Broker Check

Individual Life Insurance

Much has changed in recent months, but the importance
of life insurance hasn’t.

Is Your Life Insurance Up to P.A.R?

A Professional Analysis and Review Will Help Your Insurance Keep Pace With Your Life.
Your life insurance is one of the most valuable assets you own. It is there to take care of your family when you are no longer there to provide for them yourself.

Permanent Life Insurance Can:

  • Provide survivor income.
  • Ensure that debts are paid.
  • Supplement your retirement income.
  • Ensure your spouse’s retirement.
  • Protect your estate.
  • Leave a legacy.
  • Protect your business.
  • Attract or retain a key employee.

When your life insurance policies were purchased, certain assumptions were made – assumptions about policy charges, interest rates, planned premiums, etc. Perhaps the original reason for your purchase still exists, or your needs might have changed, requiring more or less coverage. It is important to periodically review the status of your policy so that the life insurance you need will be there when you need it. Our life insurance professional analysis and review will help determine what your current needs are.

Reasons You Should Consider a Life Insurance Professional Analysis and Review:

  • Your need for life insurance may have increased or decreased.
  • Extended periods of low interest rates may have affected policy performance and require more premium dollars to meet policy charges.
  • Your health might have improved, qualifying you for a better rating.
  • Your family or business situation may have changed.
  • Loans, withdrawals or other policy activity may have affected the policy’s performance.
  • Premiums may not have been paid as planned.

If you are considering making changes to your existing life insurance policy, it is important to weigh the implications of your choice. There are no “right” answers, only the need to determine what is most important to you. Your life insurance professional can help you understand the pros and cons of your choices. Following are some possible reasons to keep your existing coverage as well as reasons to consider a replacement policy.

Benefits to You

A life insurance needs analysis provides multiple benefits to you including opportunities to:

    • Review your current situation and need for life insurance.
    • Determine if your existing policy(ies) still meet your current needs, and where appropriate, determine if a policy’s funding needs to be adjusted to meet your current life insurance needs.
    • Consider any possible improvement in your underwriting class.
    • Review any new riders that might be available.
    • Understand the provisions and benefits within your existing policy.
    • Consider alternatives that might better meet your needs, such as:
      • policies with secondary guarantees.
      • extended maturity options.
      • better loan provisions.
      • lower policy charges.
      • better underwriting classes.

    Possible Reasons to Keep an Existing Policy

    New Contestable Period

    Any time a new policy is purchased a new contestable period begins. Policies can be contested within the first two years after issue to discover if any material information was not revealed on the application that would have affected the insurer’s decision to issue the policy. For replacements with the same insurer, some companies apply a new contestable period only for an increase in the amount of insurance.

    New Suicide Period
    A new 2-year suicide period begins with a new policy. It is important that you are fully aware of this provision. For replacements with the same insurer, some companies apply a new suicide period only for any increase in the amount of insurance.

    Existing Loans
    Some policies offer favorable loan interest rates or wash loans after a policy has been in force for period of time, often ten years.

    In some situations, loans are not transferable from one policy to another. Additionally, some insurers do not recognize the transfer of a loan as a tax-free exchange, even if the receiving company can accept a loan.

    New Acquisition Costs
    New life insurance contracts contain charges and acquisitions costs that must be recouped via the payment stream. Older policies may have already accounted for these charges.

    Guaranteed Credit Rates
    There may be higher guaranteed minimum interest crediting rate on an older policy.

    Surrender Period is Less
    Beginning a new life insurance policy also means a new period for surrender charges. It could be that your existing policy is almost out of the surrender period.

    Special Internal Exchange Rules
    Some insurers have special internal exchange rules that may apply in the event the policy needs to be changed. This might include favorable underwriting, or waiving surrender charges on the transfer

    Change in Underwriting Status- For the Worse
    If you have experienced an adverse change in your health, a new policy might mean a higher rating. It might be best to consider paying additional premium into the existing policy to keep it in force.

    Legislative Benefits – Pre TAMRA, Cash Rich Testing
    Tax laws can change the definition of a life insurance policy, as well as how it is taxed. If a contract was issued before June 21, 1988, it may have some tax benefits that are not available with a new policy. Older policies are not governed under the rules for Modified Endowment Contracts (MEC). This rule severely reduces the amount of money that can be deposited in a life insurance policy in the early years without losing the “first in, first out” provision in life insurance.

    If a policy is a MEC, any money withdrawn is considered interest first, and subject to a 10 percent penalty before age 59 1/2. In addition, the life insurance corridor amounts were much higher on policies issued before June 21, 1988, so there are much higher funding limits than policies issued after that date.

    Another date to remember is December 31, 1984, which relates to Cash Rich Testing, also known as the Recapture Ceiling Test. This legislation also included a “definition of life insurance” which limits the amount of money that can be paid into a contract and still receive the tax benefits of tax deferral on the life insurance policy. This usually occurs when there is a reduction in benefits under the contract (face reduction, PUA surrender, etc.). Policies issued before December 31, 1984, are not subject to this test.

    Possible Reasons to Exchange Policy

    Secondary Guarantees

    One of the newer policy design features for universal life includes the ability to guarantee the death benefit based on a fixed premium structure. This guarantee applies even if there is a sustained drop in interest rates or if the current cash value declines or disappears, as long as the premium is paid according to schedule.

    Better Mortality
    Along with dramatic improvements in medical science comes a corresponding increase in life expectancy. Because of this, many new policies have lower mortality expenses than existing policies, sometimes significantly lower.

