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Question for the Money Doctors

Question submitted on May 1, 2013.

Question

Re: universal life insurance. Basically, this type of ins. is design the premium that we paid, it broke down in three portions 1st-portion of $ goes to ins. 2nd- porttion of $ goes to investment and lastly fees & cost. I understand that you CANNOT write off the cost of ins. but what about the $ that co. invested for years "stock/bond/mutual fund ect..?? I heard/read at one time.. that when you cash out the remained money and as long as you put them or transfer it into an "investment account" then you can write it off. Tell me what your thoughts are?? love to hear back from you again

Answer

You ask a very important question. Insurance products carry very specific tax attributes. Generally, you cannot deduct losses on a life insurance policy. There are two ways to fix a sick policy and preserve your basis (how much you put into the policy or derived a benefit from the policy), One is to restructure the current policy so that the insurance charges are minimized over time. When this is done, it is important to make sure that there is no break in total insurance for the family. So, an additional term policy may need to be written and satisfactorily delivered prior to restructuring. The other is to find a significantly better company in terms of low expenses and do what is a 1035 exchange. There are key risks to both strategies that need to be discussed before any decision is made.

It is important to take into consideation a number of varaibles on life insurance.

The first is the structure. When you put money into a universal/whole/variable life insurance policy, one should not think about how cheap they can get it for, one should think about how much is appropriate to fund so they can minimize the long term costs of insurance without it becoming a Modified Endowment Contract.

The second is to make sure that the company has favorable cost structures. There are a number of very good insurance companies that deliver extraordinary value.

The third, not by order of importance, is to ensure that decisions fit with you personal plans and that all investment options serve as compliments to one another in order to achieve your goals.


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