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Anyone know anything about cancelling a life insurance policy?
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lightblue
LIF Adult
Member since 1/17 2249 total posts
Name:
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Anyone know anything about cancelling a life insurance policy?
We opened up a survivorship policy which to my understanding blends whole and term insurance. It was supposed to benefit our son when we pass (money to fund a special needs trust), but the yearly premium is higher than a term policy and now I regret opening it. I called up today seeing about cancelling, and the woman I spoke with said theres no fee but that we'd have to pay tax on capital gains if we surrender. We've only had the policy 2 years so I'm guessing there can't be a lot of gains but wanted to see if anyone else is familiar with this type of policy or has gone through cancelling before and what the ramifications are.
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Posted 4/13/20 10:15 AM  |
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LSP2005
Bunny kisses are so cute!
Member since 5/05 19458 total posts
Name:
L
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Re: Anyone know anything about cancelling a life insurance policy?
I would ask what the actual capital gains are. They are not taxed as high as regular income, but for a two year old policy I cannot fathom it would be a ton of money. Depending upon your income and marital status the rates are either 0%, 15% or 20%. It is clicking off on a line on turbo tax to say I have capital gains. So it is not that involved.
While I don’t have a special needs trust, you should make sure your attorney knows exactly which policy is held, where, and for what amount so that your trust documents are specifically updated to reflect the policy change. This is especially important for a special needs trust because in order for an individual with special needs to qualify for adult services they cannot have assets beyond a very minimal amount in their own name, you need to consult with an attorney who will represent you and handle this for your families specific needs, not just filling out an on line trust document. I know that this was not directly what you asked about but felt it was important to let you know that this is something that must be done in conjunction with what you are asking about or all of your planning would be ruined.
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| Posted 4/13/20 10:26 AM |
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lightblue
LIF Adult
Member since 1/17 2249 total posts
Name:
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Re: Anyone know anything about cancelling a life insurance policy?
Posted by LSP2005
I would ask what the actual capital gains are. They are not taxed as high as regular income, but for a two year old policy I cannot fathom it would be a ton of money. Depending upon your income and marital status the rates are either 0%, 15% or 20%. It is clicking off on a line on turbo tax to say I have capital gains. So it is not that involved.
While I don’t have a special needs trust, you should make sure your attorney knows exactly which policy is held, where, and for what amount so that your trust documents are specifically updated to reflect the policy change. This is especially important for a special needs trust because in order for an individual with special needs to qualify for adult services they cannot have assets beyond a very minimal amount in their own name, you need to consult with an attorney who will represent you and handle this for your families specific needs, not just filling out an on line trust document. I know that this was not directly what you asked about but felt it was important to let you know that this is something that must be done in conjunction with what you are asking about or all of your planning would be ruined.
Thank you for this! I actually did set this up with a lawyer who set up a dormant special needs trust that only takes affect when we pass, the life insurance was supposed to fund the trust as well as our other assets with our typical daughter eventually managing the trust. I feel like all of this was a waste of time and $ though since we are planning on moving OOS in a few years (wasn't the plan at the time) so I figure this legal paperwork wouldn't matter if we are living OOS.
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| Posted 4/13/20 10:33 AM |
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LSP2005
Bunny kisses are so cute!
Member since 5/05 19458 total posts
Name:
L
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Re: Anyone know anything about cancelling a life insurance policy?
All of that will help, but some may be state specific. Yes, you would basically be paying to do this again. I am not going to say the attorney advised you poorly because I have seen elsewhere similar recommendations on having the kind of insurance you have specifically for the special needs trust. Yes it costs more than term life, but before you do anything speak with your attorney who set everything up to ask why this policy is in your interest vs term which would cost less.
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| Posted 4/13/20 10:43 AM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
Name:
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Re: Anyone know anything about cancelling a life insurance policy?
Posted by lightblue
We opened up a survivorship policy which to my understanding blends whole and term insurance. It was supposed to benefit our son when we pass (money to fund a special needs trust), but the yearly premium is higher than a term policy and now I regret opening it. I called up today seeing about cancelling, and the woman I spoke with said theres no fee but that we'd have to pay tax on capital gains if we surrender. We've only had the policy 2 years so I'm guessing there can't be a lot of gains but wanted to see if anyone else is familiar with this type of policy or has gone through cancelling before and what the ramifications are.
Unless the policy is a term policy - there will be surrender charges in the first 2 years. A survivorship policy is to who is insured - not the type of insurance it is. This is a policy on your life and your husband's life and will be paid out on the death of the second.
You wouldn't pay capital gains but there is an income tax liability but you would have to have cash returned above your cost basis to you for that.
I would check with a lawyer before you cancel the policy or let is lapse.
Also, if moving to another state - you may not need new trust paperwork. You may only need an addendum.
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| Posted 4/14/20 9:58 AM |
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