Retirement Hacks is a weekly video designed to help you move one step closer to experiencing your version of an Incredible Retirement ñ Doing What you Want, When you Want. Today, I want to talk to you about the biggest mistake we see almost everyone if you own a cash value life insurance policy. Especially if the policy is 10 years old or older. Cash value life insurance could be anything from whole life, universal life, variable universal life, variable whole life, or indexed life insurance. Basically, any life insurance policy that has some kind of saving or investment feature built into it.
What's the biggest mistake you could make? You don't get what is called an in-force illustration on your policy every five years. I'm not talking about the annual statements that the companies might send you. What I'm talking about is something that you actually have to request from the insurance company yourself. It's called an in-force illustration request. If you don't do this every five years, you could end up with a nasty surprise. Sometimes triggering 10s of thousands of dollars of taxable income or maybe even losing coverage you thought would never go away.
Here's an example of what I'm talking about. A client had a whole life policy with a cash value of about $27,000. They had stopped making premium payments on it many, many years ago. They thought the policy was in some kind of a paid up premium status.
When we got the in-force illustration back from the insurance company, what we discovered was somewhere along the line, they had authorized the insurance company to take out policy loans to cover the premium payments. The outstanding loan balance was now over $20,000.
They thought the policy would be paid up when they turned 65. But, because of these policy loans, the policy would never be paid up. In fact, the cash value in the policy would be wiped out in less than 7 years. At that time, they would have to start making premium payments almost triple what the original premium payments were. If they just let the policy expire worthless, the $20,000 loan balance would become taxable income to them.
If you own any cash value insurance policies. Make sure you, or your agent, or your financial advisor get an in-force illustration every five years on your policies to make sure the policy continues to perform the way you expect so you avoid any nasty surprises.
I remember several years ago one of our clients had a very old variable universal life policy. They were confident that the agent was keeping an eye on things until one day we get a panic call from them. It turns out the agent had not been keeping track of the policies and now, due to a multitude of reasons, if, they were going to have to start making premium payments of $30,000 a year.
In both of these situations, we were able to help our client make the best of what turned out to be not that good of a situation for them.
This week's action item for you is to make sure that you're getting an in-force illustration every five years for any cash value life insurance policy that you own.
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