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How to Dump a Whole Life Insurance Policy

by Mark P. Cussen

Overview

Getting rid of an unwanted whole life insurance policy has more profitable alternatives now than there used to be, and there are several ways to get out of a policy that you no longer want or need. The right choice will depend upon your personal circumstances and needs. You can either dump the policy outright or convert it into some other insurance or investment option.

Step 1

Assess the cash value of your policy and decide whether you want to just cash it in or try another alternative. If you cash in the policy, simply notify your carrier that you wish to do so and they will either send you a surrender form or more likely direct you to a downloadable form on their website. You will be taxed on the interest you earned from the cash value, however.
Step 2

Take out a loan for as much of the cash value as you can and keep the remainder of the policy in force. This is the most direct way to access the cash in the policy. There is no tax consequence for doing so, since the loan is considered to be a tax-free return of principal. This also allows you to retain the death benefit minus the cash value. If you no longer want or need the policy, let it lapse after taking out the loan.
Step 3

Convert your policy into an annuity contract via a 1035 Exchange. The value of the contract will approximately equal the cash value of the policy. This is a good idea if you are trying to save for retirement. You can exchange your policy into either a fixed, indexed or variable contract, depending upon your risk tolerance and time horizon.
Step 4

Exchange your policy for a universal or variable universal policy that offers long-term care or disability benefits. This type of policy can be tremendously beneficial if you need this type of care. The riders these policies offer are often far more forgiving in terms of underwriting than straight disability or long-term care policies.
Step 5

Sell your policy in a structured life settlement arrangement. This can be very profitable if you are over age 65. Life settlements have superceded the old viatical policies as a means of accessing the death benefit in the policy before death. Many life settlements are now protected by a surety bond, thus lowering their risk.