Although the goal in permanent life insurance is to hold the policy until you pass away, circumstances may arise where you consider surrendering the policy or significantly reducing your death benefit. Reasons might include prohibitive fees, shifts in financial priorities, or dissatisfaction with investment results.
Before surrendering, remember that surrender charges can be substantial if you are still within the surrender charge period. Additionally, any cash value you receive above your cost basis might be taxed. In some cases, a “1035 exchange” may be an option to move your cash value into a different life insurance policy or annuity without incurring immediate taxes, depending on regulations in your jurisdiction. Always confirm such strategies with qualified professionals to avoid surprises.
Case Studies: Hypothetical Scenarios
To illustrate how variable universal life insurance might operate in different life situations, consider these hypothetical examples (purely illustrative, not tailored financial advice):
Case A: Young Professional Seeking Long-Term Growth
A 30-year-old with stable income decides to purchase a variable universal life policy with a modest face amount. He contributes premiums well above the minimum to build cash value aggressively, allocating most of it to equity subaccounts. Over 30 years, assuming reasonable market growth, he amasses a sizable cash value that he can partially borrow against in retirement. He also has permanent coverage for his eventual passing.
Case B: Middle-Aged Entrepreneur with Estate Concerns
A successful 50-year-old business owner wants permanent insurance to protect heirs and cover estate taxes. She chooses a VUL policy, invests in balanced subaccounts, and funds the policy near the “target premium” to ensure consistent growth. Market swings create fluctuation in her cash value, but careful reviews and occasional premium adjustments keep the policy healthy. Upon her death at age 80, her beneficiaries receive the death benefit, thereby meeting her estate planning objectives.
Case C: Policy Lapse Risk
A 45-year-old initially overfunds her policy, but later falls on difficult times and pays only the minimum premium. Meanwhile, market conditions decline. Over a few years, administrative fees and COI charges erode the cash value. She fails to monitor the statements and eventually faces a lapse notification. To salvage the policy, she must infuse a large sum or risk losing coverage entirely. This scenario highlights the importance of consistent monitoring and timely premium adjustments.