    Loan Treatment
    Having a significant loan on a policy may seem insurmountable, but this doesn’t have to be the case. Under the Section 1035 exchange rules, the IRS allows for the transfer of a loan along with the cash value from an existing life insurance policy to another life insurance policy, so long as you are also the owner of the policy. Some insurance policies offer attractive loan interest rates that might not be available on the existing policy. There may even be an option of a “wash loan”, meaning that the interest that is credited on the loan amount is the same that is charged for the loan. This could be important if you do not plan to pay back the loan. Keep in mind the IRS may take the position that the loan is taxable distribution because there is no interest differential.

    Another potential benefit is the ability to use the cash value to completely or partially pay back the loan. However, you may not receive favorable tax treatment on the transfer if the purpose is to pay back the loan. If you wish to pay back the loan via a withdrawal, you may wish to consider paying back the policy loan in a different policy year. Remember, loans and withdrawals will reduce cash values and death benefits. Surrender charges and taxes may also apply.

    More Competitive Plans
    Whether it’s a TV, computer, or an insurance product, improvements are inevitable, and prices tend to decrease because of new innovations. In relation to life insurance products, insurers are cutting expenses and distribution costs. When this is combined with other pricing improvements, it can lead to a much more competitive product, with lower costs and/or features and benefits not available on earlier plans.

    Preferred and Plus Underwriting
    25 years ago, only two classes of standard underwriting were available, smoker and non-smoker. Since that time, these classes have been sub-divided into Preferred, Preferred Plus, and in some instances, Preferred Select Plus. This occurred first for the non-smoker class and later for the smoker class. If you fit into one of the preferred classes, you might benefit from the lower mortality charges in an exchange. Even if you fall into the standard class, it is possible that the mortality charges on your current policy might be higher than if you exchanged it for the same underwriting class on a new policy.

    Special Underwriting Programs
    If you are currently rated and the existing company won’t remove the rating, it is possible that you could qualify under a special underwriting program. This is a program where rated cases through a certain table rating, sometimes up to table 3, will automatically be issued a standard rating. If your health has improved from a previous rating or if your health is currently viewed more favorably, you might benefit from a program like this.

    Extended Maturity
    Many existing policies have an age 85, 90, or 95 maturity date. When a policy matures, the policy cash values will become payable to the owner of the policy and taxes will be due on any gain. The insurance contract will be completed, so the face amount will not be paid.

    If you live to the maturity of your policy, another issue could arise related to loans. One of the potential benefits to permanent life insurance is the ability to withdraw cash values up to basis tax free, then switch to loans, again tax free up to cost basis. If a policy matures with an outstanding loan or lapses, any gain that has been received is taxable. Paying income tax at that time may be difficult for a policy owner, it there is not enough net cash value in the policy to pay the tax.

    This problem is avoided with some new policies which have no maturity date. They are designed to continue the death benefit as long as you live. At age 100, most charges are discontinued and any cash value continues to accumulate at the current interest rate. If loans exist, as long as there is a positive cash value, no tax will be due. At your death, the net death benefit is paid (face amount minus loans and withdrawals).

    Company Strength
    One of the most important factors you should consider is the strength and stability of the issuing life insurance company. The higher the ratings of a company, the more likely this company is to keep its promises to its policy owners. Ratings are reviewed annually by third parties and vary by criteria.

    Legislative Benefits – Pre TAMRA

    Previously we mentioned that if a contract was issued before June, 21, 1988, it may have some tax benefits that are not available with a new policy. If one of these plans is 1035 exchanged to a new plan, it’s very possible that the new plan won’t be a MEC. When cash value is transferred from one policy and qualifies under the 1035 exchange provision, the cash value is not considered a single premium, but spread over several years. However, your ability to make additional contributions to the contract may be limited in order for the contract to not become a MEC.

    What is a Section 1035 Exchange?
    A Section 1035 exchange is the process of directly transferring accumulated funds in a life insurance policy to another life insurance policy or annuity contract or from an annuity contract to another annuity contract without creating a taxable event. A Section 1035 exchange allows you to exchange outdated contracts for more current and efficient contracts, while preserving the original policy’s tax basis and deferring recognition of gain for federal income tax purposes.

    Most insurers acknowledge section 1035 of the Internal Revenue Code as a tax-free exchange from one insurance policy to another and will send a Form 1099 with the amount of gain as “0”. However, if the transfer of an outstanding loan is involved, the gain amount would be shown in the amount of the loan on the Form 1099 which must be explained on the tax return. The loan will be on a separate Form 1099.

    In Summary
    It is always a good idea to review your situation every few years, and a life insurance professional analysis and review offers an excellent opportunity to make sure that your insurance coverage is appropriate to your current situation. At Sestito Financial Services, our approach would begin to discuss your current situation in relation to your original and current goals. We will gather information about your policies and request several illustrations from the issuing companies to see if your life insurance policy is on track, and if not, what is necessary to bring it up to date. After all information is received, we will offer suggestions to adjust your current policy or recommend alternatives to help you reach your goals.

    Neither Sestito Financial nor its sales professionals render tax or legal advice. Please consult with an accountant, attorney, and/or tax advisor concerning your particular situation.

    Determine your current needs and purpose of life insurance.
    Does the existing amount and type of insurance
    meet your current requirements?

    Discuss your needs and objectives.

    Review and evaluate current policies and compare them to alternative solutions.


    If existing policy is performing as expected or better, and if needs have not changed, no further analysis is needed.


    If existing policy is not performing as expected, or if needs have changed, determine action required to reach goal within the existing policy.


    If appropriate, consider other policies.


    Continue to review periodically to be sure policy is on course.


    If funding needs to be increased to reach your goal, or if the goal has changed, work with your agent to correct the situation within the existing policy.


    If appropriate, consider replacement with new policy.