Closing an IUL

Hi! I believe I have a IUL account. It’s through Transamerica. Variable Universal Life. I’ve had it for 17 years. Total death benefit is $271,000. My son is now 24 y/o and I have a decent retirement account and Life Insurance through my employer. I’m thinking I should cash out and close account and use that money to pay off car, etc. and then invest in index funds once debt is paid off. Thoughts? Will I be taxed on money I cash out of this account?

Hi @Erica_K-S! A Variable Universal Life (VUL) policy is similar, but slightly different to an IUL (Index Universal Life). We are not fans of universal life insurance at PFC. If you haven’t already, PFC has an article on IULs, but the same principles apply to VUL’s as well. The link is below for reference.

To surrender your VUL, there are generally two routes you can take. 1) you can surrender the policy back to the insurance company. 2) you can sell the policy to a life settlement company.

For the first one, the insurance company gives you your cash value (assuming you have positive equity) and they take out surrender fees, which can be fairly high.

For the second one, you usually have to be 65+ years of age (with some exceptions). In this scenario, you would sell your policy to a third party firm that will maintain it. This is usually the best route to take if you qualify and they are willing to pay you more than the surrender value the insurance company will give you.

For taxes, it’s important to consult with a tax professional. Your cost basis is the total of the premiums you have paid into the policy over the years. If the cash value is worth less than that, it’s not taxable. If it is worth more than that, the difference is taxable.

I hope this is helpful. Please let us know if you have any other questions!

Shane

Thank you for the information! In looking at my policy it appears there are no surrender fees/charges after 10 years so I think that might be a good option for me to look into. I appreciate your financial help!
Erica

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