its tax basis.
- Make sure that the responsibility of handling the tax basis transfer is clearly communicated to your adviser.
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