People Buying Life Insurance to Enhance Inheritance, Newspaper Reports

Apr. 27--AS CONSUMERS FACE LOSSES in the value of their investment portfolios and/or their homes -- not to mention other economic challenges during this recession -- they are turning to another asset to restore stability to their finances: life insurance.

When circumstances change in a person's finances or health, there are more options today that allow owners to use their policies to gain emergency cash, cover medical expenses, provide an earlier inheritance to heirs or supplement retirement living.

"Some people are changing their life insurance to save money. They're also buying insurance policies to leave to their children and grandchildren because of losses in the stock market. Most people have taken a 40 percent hit in the stock market. What they're trying to do is figure out ways to offset those losses," said Carl Feen, owner of the financial planning firm Carl S. Feen & Associates in New Haven.

Here are some of the choices consumers have when making life insurance policy changes:

--Life settlements

The sale of an insurance policy in the secondary market is known as life settlement. It is ideal for candidates 65 or older, who have experienced a decline in health but are expected to live another two to 14 years, Feen said.

Life Settlement is a method to replace policies that are no longer wanted or affordable. The best types of policies for applying life settlement include term life, universal life with a premium that is greater than 6 percent of the death benefit, whole life with cash value totaling less than 15 percent of the death benefit and "second to die" contracts, which allow a surviving spouse to sell the policy, he said.

Before the policy lapses, an actuarial firm measures the life expectancy of the policyholder and analyzes medical records released by the client's physician. "Then we come back with a number which is in excess of the cash value of the policy," he said.

Clients have used the settlement payment to purchase a more suitable policy, cover health care costs, set up escrow accounts to pay for long-term care insurance or purchase a house more tailored for their stage of life, he said.

The buyer of the policy becomes the beneficiary and when the original owner dies, the buyer collects the death benefit according to the terms of the policy.

--1035 tax-free exchanges

As of January 2009, every life insurance company has to use a mortality table that was revised in 2001. It shows Americans living 15 to 18 percent longer than they did under the prior table, issued in 1980. "What does that mean? That means the insurance premiums are cheaper than they were five years ago," Feen said.

Because of the new table, he recommended that consumers shop around for the most affordable insurance premiums. Before a policy expires, the holder can convert the monthly premium to a quarterly one, while trying to exchange it for a new contract that offers either a greater death benefit for the same monthly payment or the same level of death benefit for a lower monthly payment.

The number 1035 refers to a section of the federal tax code that allows the transfer of accumulated funds in a life insurance, annuity or endowment policy in a way that "no gain or no loss" occurs, meaning the transaction is not taxable.

"It takes about 90 days to sell a contract," Feen said. "This is a way to reduce insurance costs. There's no tax implications for exchanging one policy for another."

Feen, a former vice chairman of the U.S. Department of Labor's ERISA (Employee Retirement Income Security Act of 1974) board, which regulates pensions and health care, said people should view life insurance as an asset that is part of a larger portfolio of investments. "It stabilizes wealth transfer," he said.