Rodolfo was in his late 30s, engaged to be married and was on a quest to buy his first home in New England. He approached his financial advisor about how to finance a home, and in reviewing all his available assets to determine how much he could afford, they uncovered two life insurance policies – both of which had a cash value.
A life insurance broker had sold Rodolfo two life insurance policies around a decade before. One was a universal life policy and the other was a whole life policy, two types of policies that accumulate cash, but are very expensive and not efficient from an investment standpoint.
Rodolfo sat down with his financial advisor who walked him through a full insurance needs review, evaluating his income, his assets, what he would be protecting (the reason why he would purchase insurance), and his financial goals – in this case, buying a home. He didn’t have any children, his fiancée was in the workforce with a healthy salary, and there weren’t any other dependents he needed to be concerned about leaving assets to. In short, there wasn’t a great reason why he bought these policies. However, he needed cash for his purchase, and he was still paying into these expensive insurance policies.
Rodolfo and his advisor discovered that the universal life policy had accumulated about $30,000 worth of cash value, which, unfortunately, was less than what he had paid into the policy at that point. This did mean, however, that there were no tax consequences for him to surrender the policy (i.e. withdraw the funds). Because he didn’t have insurance needs at the time, wanted cash for a home down payment, and any potential future insurance needs could be met through buying term insurance, Rodolfo surrendered his first policy and used that toward his down payment. His other policy was structured a bit differently and had a longer surrender schedule, which meant he could face penalties by the insurance company as well as small tax liabilities if he surrendered it. His advisor recommended he hold onto that policy through the surrender period, but if he needed the cash, he might be able to access it without too much of a financial hit.
Through the course of a full insurance needs analysis, Rodolfo determined his insurance needs could be met through a much simpler, less expensive policy, and could use the policies he had already purchased to fund some other investment – in this case a home purchase. Rodolfo ended up successfully purchasing his first home, and he and his now-wife are enjoying homeownership to the fullest. Schedule an appointment with a Personal Capital advisor to help review your situation to ensure all your financial components – including annuities – are considered to maximize your total financial benefit.
This case study is fictional and does not depict any actual person or event.
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Jacob Jaegle, CFP®
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