Don’t Let Your Life Insurance Lapse

Life insurance is one of the most valuable financial tools you can own, providing protection, security, and long-term financial benefits. But as your life changes, so do your financial needs. If you have an existing policy that no longer serves its original purpose, what should you do?

Before simply letting a policy lapse, it’s essential to explore your options. Many people are unaware that their life insurance may have value beyond the cash surrender amount. In certain cases, a life settlement—selling a policy for more than its cash value—can be a compelling solution. While the idea may initially feel off-putting, it can be a powerful financial tool for those who no longer need the death benefit but want to maximize their policy’s value.

There are several ways to optimize or repurpose your coverage, including:

• 1035 Exchanges – Tax-efficiently swapping one policy for another that better fits your current goals.
• Term Conversions – Extending coverage by converting a term policy into a permanent one.
• Life Settlements – Selling a policy for a lump sum that exceeds its cash value but is less than the death benefit.

1035 Exchanges: Upgrading Your Policy Without a Tax Burden

A 1035 exchange allows you to transfer the cash value of an existing life insurance policy into a new one without triggering taxes on any gains. This provision, established under Section 1035 of the Internal Revenue Code, is particularly useful if your current policy no longer meets your needs or if there are better products available.

When does a 1035 exchange make sense?

• You want a policy with lower fees or better cash value growth.
• Your health has improved, and you may qualify for a better rating and lower premiums.
• You want to move from a traditional life insurance policy to a long-term care hybrid policy.
• You’re seeking better investment options within a variable or indexed universal life policy.

A well-structured 1035 exchange ensures that your policy continues working for you, rather than simply being surrendered or allowed to lapse with little benefit.

Term Conversions: Keeping Coverage Without Requalifying

If you originally purchased a term life insurance policy, you might be approaching the end of its term period. Instead of letting it expire, you may have the option to convert it into a permanent policy without undergoing new medical underwriting. This can be a game-changer, especially if your health has changed and you might not qualify for new coverage at a reasonable rate.

Why consider a term conversion?

• You still need life insurance coverage but don’t want to go through the hassle of a new medical exam.
• You’ve had health changes that could make a new policy prohibitively expensive or unattainable.
• You want a policy that builds cash value and provides lifelong protection.
• Your financial responsibilities have grown, such as estate planning needs or business succession planning.

Many term policies offer partial conversions, allowing you to convert only a portion of your coverage while keeping some term insurance in place. This strategy can be a cost-effective way to maintain protection while controlling costs.

Life Settlements: Selling Your Policy for Immediate Cash

If you no longer need your life insurance policy or can’t afford the premiums, selling your policy in a life settlement may be a smart alternative to simply letting it lapse. A life settlement allows you to sell your policy to a third party for a lump sum, which is often greater than the policy’s cash surrender value but less than the death benefit.

When is a life settlement a good option?

A life settlement may be worth considering if:

• Your coverage needs have changed, and the policy no longer fits your financial plan.
• Premiums have become burdensome, and you’d rather use the funds elsewhere.
• You have other assets or coverage in place, making the death benefit unnecessary.
• You’re looking for additional liquidity to fund retirement, healthcare, or other priorities.

Before making any decision, it’s crucial to evaluate all your options to ensure you’re maximizing the value of your policy. If you’re curious about what might be possible for you, we’re here to help you explore the best path forward.

Making the Right Choice for Your Situation

Life insurance is an evolving part of your financial plan. What made sense when you first purchased your policy may no longer be the best fit. But rather than letting a policy lapse, you should explore ways to maximize its value.

• If your policy has cash value and you want a better product, a 1035 exchange might be your best move.
• If your term policy is expiring and you still need coverage, a term conversion can provide permanent protection without new medical exams.
• If you no longer need the policy and want to liquidate it, a life settlement could provide an immediate cash infusion.

Next Steps

The worst mistake you can make is assuming that if you no longer need your policy, it has no value. Life insurance is an asset, and like any asset, it should be managed strategically.

If you’re unsure about your current policy’s role in your financial plan, reach out. We can help you review your options, compare strategies, and ensure that your policy continues to work in your best interest.

Don’t let your life insurance lapse without first exploring these valuable opportunities. Your policy may be worth far more than you realize, and with the right approach, you can make the most of it for yourself and your loved ones.

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