Is Your Cash Value Life Insurance Policy Still a Good Fit for You?
Over the years, you could have grown out of it. Or maybe your life insurance policy’s performance didn’t live up to your expectations. In any case, you have options, so here’s how to make the most of this valuable asset.

When most people buy a life insurance policy, they file it away hoping to never need it. But, if you have cash value life insurance policy, such as whole life, universal life or variable universal life, you purchased more than just insurance coverage. Your policy is also an investment, and some of your premiums over the years went to building cash value.
Like other assets in your portfolio, it’s important to review your policy regularly to make sure it still fits your goals and is performing as expected.
Ask yourself: Have my goals changed?
You likely purchased your policy with certain goals in mind, like saving for retirement or funding an inheritance for your children. But if you purchased your policy several years — or even decades — ago, your goals may be different today than when you paid your first premium. The first step in your review should be to revisit why you purchased the policy in the first place and consider if anything has changed. Maybe your financial or family situation is different than what you expected several years ago. Or perhaps your retirement goals have evolved over the years.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For example, we worked with one client who purchased a whole life policy in his 40s, but now at age 63 no longer felt he could comfortably pay the ongoing monthly premium that the policy demanded.
Did your policy do as well as was expected?
Another important thing to review is how your policy has performed. When you purchased the policy, you were shown an illustration of how the cash value and death benefit were expected to grow over time as investment performance and/or insurer dividends were earned. Take stock of what your cash value balance and death benefit are today versus what was projected.
If your policy balances are materially lower than what was projected, that could be an indication that your insurer has lowered dividends or raised fees materially. For variable universal life policies, lower balances could also mean that the funds you’re invested in have done poorly. Poor performance doesn’t just mean a lower cash value today, it could mean trouble down the road. If you were planning to use your policy for retirement income, poor performance could mean your future income will be lower than hoped. In some extreme cases, poor performance could also lead to additional premiums in the future.
If it’s time to make a change, consider a 1035 transfer
In general, permanent life policies are meant to be long-term holdings and should not be replaced or terminated frequently, if at all. If it’s performing well and still fits your goals, you’ll likely do best by keeping your policy. However, if your policy has under-performed or just isn’t a fit for you anymore, making changes to it or replacing it with something else could be the best option, particularly if you’ve built up substantial cash values. For example, you could consider a 1035 exchange into an income annuity or long-term care insurance policy that may better meet your retirement needs going forward.
A 1035 transfer, if executed properly, is tax-free upfront and allows you to continue deferring taxes on any un-taxed gains you currently have in your cash value policy.
One client’s story shows the possibilities
In a recent case, we worked with a 60-year-old client who had three whole life insurance policies he purchased over the years. The policies had not performed well, and results were not expected to improve going forward. In addition, the policies required tens of thousands of dollars of additional premium during his retirement years.
While he could easily have afforded the additional premiums, it was not the best use of his retirement income, so we consolidated his policies into a single hybrid long-term care policy that did not require any future premiums. The policy provided him with a substantial amount of long-term care coverage if he needed it and a return of his premium to his family if he passed away without needing care. With this transaction, our client was able to get an insurance policy that was a better fit for his needs going forward and simplify his financial life.
The next step for you
If you decide to go the 1035 route, make sure to consult with your insurance and tax advisers first, as an improperly executed transaction could invalidate some of the transaction’s important tax benefits. Also, if you decide to replace your current policy with a new one, make sure your new coverage is in place before canceling the old one. The last thing you want is to be stuck with no coverage if your new insurer does not approve your application.
For more information or to get help reviewing your current policies, you can visit www.saturdayinsurance.com/life-insurance.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Dennis Ho is co-founder and chief executive of Saturday Insurance, an online independent insurance agency. With over 20 years of industry experience, Dennis has a passion for insurance and the role that it can play in building financial security. Dennis is a Fellow of the Society of Actuaries and a CFA Charterholder. Originally from Winnipeg, Canada, Dennis now resides in New Jersey with his wife and three young children.
-
Blue Collar Workers Add AI to Their Toolboxes
The Kiplinger Letter AI can’t fix a leak or install lighting, but more and more tradespeople are adopting artificial intelligence for back-office work and other tasks.
-
Stock Market Today: Stocks Chop as Chipmakers Decline
Several semiconductor stocks fell Friday on reports that the White House may consider revising license waivers for global chipmakers.
-
The $1 Million Retirement Question: Are You Being Tax-Smart About Your Pension?
A financial planner raises some key considerations for navigating retirement with a pension and recommends four strategies.
-
The Costly Mistake You Might Be Making With Your First 401(k)
Most people start contributing to their retirement savings later in life. That could be a big-time mistake, literally costing you thousands of dollars.
-
An Estate Planning Attorney's Guide to the Importance of POAs
Regularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax Bomb
Your home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing Enforcement
Significant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's How
Combining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
-
Here's Why You Shouldn't Do an Estate Plan Without a Financial Planner
Estate planning isn't just about distributing assets. Working with a financial adviser can ensure you've considered the big picture — and the finer details.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a Strategy
Like presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.